As businesses either enter or expand their reach within the U.S. market, understanding the complexities of sales tax compliance is more vital than ever. In 2025, companies will continue to face significant challenges related to evolving sales tax regulations, as states increasingly seek to simplify tax collection and broaden their taxable bases.
This article highlights crucial sales tax developments on the horizon and offers strategic recommendations for maintaining compliance and operational agility in this dynamic environment.
Understanding Nexus: The Foundation of Sales Tax Obligations
Nexus is a critical concept determining a business’s obligation to collect sales tax. Companies must collect sales tax if they establish nexus with a state, which can arise through physical presence, such as owning property or having employees, or by surpassing economic thresholds, such as generating over $100,000 in gross sales or conducting 200 transactions in the previous or current year.
Recent trends show several states, including Indiana, Louisiana, North Carolina, South Dakota, and Wyoming, have eliminated the 200-transaction threshold. This movement is expected to persist into 2025, thereby raising the stakes for compliance.
Moreover, court rulings have emphasized the need for vigilance in monitoring physical nexus. For instance, Washington State upheld a tax assessment against sellers using the Fulfillment by Amazon (FBA) program, asserting that retaining ownership of products stored in-state constituted physical nexus. Companies employing third-party distributors, like those in Arizona, should also assess their distribution structures, as fulfillment activities may inadvertently create nexus.
Key Action Items:
- Examine your supply chain and distribution strategies to ascertain potential nexus liabilities.
- Stay updated on legal precedents that could impact your nexus status.
Expansion of Responsibilities Through Marketplace Facilitator Laws
Marketplace facilitator laws have shifted the responsibility of sales tax collection from individual sellers to the platform operators themselves across all states that impose sales tax and the District of Columbia.
This shift now extends to various taxes and fees, beyond standard sales tax, encompassing items like repayment fees for prepaid wireless services and retail delivery fees. Understanding whether your business qualifies as a marketplace facilitator under different state laws is essential.
Several recent court cases have illustrated that states aggressively pursue the imposition of tax obligations even prior to the official enactment of marketplace facilitator regulations. Moreover, marketplace facilitators must carefully evaluate whether their commissions are liable for taxation as data processing services—a development that some states, including Texas, have begun to scrutinize.
Key Action Items:
- Thoroughly analyze your role on digital marketplaces to determine tax obligations.
- Clarify the nature of your commissions and fees in relation to potential data processing service taxes.
Taxability Trends: Software and Digital Products on the Rise
As states look to enhance their revenue sources, digital products and software are increasingly coming under the tax microscope.
Recent measures have seen states such as Kentucky, Maryland, and Vermont enact laws to impose sales tax on software as a service (SaaS), while Louisiana will follow suit in January 2025, allowing taxation of SaaS and information services under specific conditions.
Anticipate continued discussions across various states regarding the taxation of digital products–with jurisdictions like Virginia exploring taxes on services such as software applications and data storage. With movements towards taxing consumer data collection also on the rise, businesses must remain vigilant, especially in states where they have nexus.
Key Action Items:
- Stay alert to proposed legislation regarding the taxation of software and digital offerings.
- Assess whether newly imposed tax obligations apply to your business practices and offerings.
Conclusion: Be Prepared for 2025’s Evolving Sales Tax Landscape
With the landscape of sales tax compliance set for significant shifts in 2025, businesses must adopt proactive measures to remain compliant and agile.
By continually reviewing nexus implications, marketplace responsibilities, and the taxability of digital services, organizations can navigate this evolving environment and strategically position themselves for success.
