The Expanding Digital Tax Net – How States are Taxing Digital Goods and Services in 2025

Through South Dakota v. Wayfair, states gained a new way to tax businesses, specifically by creating a framework to link remote businesses to taxing jurisdictions based on economic nexus. In 2025, the states are taking another step towards broadening their tax base by creeping farther into the digital realm through new rules and regulations governing the taxation of digital goods and services.

The economic shift from a goods-based to a service-based economy has made it necessary for states to modernize their tax codes to avoid tax base erosion. By expanding into digital goods and services, which account for a large share of how business is conducted nowadays, the states can collect more revenue to support education, public safety, transportation, healthcare, and other local aid projects.

However, these changes have faced significant pushback, leading to lawsuits. Let’s dig into how these changes have played out in 2025, and what the outlook is for the future.

States Push Sales Tax Into the Digital Economy

In 2025, several states will have either begun implementing or introduced new ways to tax digital goods and services, including sales taxes on digital advertising, Software-as-a-Service (SaaS), data processing, and content platforms.

The beginning of the year brought several changes to the tax systems across the states. Chicago increased the personal property lease tax from 9% to 11% effective January 1, 2025. This tax applies to rentals and leases of not just tangible goods but also intangible property such as SaaS and software exempt from the state’s sales tax under the “5-Prong Test”. Louisiana also enacted changes on January 1, expanding the sales tax to include SaaS, digital products, and information services.

By the midpoint of the year, other states had joined the push into the digital world addressing not just taxation but also public policy and usage. In Texas, legislators signed the Texas Responsible Artificial Intelligence Governance Act on June 22, 2025. This act, set to take effect on January 1, 2026, regulates the development of AI systems and broadly defines them to encompass generating content, making decisions, and making predictions. It’s worth noting that Texas has longstanding tax rules that treat SaaS as a taxable data-processing service. However, a rule update in 2025 and a separate budget law passed in May 2025 included more specific guidance on taxing SaaS for both commercial and individual use and maintains the reduction of the tax base on data processing at 80% of the price.

Additionally, Maryland enacted a 3% sales tax on specific technology services, including data processing, software publishing (including eliminating the exemption for SaaS for commercial use), and web hosting, effective July 1, 2025. While the 3% sales tax on specific services is notable, Maryland has been at the center of digital tax discussions for some time. In 2021, the state enacted a digital advertising tax (DAT), which has come under legal scrutiny in the years since its passage.

Similarly, Washington has also been at the center of a legal storm. As of October 1, 2025, retail sales tax was applied to a broader range of services, including digital advertising, custom software development, website development, and IT services. The state repealed the “human effort” exclusion from the definition of digital automated services, making more automated digital services taxable.

Let’s delve into those legal challenges, as they offer a glimpse into what the future holds, depending on the outcome of these cases.

Legal Battles Over Digital Taxes Intensify

In Maryland, the legal battle has been long. Initially, the U.S. Chamber of Commerce and the Internet Association sued, arguing the state law clashed with federal prohibitions on state-level digital advertising taxes. The Comptroller later proposed regulations using a device-based sourcing rule and requiring declarations for businesses expecting liabilities over $1 million.

A Maryland Circuit Court judge ruled the tax unconstitutional, citing violations of the Internet Tax Freedom Act, the Dormant Commerce Clause, and the First Amendment, as well as the exemption of news media. That ruling was vacated by the Maryland Supreme Court, which held the challengers hadn’t exhausted administrative remedies. Most recently, the Fourth Circuit struck down Maryland’s “pass-through” ban—prohibiting companies from itemizing the tax on invoices—as an unconstitutional First Amendment restriction, likening it to colonial resistance against the Stamp Act; the case has been remanded for remedies and may head to the U.S. Supreme Court, while other federal challenges on Commerce Clause and ITFA grounds continue. For the latest updates related to the lawsuits, click here.

In Washington’s case, the battle is just beginning. On September 9, 2025, a Comcast subsidiary filed a lawsuit against the state and the Department of Revenue in Thurston County Superior Court. The company argues that Senate Bill 5814 is unconstitutional because it taxes nearly all internet-based advertising while specifically excluding most non-internet advertising services. Some of the exempted advertising mediums include newspapers, radio, and television. Additionally, it creates a discriminatory tax that violates the federal Internet Tax Freedom Act (ITFA).

Furthermore, Security Services Northwest filed an additional lawsuit in Thurston County Superior Court on September 30, 2025. Similar to the Comcast suit, the company claims that the tax unfairly targets security services and will increase costs for customers seeking protection. The suit also argues that the implementation of the new rule was rushed and, as a result, violates the company’s due process rights. Check out this update in the Sales Tax Institute’s News and Tips section to learn more about the history and the latest in the ongoing lawsuits.

What’s Next: The Race to Tax the Digital Marketplace

Despite ongoing legal challenges, the momentum behind digital advertising taxes is growing. States are increasingly looking to follow the lead of Maryland and Washington by introducing similar legislation. Rhode Island has proposed a 10% tax on digital advertising revenue for companies with at least $1 billion in global revenue, set to take effect in 2026 if enacted. New York lawmakers have introduced bills targeting both digital advertising and data collection services, while Massachusetts is considering a 6.25% excise tax on digital ad revenue. Nebraska and Connecticut have also joined the conversation, with Connecticut advancing both past and pending proposals aimed at taxing the gross revenue of large digital advertisers. Meanwhile, states such as Minnesota, Arkansas, and Indiana are exploring ways to tax social media platforms as part of broader efforts to expand their tax bases.

So, what does this mean for businesses and consumers? The implications are twofold. First, the sales tax landscape is poised to become even more complex, requiring companies to adapt quickly to stay compliant. Second, legal battles are likely to intensify. The outcomes of the Maryland and Washington cases will shape how future lawsuits are framed, but resistance from businesses is expected to continue. For consumers, this evolving tax environment could lead to increased costs as companies adjust pricing strategies to absorb or offset new tax burdens.

As states continue to redefine the boundaries of sales and use tax in the digital age, staying informed is essential. Subscribe to the Sales Tax Institute Newsletter to get the latest updates, expert insights, and practical tips on emerging sales tax changes delivered right to your inbox.