The service sector is the largest and fastest growing sector in the United States (US) economy, accounting for an increasingly significant share of US gross domestic product. However, the service sector has historically been viewed as having little or no productivity growth and being devoid of an ability to innovate, when, in fact, service-sector firms are on average active in all aspects of research and development (R&D) and innovation. The issue is the lack of ability to accurately identify and measure R&D expenditures and innovation activities in the service sector. This inability is a problem because measurement is key to the success of public policies targeted at stimulating research and innovation. For example, tax credits and other incentives rely on strict definitions and measurement of R&D to determine which activities are eligible. The applicability of definitions and the difficulties in identifying and measuring service-sector R&D has implications for the effectiveness of current innovation policies.