End-of-year sales tax and VAT report: 2025

The bottom line

Here are the key changes that you need to know from the second half of 2025 and their implications for companies selling across state or international borders:

1. Chicago proposed a $0.50-per-user tax on major social platforms, with higher streaming (10.25%) and cloud (11%) rates taking effect January 1, 2025. Maine will tax digital streaming at 5.5% starting in 2026, while Indiana confirmed generative AI chatbots remain non-taxable when accessed remotely.
2. Washington’s new digital advertising tax took effect on October 1, 2025, requiring sales tax collection on online advertising and related services, while Maryland continues to defend its own digital ad tax in court following evidentiary hearings in July.
3. Illinois, New Jersey, and Utah are eliminating their 200-transaction economic nexus thresholds, meaning remote sellers will rely solely on revenue thresholds to determine sales tax obligations.
4. Manitoba is preparing to expand its 7% retail sales tax to cloud computing services, including SaaS, PaaS, IaaS, hosting, and subscription-based digital platforms, effective January 1, 2026.
5. Several countries advanced material VAT and GST changes, including Belgium’s proposal to raise its standard VAT rate to 22%, Bhutan’s approval of a 5% GST regime effective January 2026, and Finland’s proposal to reduce its reduced VAT rate from 14% to 13.5% starting January 1, 2026.
6. New rulings in New York and Tennessee show states shifting from labels to functionality, treating SaaS platforms and mobile apps as taxable software when the software drives the core value delivered.
7. Washington’s steep increase to the advanced computing surcharge and its new high-income surcharge create a far heavier tax burden for large technology groups beginning in 2026. Companies with Washington activity should prepare for the potential for materially higher business and operations (B&O) tax liabilities, more complex income calculations, and new reporting requirements.

Line items

1. U.S. jurisdictions expand taxation of digital media, social platforms, and cloud services

The brief: Cities and states are rapidly converging on a common approach to taxing “new media,” including streaming services, social media platforms, and cloud-delivered computing. Chicago has proposed a per-user tax, dubbed the “Social Media Amusement & Responsibility Tax” (SMART), on large social platforms while simultaneously increasing rates on streaming and cloud services. 

Similarly, Maine has extended its 5.5% sales tax to subscription-based digital audiovisual and digital audio services starting January 1, 2026. Indiana has also taken a different tack by confirming that generative AI chatbot services remain outside its sales tax base because they’re accessed remotely rather than delivered as tangible software. Together, these moves signal aggressive expansion of tax obligations across digital consumption models.

The backstory: Chicago’s proposal would impose a $0.50 monthly tax on each active user over the first 100,000 Chicago users on large social platforms. This is an unprecedented attempt to tax user-generated networks. It sits alongside increases already in effect in the city: a 10.25% amusement tax on streaming services and an 11% tax on SaaS and cloud computing. While the proposal is framed as a behavioral health funding measure, the tax structure closely mirrors how other jurisdictions have begun treating streaming, SaaS, and cloud access as taxable digital media consumption.

Other states are testing the boundaries of digital taxation in different ways. Indiana, for example, recently clarified how AI services fit into existing software tax rules. The state determined that generative AI chatbot services are not subject to sales tax because customers access the software through a website or app rather than downloading or owning it. Since the access contained no permanent ownership, Indiana considered the AI chatbot a nontaxable service. Indiana’s position reflects a long-standing distinction in its tax code: remotely accessed software isn’t taxable unless the customer receives tangible rights or a local installation. This interpretation offers an early signal of how states may apply traditional software frameworks to fast-growing AI services.

Maine is also reshaping its rules to capture modern digital delivery models. By defining “digital audiovisual and audio services” to include subscription transfers without permanent ownership, the state is explicitly capturing modern streaming platforms. Sales of digital audiovisual and audio services occurring on or after January 1, 2026, will be reported on the sales tax return line for sales of tangible personal property and taxable services subject to 5.5% tax. 

Maine is also abolishing its service provider tax (SPT), folding previously distinct service categories into its core sales tax framework. The result is a more streamlined but expanded taxable base for digital services. 

These developments are not isolated. They reflect a broader shift in how states think about digital delivery. At the turn of the 21st century, many of these services would have been provided through physical media, making it straightforward for states to tax them as tangible personal property. But the move to remote, cloud-based delivery has broken that link. Traditional sales tax systems were built for transactions involving physical goods, and the transfer of physical items is no longer part of how these services are delivered. As a result, states are creating new ways to bring cloud services, streaming entertainment, and social platforms under unified digital tax structures.

