What you Need to Know about Service Taxes in the U.S.

Are Services Taxable in the United States?

When it comes to understanding whether services are taxable in the United States, the answer varies widely by state and the type of service provided. While taxation of tangible goods like clothing and electronics is relatively consistent, the tax treatment of services is more complex. Some states impose sales taxes on certain services, while others exempt them altogether. This variation creates a complicated landscape for both consumers and businesses. Learn about the complex landscape of service taxes in the United States, including varying state regulations and tax treatment of different services.

Sales Tax: A Quick Overview

Sales tax is a consumption tax imposed by state and local governments on the sale of goods and specific services. Traditionally, states have taxed tangible personal property, but with the economy increasingly driven by services, states have begun broadening their tax bases to include more services. Whether a service is taxable often depends on the individual state’s regulations and fiscal policies.

Common Services Taxes in Various States

Here’s a look at how some everyday service taxes are treated across different states:

1. Hairdressers/Barbers:
   • Some states tax personal care services such as haircuts, while others do not. For example, in New Mexico, hairdressing services are taxable. Meanwhile, Ohio and West Virginia exempt haircuts and other beauty services from sales tax.
2. Cleaning Services:
   • Cleaning services may also be subject to sales tax depending on the state. New York taxes commercial cleaning services but exempts residential cleaning.
   • In Ohio, commercial cleaning services such as building maintenance are taxable, while residential cleaning services are exempt. West Virginia follows a similar model, taxing commercial cleaning but exempting residential cleaning services.
3. Waiters and Waitresses (Food Service):
   • Meals at restaurants are generally taxable, but tips given to waitstaff are not. Both Ohio and West Virginia tax restaurant meals, though tips for waitstaff remain untaxed.
4. Professional Services:
   • Services provided by professionals such as lawyers, accountants, and consultants are generally exempt from sales tax in most states, including Ohio and West Virginia. However, states with broader tax bases, like Hawaii and South Dakota, tax professional services.
5. Digital and Data Services:
   • The taxation of digital services is a growing area of focus for many states. Some, like New York and Washington, tax digital products such as downloadable software or streaming services. In Ohio, certain digital goods are taxable, while West Virginia is still developing its approach to taxing digital services.

Service Taxes in Ohio

Ohio applies sales tax to a wide range of services but exempts many others. The state’s base sales tax rate is 5.75%, though local taxes can increase the total rate to anywhere from 6.5% to 8%.

• Taxable Services in Ohio: Examples of taxable services include laundry and dry cleaning, landscaping, building maintenance, and telecommunications. Businesses providing these services must collect sales tax from customers.
• Exempt Services in Ohio: Many personal services, such as hairdressing, healthcare, personal training, and massage therapy, are exempt. Most professional services, including legal and accounting services, are also not subject to sales tax.

Service Taxes in West Virginia

West Virginia has a state sales tax rate of 6%, with local taxes possibly raising the total to 7%. Like Ohio, it taxes some services while exempting others.

• Taxable Services in West Virginia: Services such as commercial cleaning, building maintenance, and telecommunications are subject to sales tax. Dry cleaning and certain repair services are also taxable.
• Exempt Services in West Virginia: Personal services like haircuts, nail salons, residential cleaning, and massage therapy are exempt. Similarly, professional services, including legal and consulting services, are not taxed.

Why Are More Services Being Taxed?

As economies evolve and services dominate a larger share of consumer spending, states are increasingly considering taxation on services as a new revenue source. Goods were once the primary target of sales tax, but as consumer behavior shifts, states are broadening their tax bases. States with budget shortfalls or those looking to modernize their tax codes see the service sector as a natural area to explore for additional revenue.

Additionally, the rapid growth of digital services—from streaming platforms to cloud-based software—has complicated traditional tax models. As more services move online, states are grappling with how to tax these intangible products.

Staying Informed About Service Taxes

Because sales tax laws are constantly changing, businesses must stay informed to ensure compliance. Consumers should also be aware of tax policies to avoid surprises when purchasing services. It’s always a good idea to consult your state’s Department of Revenue or a tax professional if you’re unsure about whether a specific service is taxable.

Another source for information is this list of service tax facts per state from Tax Jar.

Whether services are taxable in the United States depends largely on the state and the type of service. While tangible goods have historically been the primary focus of sales tax, more states are increasingly taxing services such as commercial cleaning and telecommunications while exempting others like haircuts and professional services. As states continue to expand their tax bases to include more services, both businesses, and consumers should stay informed about the latest tax laws to avoid compliance issues or unexpected costs.

Of course, we’re always here to help and answer any specific questions you may have regarding service taxes and other small busienss bookkeeping questions.

This information is not intended as legal or tax advice. Cowdery Tax and its representatives does not offer legal or tax advice. We offer services for business bookkeeping, payroll, tax payments, and personal tax filings. We share information that is publicly available. Tax laws may change with or without notice that may alter or change the information contained in this publication.