No two states tax the exact same specific services, but the general types of services that are taxed can be roughly divided into six categories. When it comes to sales tax, the general rule has always been that “products are taxable, while services are not taxable. Sales tax also doesn't apply to most services. Examples of services not subject to sales tax include capital improvements in real estate, health care, education, and personal and professional services.
See Transactions that are not subject to sales tax for more information. If you sell service contracts separately or in conjunction with the sale of tangible goods, you may have to collect sales tax. In some states, businesses must charge sales tax for services provided in conjunction with sales of physical goods. While services aren't subject to sales tax in every state, it's important to note that the exclusions aren't absolute.
For more detailed information on which sales are subject to tax, see the Tax Bulletin Quick Reference Guide to Taxable and Exempt Properties and Services (TB-ST-740). Many companies that provide services are still unaware of these legal changes, some mistakenly believing that they don't have to pay any sales tax, even if they sell services across the United States. Knowing what rate to charge and what sales tax rules apply is especially difficult for companies that sell goods or services in multiple states. Some states that tax too few services, such as Utah, continue to tax admission fees for most sporting and entertainment events.
Of the remaining 45 states, four (Hawaii, South Dakota, New Mexico and West Virginia) tax services by default, with exceptions only for services specifically exempt from the law. Each of these states taxes a different set of services, making it difficult for service companies to understand what state laws require them to file a return, as well as what specific elements of their services are taxable. Companies that sell services in multiple states need to know where those services are subject to sales tax. If sales tax rates and rules are not properly applied to products and services, costly mistakes can be made.
For example, both Florida and Iowa are marked as “taxable” as “business services,” although Iowa taxes a wide range of these services and Florida taxes only security and detective services. As the United States moved from a manufacturing-based economy to a service-based economy, many states also began to impose taxes on sales and the use of services.