Sales Tax in 2025: What You Need to Know
By Gail Cole
Lead Writer and Content Developer at Avalara
Sales tax changes are inevitable. You can fear them, loathe them, or pretend they don’t exist, but it’s better to meet them head on so you can be tax compliant. Here is a sneak peak of what you’ll find in the Avalara Tax Changes 2025 report, a comprehensive analysis of the latest compliance trends.
More states could change economic nexus rules
Six and a half years after the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., states continue to fine-tune their economic nexus laws. Eliminating the 200-transactions threshold is trending: Thirteen states have ditched their transaction test to date.
The Alaska Remote Seller Sales Tax Commission, which administers remote sales tax for more than 50 jurisdictions in the Last Frontier, is abolishing its transaction threshold effective January 1, 2025. New Jersey has introduced legislation to do the same, and it probably won’t be the only state working to get rid of the transaction threshold in 2025.
To be clear, states are under no obligation to eliminate the 200-transactions threshold: The Supreme Court didn’t stop South Dakota from setting a remote sales tax test of $100,000 in sales or 200 transactions. However, if states take more steps to simplify remote sales tax compliance now, Congress may be less inclined to intervene with remote sales tax requirements later.
Congress may push states for remote sales tax simplification
Senator Maggie Hassan of New Hampshire is leading a charge to “address the burdens that Wayfair has placed on small businesses.” She’d like to start by exempting remote sellers with less than $10 million in annual sales from sales tax collection obligations.
That would mean exempting more than 95% of all businesses.
Hassan has also put forward less draconian proposals. For example, states that are members of the Streamlined Sales Tax Agreement (SSUTA, or SST) would need to set an economic nexus threshold of $100,000 in annual retail sales (with no transaction threshold) and have only one tax rate per five-digit ZIP code. Non-SST states would be required to exempt remote sellers with less than $1 million in annual sales in the state and fully compensate small remote sellers for their sales tax compliance costs. Diane testified before Hassan and other members of the U.S. Senate Committee on Finance in May 2022 and again in September 2024.
It should be noted that Hassan represents one of just a few states with no sales tax, so if her proposals make it off the drawing board, they may not get much support. But that doesn’t mean she doesn’t make a valid point: Remote sales tax compliance is a burden for businesses.
Perhaps nowhere is that more evident than in Illinois.
Finance Committee Hearings to examine providing small business relief from remote sales tax collection, in Washington, DC on September 25, 2024. (Official U.S. Senate photo by Rebecca Hammel)
Illinois will have to defend (or change?) its remote sales tax requirements
If businesses and tax professionals grumble about remote sales tax, most won’t sue states over their requirements. Why, then, is Illinois currently facing several lawsuits over its remote sales tax requirements?
Illinois is a bit unusual in that it uses different sourcing rules and collection requirements for different sellers. It’s not the only state to distinguish between in-state sellers and out-of-state sellers with no physical presence in the state, but it is the only state to establish different sourcing rules for out-of-state sellers (businesses based in another state that have a physical presence in Illinois) and remote sellers (businesses based in another state that don’t have a physical presence in Illinois). Effective January 1, 2025, a provision of Illinois S.B. 3362 goes into effect which makes certain Illinois retailers responsible for destination-based sourcing for sales tax purposes. Illinois retailers who maintain a place of business in Illinois and sell tangible personal property from a location (or locations) outside Illinois will be required to collect all applicable state and local taxes at the location where it is shipped or delivered (or the location where the purchaser takes possession).
Updating taxes on digital goods and services
States have been fairly flush recently, but those salad days are ending. In the coming years, many states will need to tighten their belts or find new sources of revenue. Expanding the sales tax base to digital goods and services is one option.
There wasn’t much movement in this area in 2024, but there was some. Georgia started taxing digital products January 1, 2024, and Vermont began taxing software as a service July 1, 2024. North of the border, Canada’s Digital Services Tax Act came into force in June 2024.
Other efforts to broaden sales tax in 2024 failed. Virginia Governor Glenn Youngkin introduced a plan to tax digital goods and services, but the Legislature didn’t approve it. The Kansas Legislature suggested a tax on digital property and subscription services, but the died in committee. Whether these proposals will resurface in 2025 remains to be seen.
Meanwhile, Maryland’s beleaguered digital advertising tax won another legal battle in July 2024 when the United States District Court for the District of Maryland dismissed a case challenging the constitutionality of the tax. Several state-level challenges are still pending, however, and attorneys representing the plaintiffs are confident Maryland courts will eventually overturn the 2021 law. Unsure of the eventual outcome, other states aren’t rushing to adopt a digital ad tax of their own. But some, including Massachusetts, Nebraska, New York, Tennessee, and Washington, D.C., are digital-ad-tax curious.
Taxing digital goods and services comes with a lot of baggage, so there’s a lot to unpack. How should businesses source sales of intangible products? Should B2B sales be taxable or exempt? What’s the best way to tax a digital product used in multiple places?
Keep your eyes on the Avalara website to get your copy of the Avalara Tax Changes 2025 report in January.