Understanding the application of and compliance with sales tax laws are a critical topic of discussion among management of businesses operating in or looking to begin doing business in the US. Challenges experienced with sales tax in prior years will continue in 2025 as the laws and regulatory framework continue to grow in complexity, along with an increase in enforcement.
Key among these challenges will be the expansion of the taxable base to encompass services and emerging technologies, reflecting a broader effort to capture revenue from the digital economy, software accessed through the cloud and consumer data collection. To centralize tax collection, US states are turning to broadly defined marketplace facilitator provisions and are expanding the scope of taxes and fees to be collected. To raise revenue from e-commerce transactions, states have begun to enact delivery fees based on deliveries taking place within the state. To ensure compliance, states have ramped up their audit activities, focusing on verifying that companies adhere to nexus laws and accurately characterize and map products and services within compliance software for sales tax purposes.
This article looks at anticipated sales tax trends to watch in 2025 and offers recommendations for a proactive approach to addressing changes, helping businesses to remain compliant and strategically agile in navigating this evolving environment.
Companies are required to collect sales tax if they have nexus with a state, which can be established through a physical presence (payroll, property, agents, etc.) or sales exceeding economic thresholds enacted by all states that impose a sales tax (e.g., USD 100,000 of gross sales or 200 separate transactions within the past or current year).
To reduce the compliance burden and costs of administration, several states (i.e., Indiana, Louisiana, North Carolina, South Dakota and Wyoming) dropped the 200 separate transaction thresholds in 2023 and 2024, a trend that is expected to continue in 2025.
In 2024, courts highlighted the importance of companies monitoring their physical nexus during distribution of their products. In the case of Orthotic Shop, Inc., the Court of Appeals of the State of Washington upheld a tax assessment against remote sellers who sold their products through the Fulfilment by Amazon (FBA) program. The court found that because the sellers retained title to their products stored in Washington state via the FBA, they established a physical nexus prior to the sale for purposes of the sales tax and the state’s Business and Occupancy tax. Other states have also been assertive in claiming that holding inventory to which a company retains title at fulfilment centres establishes nexus for the company. This nexus affects not only sales tax but other state taxes as well, such as income, franchise and gross receipts taxes.
A remote seller can also establish physical nexus through a relationship with an in-state third-party distributor that fulfils online orders. For example, in the case of RockAuto, a Wisconsin-based remote seller utilized in-state third party distributors to fulfil orders in Arizona using the distributors' inventory. These distributors also handled storage, shipping and returns. The company required distributors to comply with its shipping and return policies, such as using its labels, branded tape and including a promotional magnet. Additionally, the company selected which distributor and location would fulfil the orders and contractually prohibited the distributors from selling products directly to customers through the distributor's website. The Arizona Court of Appeals determined that the remote seller's use of Arizona-based distributors, based on these activities, established a physical presence and substantial nexus.
Companies should review their supply chain and market presence strategy to see if their physical activity and distribution relations may create nexus in addition to economic activities.
Marketplace facilitator laws, now enacted in all states that impose sales tax and the District of Columbia, shifted sales tax collection and reporting obligations from individual retailers to marketplace facilitators for sales occurring on physical or virtual platforms. In addition to sales taxes, some states have expanded marketplace collection to include other taxes and fees, for example: prepaid wireless 911 fees (Kansas), lead-acid battery and tire fees (Florida), waste recycling fees (California) and retail delivery fees (Colorado). This is another trend that is likely to continue in 2025.
Whether a person or an entity is a marketplace facilitator for state tax purposes is determined by each state’s definitions. Businesses are encouraged to carefully review their activities to determine if they fulfil the criteria of a marketplace facilitator under state nuanced and technical definitions, and to understand the implications for their obligations to collect and remit taxes and fees. Court decisions from 2024, such as Amazon Services and StubHub, highlight how states are aggressively seeking to impose collection obligations on marketplaces, even before the effective date of marketplace facilitator laws.
