Does my law firm have to pay sales tax?

Yes and no. When your firm purchases services and goods that are taxable in your state (if your state charges sales tax), you are required to pay sales tax just like a consumer or other business would. This covers typical law firm purchases, like software, computers, and office supplies. 

But when most lawyers ask whether law firms have to pay sales tax, they’re really wondering about whether they are required to charge sales tax on the legal services they provide to clients.  

The answer depends on local state regulations and whether or not your firm qualifies for any special exceptions.   

Many states charge sales tax on tangible property, but increasingly, some states are also charging sales tax on professional services. And others don’t charge sales tax at all.  

So, do law firms have to pay sales tax? Sometimes. Are there all kinds of weird rules and exceptions to charging and paying sales tax? You bet. Let’s look at current local state sales tax laws, review recent tax policy changes, and determine how sales tax impacts your law firm. 

Know your state laws

First, you need to know your state laws. At present, Hawaii, New Mexico, and South Dakota are the only three states to charge sales tax on legal services. Florida briefly charged sales tax on services for a one-year period in the late 1980s, but currently doesn’t.  

When it comes to sales tax, professional services are among the least-taxed services offered in the United States. Business services, personal services, and real property services are much more likely to have a sales tax requirement in various states. 

But policies can and do change. It’s important to stay current on your state’s requirements. As the United States increasingly becomes a service-based economy, more states are poised to consider extending their sales tax to include professional services.  

And because it’s impractical for a state to try to figure out sales tax from the buyer’s end, it’s up to the seller (in this case, the law firm) to know what the sales tax would be and charge it appropriately. 

For additional clarity and peace of mind on your tax obligations, consider reaching out to a local law firm that specializes in sales tax.

Exceptions: When Law Firms May Have to Charge Sales Tax 

While most legal services are exempt from sales tax in a majority of states, there are several situations where firms may still need to charge it. Understanding these exceptions can help you avoid compliance issues and unexpected tax liabilities.  

Here are some of the most common scenarios to watch for.

Firms Providing Legal Services Out of State 

In response to the rise of large companies selling products on the internet, the United States Supreme Court ruled in 2018 that out-of-state sellers must still charge sales tax if they’re earning more than $100,000 in a certain state or conducting more than 200 transactions there. 

If you’re licensed to practice law in more than one state—and one of those states taxes professional services, like Hawaii, South Dakota, or New Mexico—you must charge sales tax if you do a certain amount of business there. This rule applies even if your practice isn’t based primarily in that state. 

Firms Offering Bundled Services 

If your firm offers clients “bundled services” that include both taxable and non-taxable services or goods in a single package (for example, legal document preparation and branded binders or estate planning kits), some states require you to charge sales tax on the entire bundle. Others allow you to separate the charges, so clear invoicing that includes all essential information is crucial. 

Firms Selling Digital Products and Client Portals 

Certain states consider digital goods, like downloadable templates or paid client portal access, taxable items. Even if your core legal services are exempt, these add-ons might not be. Offering free access to templates, client portals, and other digital goods can eliminate the need to charge sales tax.  

Firms Covering Hard Costs and Pass-Through Expenses 

When you charge clients for hard costs you pay a third-party vendor for upfront, such as court filing fees, courier costs, or copies, your responsibility for sales tax may vary depending on whether these are billed “at cost” or marked up. Some states treat these as resale items; others may consider it part of your taxable service. 

Firms Providing Consulting or Expert Witness Work 

If your attorneys serve as consultants or expert witnesses, those services might be taxed differently than traditional legal work. Always check how your state classifies these roles.  

Stay Tuned for Sales Tax Policy Changes  

With continual updates to sales tax rules, especially those governing professional services and out-of-state transactions, firms must stay current on state policy changes to stay compliant. While some states have moved quickly to include legal services in their tax base, others are still evaluating the impact. 

If your state requires sales tax on legal services, CosmoLex can help. Manage every invoice, expense, and client matter in a fully integrated practice management system that includes powerful billing, legal accounting, and trust accounting tools.  

As sales tax policies continue to evolve, law firms that stay proactive and equipped with the right tools will have a clear advantage. Simplify compliance, eliminate accounting errors, and focus on serving your clients with CosmoLex—try it free for 10 days or get a personalized demo to explore every feature.  

Browse Other Related Articles 

Keep reading about the intersection between law practice and tax with more articles on our blog: 

• What Is My Law Firm’s Tax Liability? 
• How Can My Law Firm Pay Less in Taxes? 
• Are Settlement Funds Taxed?