States Expand Sales Tax into New Frontiers as Digital Businesses Pick Up the Slack for Struggling Consumers

By Ken Webster
Head of Research at Numeral

Two seismic events have reshaped the U.S. economy in the years since 2019. The first was the COVID-19 pandemic, which contributed to historic inflation and major shifts in consumer behavior. The second was the rapid emergence of new technologies, such as AI, that have eroded worker confidence in the labor market.

These shifts have presented fiscal challenges for states, as traditional sales tax bases built around physical goods have become less aligned with a service-based digital economy. But in a fortunate turn of events for states looking for ways to increase tax revenue, the Supreme Court significantly expanded states’ authority to require sales tax collection.

With its 2018 ruling in South Dakota v. Wayfair, the Supreme Court allowed states to require out-of-state businesses to collect and remit sales tax, even in cases where a business did not have a physical presence in the state, ending the physical presence requirement established by Quill Corp. v. North Dakota. This decision allowed states to pass laws requiring remote sellers to collect sales tax if they have sufficient economic connections with the state.

States have increasingly used this expanded authority to subject more sellers to sales tax compliance obligations and to tax new categories of digital products, including software-as-a-service (SaaS). As states continue expanding their sales tax reach, staying informed is critical. Register for the Mid-Year Sales Tax Update 2026 webinar to gain practical insights into the latest legislative, administrative, and judicial developments, including tax base expansion efforts, digital product taxation changes, and evolving nexus rules.

From Tangible Goods to an Increasing Reliance on Revenue From Digital Products

Because state sales tax systems were originally designed around tangible goods, and because physical nexus rules limited their authority, states were initially slow to tax SaaS and other cloud-based services.

In fact, before 2010, SaaS and cloud-based services were often exempt or taxed only through administrative guidance, while prewritten software was primarily taxed only when delivered on physical media discs or thumb drives. This was true despite Salesforce beginning the rapid transformation of the software market into a service-based one as early as 1999.

While there were some early exceptions, including Massachusetts, Arizona, and New York, the majority of states did not have specific administrative guidance or laws in place establishing that SaaS or cloud-based services were subject to sales tax until the post-Wayfair era, when economic nexus rules allowed them to more easily target remote sellers, including those selling digital software subscriptions.COVID-19 and its aftermath led more states to establish laws on taxing digital products.

Pandemic lockdowns initially caused steep sales tax declines, with May 2020 state sales tax receipts falling nearly $6 billion, or 21%, from May 2019. Although stimulus spending and the shift to remote work and e-commerce later helped fuel a revenue surge, the surge proved temporary, and states soon faced new fiscal problems.

As consumer spending shifted online, states collected more digital revenue, but they also faced rapidly rising costs for healthcare, education, infrastructure, unemployment administration, and public services. As federal stimulus slowed and inflation surged, states began looking for ways to increase tax revenue. Digital products, SaaS, and technology services were appealing targets.

Taxation of SaaS Accelerates in the Post-COVID Era

In recent years, a growing number of states have begun expanding their definitions of taxable software, digital products, and technology services to include SaaS, data processing, cloud services, streaming, advertising technology, and digital subscriptions. Specifically:

• Vermont repealed its exemption for remotely accessed prewritten software, effective July 1, 2024, making cloud software and SaaS taxable.
• Louisiana enacted HB 8, Act 10, effective January 1, 2025, to expand sales tax to a variety of digital products, including SaaS, electronically delivered software, and information services.
• Maryland enacted HB 352, effective July 1, 2025, which imposed a new 3% tax on data and information technology services, including computing infrastructure, data processing, web hosting, computer systems design, and related sectors.
• Washington enacted ESSB 5814, effective October 1, 2025, extending retail sales tax to a variety of newly taxable services, including IT, advertising, custom software, custom website development, and additional digital automated services.
• Maine enacted LD 210, P.L. 2025, ch. 388, effective January 1, 2026, to extend sales tax to streaming audiovisual and audio services.
• Utah enacted SB 162, effective July 1, 2026, which imposed taxes on streaming services, digital subscriptions, gaming services, and seller-hosted prewritten computer software. Utah’s legislative change is notable because the state had already taxed SaaS through administrative rulings. SB 162 codified the rules and enshrined the tax regulations in statute.
• Colorado passed HB 26-1223, which takes effect January 1, 2027, and which narrows the exemption for certain software and brings downloaded and remotely accessed prewritten software into the sales tax base. Custom software remains exempt.
• California also enacted SB 122, effective January 1, 2027, to apply sales and use tax to digital prewritten software and SaaS while leaving many other digital goods exempt.

Additional states moved to broaden their tax bases, but not all succeeded. For example, Virginia’s HB 978 would have taxed numerous digital services, including software application services, computer-related services, website hosting and design, and data storage, but the bill died in committee during the 2026 session.

These shifts are not a surprise. The SaaS market generated $162.3 billion in revenue in 2025 and is expected to reach $356.6 billion by 2033. This is a significant untapped source of sales tax revenue.This shift towards taxing SaaS is also happening on a global scale. Mexico, Canada, and Kenya are among the many countries that have imposed new taxes or expanded existing taxes on digital service providers in recent years.

Fiscal experts have long suggested that imposing new taxes on services can serve as a viable, sustainable way to address revenue shortfalls, and with the rapidly accelerating pace of digital tax changes, each new state’s expansion is likely to prompt others to take notice.

As Companies Face New Compliance Burdens, Consumers Get Tax Relief

While SaaS providers and digital companies cope with rapid rule changes requiring them to monitor every jurisdiction where they have nexus, consumers are increasingly receiving targeted tax relief in response to inflation, wage pressures, and strained household budgets.

States have responded to overburdened consumers by expanding sales tax holidays, including:

• Illinois, which is enacting a sales tax holiday this year. Illinois will provide sales tax relief for the first time since 2022, when the state rolled back the sales tax rate for back-to-school items from 25% to 1.25%.
• Alabama, which suspended its sales tax on groceries for two months from May 1 to June 30.
• Florida, which extended its back-to-school sales tax holiday from the customary week-long tax break to a full month this year.

While this targeted relief is a boon to consumers who are coping with an ongoing affordability crisis that has more than a third of adults citing the cost of living as their most important financial problem, it has only added another layer of complexity to sales tax compliance for businesses.

Bottom Line

The massive post-COVID expansion of SaaS taxation reflects states’ efforts to both respond to growing financial pressure and to tap into a substantial potential revenue pool by modernizing their tax bases amid shifting economic realities.

These changes are likely to have a substantial fiscal impact, with California’s new SaaS tax alone expected to contribute $900 million to the state’s general fund, as well as an additional $1.1 billion in added sales tax revenue.

And the states where SaaS remains untaxed may take notice and move to expand their own tax bases, especially if generating additional revenue from digital services will help them fill budget gaps.

For SaaS providers, the complexity of existing regulations, the fact that regulations change, and the need to monitor where they’ve established nexus and therefore have tax obligations (in the U.S. and in other countries) mean that sales tax compliance requires diligent attention. For a deeper look at the latest sales tax developments, including tax base expansion initiatives, nexus changes, and significant legislative and judicial updates, save your seat for the Mid-Year Sales Tax Update 2026 webinar on August 26^th.