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Service taxes is not one tax. It is a 50-state minefield.
There is no federal service tax. Every state writes its own rules about which services are taxable, and the list keeps growing. Hawaii and New Mexico tax nearly all services by default. Texas taxes data processing and information services, which catches SaaS founders off guard. California exempts most professional services, which is exactly why founders assume the whole country works that way. If your product is pure software delivered as a subscription, the states most likely to tax you are the ones that classify SaaS as a taxable information or data-processing service, not the ones that tax professional services like law or accounting; those are usually two different lists inside the same state's code. If your company also sells implementation, consulting, or custom development alongside the software, some states tax the software license but exempt the labor hours billed separately on the same invoice, which means how you itemize a single contract can change what you owe on it. The founders who get caught are almost never the ones selling one clean product in one clean category; they are the ones with a blended contract that a diligence team reads line by line and a founder never has.
Do this today: Pull a list of every state where you have paying customers this quarter and check it against the 50-state deadline list before you file anything else.
4 states, 4 different answers on the same service
- Hawaii and New Mexico: nearly all services taxable by default
- Texas: data processing and information services, including SaaS
- Washington: B&O tax on gross receipts, profit or not
- California: most professional services exempt