Commissions and fees earned by marketplace facilitators are also receiving scrutiny. Certain states, such as Texas, have been asserting on audit that commissions or fees retained by marketplace facilitators for providing sales on its platform are subject to sales tax as data processing services. Marketplace facilitators should review if their commissions or fees may be subject to sales tax in other states that impose tax on data processing or similar services.
States looking to expand their tax base tend to look towards the taxation of software and digital products. In the last three years, Kentucky, Maryland and Vermont enacted laws allowing the taxation of software as a service (SaaS).
As from 1 January 2025, Louisiana is the latest state to impose sales tax on SaaS and information services. To prevent taxation of business inputs, Louisiana provides an exemption from taxation if SaaS was purchased or licensed exclusively for commercial purposes, was used by the business directly in the production of goods or services for sale to its customers, and the goods and services produced by the business are subject to sales tax or insurance premiums tax. An additional exemption from tax on software used in operations applies for FDIC-insured financial institutions.
In 2024, there were several notable proposals. For instance, Virginia considered imposing tax on digital services including software application, data storage services and streaming services with consideration for exclusion of business-to-business transactions. The District of Columbia and New York introduced legislation to tax the collection of data from consumers from their residents. A similar base expansion related to the taxation of software, digital products, information services and data collection, with potential exemptions for business-to-business sales, is likely to be seen again in 2025. To stay compliant, businesses should remain vigilant to changes in states where they have nexus and determine if changes in the law require them to begin collecting sales tax on newly taxable products or services.
As tax regimes continue to grow in complexity, many businesses look to software solutions to manage their multistate sales and use tax compliance. Software solutions may offer several benefits, including tracking tens of thousands of tax rates in real time and access to taxability information to determine how products and services are taxed in various jurisdictions. Such solutions, however, are not a replacement for regular comprehensive check ins with state and local tax accountants about a company’s overall activity in each state and an in-depth review of contracts, invoices and marketing material describing a company’s products and services.
Auditors are now focusing on testing compliance areas that are often missed when completed with software solutions. For instance, while software can track economic sales into the state, it does not automatically identify other physical activity in the state, such as the hiring of new employees or agents, or relations with distributors and inventory management that can impact nexus determinations. Prospective registrations, which are registrations as of a specific date without considering whether the company had nexus in previous periods, are evaluated to ensure they accurately reflect when the company established nexus with the state and whether it had filing obligations for those prior periods. Prospective registrations can be suggested by software as part of tracking economic nexus thresholds but not considering or knowing about company’s other in-state activities. Taxability selections are reviewed for accuracy to ensure they represent the nature of products as described in contracts, invoices and marketing materials. Exposures on audit arise when taxability mapping software is completed without the assistance of state and local tax expects with deep understanding of products and services and how their state-specific sales tax rules are applied.
As audit activity is expected to continue to rise in 2025 and beyond, companies relying on software for sales tax compliance should review their internal procedures, nexus determinations and taxability inputs.
To support state budgets for transportation projects and infrastructure, Colorado and Minnesota have introduced a delivery fee on retailers shipping products to customers within their states. Colorado implemented this fee on 1 July 2022, and Minnesota two years later on 1 July 2024.
In Minnesota, a USD .50 fee is imposed on each transaction with charges equal to or exceeding USD 100 involving retail deliveries in the state of tangible personal property subject to sales tax or clothing regardless of its taxability. When calculating whether a transaction meets or exceeds the USD 100 threshold, a transaction includes all charges that are part of the sales price. The fee is imposed on the seller and could be paid by the seller or passed on to the consumer subject to certain invoice presentation requirements.
Minnesota exempts from the fee businesses with retail sales less than USD 1 million in the previous calendar year or marketplace providers facilitating sales of retailers with sales less than USD 100,000 in the previous calendar year.
In 2024, similar retail fees were proposed in Nebraska, New York and Washington state and it is likely that this trend will continue in 2025. Retailers are encouraged to determine impact of such fees on the operations and if their compliance preparedness.
