Sales tax on professional services

If you remember five things, remember these.

To understand the exceptions, you have to understand the default — and why it exists.

Sales tax was designed for goods. When states adopted retail sales taxes in the 1930s, the economy was goods-heavy and the tax attached to sales of tangible personal property. Services were an afterthought. That original design still governs: the base is tangible goods plus a list of enumerated (specifically named) taxable services. Anything not named is exempt by default.

Two structures exist. Most states are enumerated-service states — services are exempt unless listed. A few are broad-base states — services are taxable unless a carve-out applies. Which structure a state uses is the single biggest determinant of whether it taxes professional services.

Three reasons professional services, specifically, tend to stay exempt even as other services get taxed:

Professional-service revenue gets taxed through four distinct doors. Knowing which door a state uses tells you what to look for.

Door 1 — Broad-base states (services taxable by default)

Four states tax services unless specifically exempted, so professional services are largely in scope:

• Hawaii — the General Excise Tax (GET) applies to nearly all business gross income, including virtually all professional services. It's technically a tax on the business (commonly passed through), not a classic sales tax. Rate: 4% + up to 0.5% county surcharge.
• New Mexico — the Gross Receipts Tax (GRT) reaches most services performed in the state, professional services included, unless a deduction applies. Combined rates ~4.9%–8.9%.
• South Dakota — services taxable by default; even legal services are taxed. Health services are a notable exemption. Rate: 4.2% + municipal.
• West Virginia — services taxable by default, but classic professional services (physicians, lawyers, engineers, architects, CPAs) are specifically exempt; WV still taxes IT, data processing, and staffing. Rate: 6%.

Door 2 — Enumerated specific services

Most states exempt "pure" professional services but tax a named list that commonly includes data processing, information services, and employment / staffing. Examples: Texas, Connecticut, Ohio, New York, Pennsylvania, and the District of Columbia. This is the door that catches technology and staffing firms.

Door 3 — Recent base expansions

The newest and fastest-moving door. In 2025, Maryland added a 3% tax on IT and data services, and Washington extended its retail sales tax to temporary staffing, IT support, custom software, security, and advertising. These moves added categories that were exempt the year before.

Door 4 — No sales tax, but a gross-receipts tax

Five states have no general sales tax: Alaska (local only), Delaware, Montana, New Hampshire, and Oregon. But Delaware (gross-receipts tax), Washington (Business & Occupation tax), and Ohio (Commercial Activity Tax) levy separate gross-receipts-style taxes that reach service revenue even where a retail sales tax doesn't. Hawaii's GET and New Mexico's GRT belong to this family too.

When a state taxes "some" professional services, it's usually one of these. Each has a technical definition that decides what's in and what's out — and the definitions are where the fights happen.

Data processing services

Broadly: the computerized entry, retrieval, search, compilation, manipulation, or storage of data. It sweeps in payroll processing, data entry, hosting, and — in many states — Software as a Service (SaaS), which is treated as taxable data processing.

• Texas taxes data processing on 80% of the charge (a statutory 20% exemption). SaaS is taxed as data processing. Rule 3.330 was rewritten in 2025 to sweep in more activities.
• Connecticut taxes computer and data processing services at a reduced 1% rate.
• Ohio and the District of Columbia tax data processing/automatic-data-processing for business use.

Information services

Furnishing information — reports, data, research — to customers. The classic exemption is for information that is personal or individual and not resold to others; the classic trap is a report built from a shared database that many clients receive.

• New York taxes information services; 2024–2025 rulings have narrowed the "personal/individual" exemption, treating benchmark-style reports as taxable.
• Texas taxes information services on 80% of the charge, like data processing.

Employment & staffing services

Supplying workers to a client — temporary staffing, "help supply," and employment-agency/placement services. This is the category that catches staffing firms, and the tax base varies sharply by state (see §05).

• Connecticut taxes personnel services at 6.35% on the total fee.
• Pennsylvania taxes "help supply" services, but the base is the fee minus separately-stated employee wages, benefits, and payroll taxes.
• Washington made temporary staffing taxable on Oct 1, 2025 (repeal scheduled for ~2029).
• Ohio taxed employment services for ~30 years but repealed that tax on Oct 1, 2021 — a common source of stale guidance.
• New York generally does not tax staffing — despite what some vendor lists claim.