Angela Acosta
Ilya Lipin
BDO in United States
Key among these challenges will be the expansion of the taxable base to encompass services and emerging technologies, reflecting a broader effort to capture revenue from the digital economy, software accessed through the cloud and consumer data collection. To centralize tax collection, US states are turning to broadly defined marketplace facilitator provisions and are expanding the scope of taxes and fees to be collected. To raise revenue from e-commerce transactions, states have begun to enact delivery fees based on deliveries taking place within the state. To ensure compliance, states have ramped up their audit activities, focusing on verifying that companies adhere to nexus laws and accurately characterize and map products and services within compliance software for sales tax purposes.
This article looks at anticipated sales tax trends to watch in 2025 and offers recommendations for a proactive approach to addressing changes, helping businesses to remain compliant and strategically agile in navigating this evolving environment.
Nexus
Companies are required to collect sales tax if they have nexus with a state, which can be established through a physical presence (payroll, property, agents, etc.) or sales exceeding economic thresholds enacted by all states that impose a sales tax (e.g., USD 100,000 of gross sales or 200 separate transactions within the past or current year).To reduce the compliance burden and costs of administration, several states (i.e., Indiana, Louisiana, North Carolina, South Dakota and Wyoming) dropped the 200 separate transaction thresholds in 2023 and 2024, a trend that is expected to continue in 2025.
In 2024, courts highlighted the importance of companies monitoring their physical nexus during distribution of their products. In the case of Orthotic Shop, Inc., the Court of Appeals of the State of Washington upheld a tax assessment against remote sellers who sold their products through the Fulfilment by Amazon (FBA) program. The court found that because the sellers retained title to their products stored in Washington state via the FBA, they established a physical nexus prior to the sale for purposes of the sales tax and the state’s Business and Occupancy tax. Other states have also been assertive in claiming that holding inventory to which a company retains title at fulfilment centres establishes nexus for the company. This nexus affects not only sales tax but other state taxes as well, such as income, franchise and gross receipts taxes.
A remote seller can also establish physical nexus through a relationship with an in-state third-party distributor that fulfils online orders. For example, in the case of RockAuto, a Wisconsin-based remote seller utilized in-state third party distributors to fulfil orders in Arizona using the distributors' inventory. These distributors also handled storage, shipping and returns. The company required distributors to comply with its shipping and return policies, such as using its labels, branded tape and including a promotional magnet. Additionally, the company selected which distributor and location would fulfil the orders and contractually prohibited the distributors from selling products directly to customers through the distributor's website. The Arizona Court of Appeals determined that the remote seller's use of Arizona-based distributors, based on these activities, established a physical presence and substantial nexus.
Companies should review their supply chain and market presence strategy to see if their physical activity and distribution relations may create nexus in addition to economic activities.
Expansion of Collection Responsibilities through Marketplace Facilitator Laws
Marketplace facilitator laws, now enacted in all states that impose sales tax and the District of Columbia, shifted sales tax collection and reporting obligations from individual retailers to marketplace facilitators for sales occurring on physical or virtual platforms. In addition to sales taxes, some states have expanded marketplace collection to include other taxes and fees, for example: prepaid wireless 911 fees (Kansas), lead-acid battery and tire fees (Florida), waste recycling fees (California) and retail delivery fees (Colorado). This is another trend that is likely to continue in 2025.Whether a person or an entity is a marketplace facilitator for state tax purposes is determined by each state’s definitions. Businesses are encouraged to carefully review their activities to determine if they fulfil the criteria of a marketplace facilitator under state nuanced and technical definitions, and to understand the implications for their obligations to collect and remit taxes and fees. Court decisions from 2024, such as Amazon Services and StubHub, highlight how states are aggressively seeking to impose collection obligations on marketplaces, even before the effective date of marketplace facilitator laws.
Commissions and fees earned by marketplace facilitators are also receiving scrutiny. Certain states, such as Texas, have been asserting on audit that commissions or fees retained by marketplace facilitators for providing sales on its platform are subject to sales tax as data processing services. Marketplace facilitators should review if their commissions or fees may be subject to sales tax in other states that impose tax on data processing or similar services.
Taxability
States looking to expand their tax base tend to look towards the taxation of software and digital products. In the last three years, Kentucky, Maryland and Vermont enacted laws allowing the taxation of software as a service (SaaS).As from 1 January 2025, Louisiana is the latest state to impose sales tax on SaaS and information services. To prevent taxation of business inputs, Louisiana provides an exemption from taxation if SaaS was purchased or licensed exclusively for commercial purposes, was used by the business directly in the production of goods or services for sale to its customers, and the goods and services produced by the business are subject to sales tax or insurance premiums tax. An additional exemption from tax on software used in operations applies for FDIC-insured financial institutions.
In 2024, there were several notable proposals. For instance, Virginia considered imposing tax on digital services including software application, data storage services and streaming services with consideration for exclusion of business-to-business transactions. The District of Columbia and New York introduced legislation to tax the collection of data from consumers from their residents. A similar base expansion related to the taxation of software, digital products, information services and data collection, with potential exemptions for business-to-business sales, is likely to be seen again in 2025. To stay compliant, businesses should remain vigilant to changes in states where they have nexus and determine if changes in the law require them to begin collecting sales tax on newly taxable products or services.
As tax regimes continue to grow in complexity, many businesses look to software solutions to manage their multistate sales and use tax compliance. Software solutions may offer several benefits, including tracking tens of thousands of tax rates in real time and access to taxability information to determine how products and services are taxed in various jurisdictions. Such solutions, however, are not a replacement for regular comprehensive check ins with state and local tax accountants about a company’s overall activity in each state and an in-depth review of contracts, invoices and marketing material describing a company’s products and services.
Auditors are now focusing on testing compliance areas that are often missed when completed with software solutions. For instance, while software can track economic sales into the state, it does not automatically identify other physical activity in the state, such as the hiring of new employees or agents, or relations with distributors and inventory management that can impact nexus determinations. Prospective registrations, which are registrations as of a specific date without considering whether the company had nexus in previous periods, are evaluated to ensure they accurately reflect when the company established nexus with the state and whether it had filing obligations for those prior periods. Prospective registrations can be suggested by software as part of tracking economic nexus thresholds but not considering or knowing about company’s other in-state activities. Taxability selections are reviewed for accuracy to ensure they represent the nature of products as described in contracts, invoices and marketing materials. Exposures on audit arise when taxability mapping software is completed without the assistance of state and local tax expects with deep understanding of products and services and how their state-specific sales tax rules are applied.
As audit activity is expected to continue to rise in 2025 and beyond, companies relying on software for sales tax compliance should review their internal procedures, nexus determinations and taxability inputs.
Retail Delivery Fees
To support state budgets for transportation projects and infrastructure, Colorado and Minnesota have introduced a delivery fee on retailers shipping products to customers within their states. Colorado implemented this fee on 1 July 2022, and Minnesota two years later on 1 July 2024.In Minnesota, a USD .50 fee is imposed on each transaction with charges equal to or exceeding USD 100 involving retail deliveries in the state of tangible personal property subject to sales tax or clothing regardless of its taxability. When calculating whether a transaction meets or exceeds the USD 100 threshold, a transaction includes all charges that are part of the sales price. The fee is imposed on the seller and could be paid by the seller or passed on to the consumer subject to certain invoice presentation requirements.
Minnesota exempts from the fee businesses with retail sales less than USD 1 million in the previous calendar year or marketplace providers facilitating sales of retailers with sales less than USD 100,000 in the previous calendar year.
In 2024, similar retail fees were proposed in Nebraska, New York and Washington state and it is likely that this trend will continue in 2025. Retailers are encouraged to determine impact of such fees on the operations and if their compliance preparedness.
Angela Acosta
Ilya Lipin
BDO in United States