Software, SaaS & digital advertising

The current expansion frontier. States are increasingly taxing prewritten software and SaaS (Maryland repealed its B2B SaaS exemption in 2025; California and Colorado begin taxing SaaS in 2027; Utah started in 2026). A parallel wave targets digital advertising as a separate gross-receipts tax (Illinois enacted a 10% targeted-advertising tax in 2026, effective 2027).

Knowing a state "taxes data processing" isn't enough. Four mechanical questions determine whether a specific invoice is taxable, at what rate, and to whom.

1 · Is it taxable? The "true object" test

When a transaction blends taxable and non-taxable elements, states ask what the customer was really buying — the "true object" or "essence of the transaction." If the true object is exempt consulting and the data-processing element is incidental, the whole charge may be exempt; if the true object is the taxable service, the whole charge may be taxable. This test is applied in New York, Texas, Ohio, and elsewhere, and it's the most-litigated question in the field.

2 · On what amount? The tax base

Even when a service is taxable, states disagree on what to tax:

• Gross charge — Connecticut taxes staffing on the total fee, including the wages you pass through.
• Markup only — Pennsylvania taxes help-supply on the fee minus separately-stated employee costs. Fail to itemize those costs and the whole charge becomes taxable.
• Partial exemption — Texas taxes only 80% of data-processing and information-service charges.

3 · Which state gets it? Sourcing

Services are generally sourced to where the benefit is received — usually the customer's location — but rules vary. New Mexico historically sourced to where the seller performs the work (litigated in the 2025 Vista Staffing case). For services used in several states at once, many states accept a Multiple Points of Use (MPU) certificate that lets the buyer apportion the tax; Maryland introduced one for its 3% IT tax.

4 · Do you have to collect there? Nexus

After South Dakota v. Wayfair (2018), a state can require you to collect sales tax once you exceed an economic nexus threshold — commonly $100,000 in sales or 200 transactions into the state — even with no physical presence. So a firm can owe collection duties in a state it never set foot in, purely on sales volume.

A screening map — not a filing position. "Specific" means the state taxes named service categories (often data processing, information, or staffing) while exempting pure professional services.

Firms that supply people (staffing) or build/run technology (IT/consulting) sit on the two fault-lines auditors probe most. If that's your world, this is where the money is.

The two 2025 expansions are still reverberating, and the proposal pipeline is active.

• Washington — the 2025 expansion (ESSB 5814) remains in effect for staffing and IT, but the 2026 legislature passed ESSB 6346 to repeal most of it effective Jan 1, 2029 (advertising stays taxable), with interim carve-outs (hospitals, schools, libraries) from July 1, 2026 and a penalty-relief window through Sept 30, 2027. The repeal is contingent on Washington's new high-earner income tax surviving court challenge.
• Maryland — the 3% IT/data-services tax (effective July 1, 2025) is the most aggressive live example of taxing IT-consulting-style services; 2026 brought follow-on regulations and Bulletin TB-56.
• Texas — a Feb 2026 appellate ruling (Hancock v. ChampionX) cast doubt on the 2025 data-processing rule; the rule stands pending further litigation.
• Proposals to watch — Michigan (6% on services), Minnesota (advertising + professional services; failed in 2026 but likely to return), a Missouri ballot measure, and recurring bills in Florida and Nebraska. California, Colorado, and Utah are expanding into SaaS.

If you're responsible for a firm selling professional services across states, work these questions.

• Map your footprint. Where do your customers receive the benefit of your services? That's where sourcing — and nexus — starts.
• Test economic nexus. In each state, are you over ~$100k / 200 transactions? If so, you may need to register even without a physical presence.
• Classify each service line. Is it a pure professional service, or does it fall into a taxed category (data processing, information, staffing, SaaS)? Apply the true-object test to blended engagements.
• Get the base right. Know whether the state taxes the gross charge or the markup, and separately state exempt components (employee costs, exempt consulting) on the invoice.
• Handle multistate use. Use MPU certificates where available; keep exemption and resale certificates on file.
• Watch the changes. This area moves during legislative sessions and through agency bulletins and court rulings — which is what the daily briefs on this site are for.