‍The bottom line: Digital content providers, cloud platforms, and social media companies should expect significant compliance expansion in 2026. This trend indicates a broader reclassification of digital access services as taxable necessities rather than fringe categories. Companies must review their sourcing rules, tax determination logic, and billing structures now to prepare for a unified approach to digital service taxation.

To manage the elimination of Maine’s SPT, note the following: If your business is currently registered for a sales and use tax account under the same entity ID (e.g., FEIN) as your current SPT account, you can use that existing registration to report the services formerly subject to SPT on the sales and use tax returns.

2. States push digital advertising taxes – and face intensifying legal challenges

The brief: Washington and Maryland are advancing taxes on digital advertising and data-driven marketing services, but both face coordinated legal challenges under the Internet Tax Freedom Act (ITFA). ITFA is a federal law that prohibits states and localities from imposing taxes on internet access or applying discriminatory taxes on online commerce — making it the central legal test for whether these new state digital taxes cross a federal line. These cases will determine whether digital advertising can be taxed differently from traditional media, a decision with national ramifications.

The backstory: Washington’s digital advertising tax, effective October 1, 2025, expands its sales and use tax to cover digital marketing, online ad placement, digital campaign support, data processing, and similar services. Meanwhile, print, radio, TV, billboards, and other traditional media remain exempt, creating immediate friction. Comcast and major streaming platforms have filed lawsuits arguing the law discriminates against digital commerce and violates ITFA. The state stands to lose $475 million in projected revenue if the legal challenge succeeds.

Washington is also broadening its tax reach beyond digital advertising. The state’s advanced computing surcharge increases sharply on January 1, 2026 — rising from 1.22% to 7.5% of gross income for affiliated groups with more than $25 billion in worldwide revenue. The annual surcharge cap also expands from $9 million to $75 million, significantly increasing the tax burden for large cloud and advanced computing companies. The surcharge applies on top of existing B&O rates for businesses classified under “services and other activities.”

Maryland is on a similar path. The state began applying a 3% sales tax on IT and software publishing services in July 2025 while defending its digital ad revenue tax (2.5%–10%) in court. Apple and Google argue the tax unlawfully targets digital advertising because programmatic features do not meaningfully distinguish digital ads from traditional ones. Maryland tax authorities counter that automation, targeting, and data intermediation justify different tax treatment. These cases are still pending. 

This legal scrutiny of Maryland’s framework increased over the summer. In August, the Fourth Circuit struck down the tax’s “pass-through provision,” which barred businesses from listing or disclosing the digital ad tax as a separate line item. The court unanimously ruled that the restriction violated the First Amendment: Maryland cannot prevent companies from explaining tax-related charges to customers. 
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Both states are exploring the same policy argument: that digital advertising has unique characteristics requiring a distinct tax approach — one increasingly challenged by federal protections for digital commerce.

The bottom line: These lawsuits are likely to shape national digital tax policy. If courts rule these taxes discriminatory, states may need to rethink or abandon digital-ad-specific tax models. Companies engaged in digital advertising should prepare for diverging state interpretations and potentially rapid policy reversals.

3. States streamline economic nexus rules by eliminating transactions thresholds

The brief: Illinois, New Jersey, and Utah all moved to eliminate their 200-transaction nexus thresholds in 2025, signaling a coordinated trend toward revenue-only standards for remote seller obligations. This simplifies compliance for many businesses while raising the stakes for companies with high volumes of low-dollar transactions.

The backstory: Utah eliminated its 200-transaction threshold for remote sellers as of July 2025. Now, remote sellers must register for Utah sales and use tax if they generate over $100,000 in gross revenue from the state. 

Illinois will eliminate its threshold beginning January 1, 2026, relying solely on a $100,000 revenue trigger. The state also introduced two tax amnesty programs — one for remote sellers (2021–2026 activity) and one for all taxpayers (2018–2025). Both programs waive interest and penalties, further smoothing the transition to a simplified nexus rule. Separately, effective January 1, 2025, Illinois began requiring retailers with a place of business in the state to collect and remit destination-based retailers’ occupation tax on sales made from outside Illinois to Illinois customers. Together, these changes shift more compliance responsibility onto sellers while aligning Illinois with broader efforts to simplify nexus rules and modernize sourcing. 
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New Jersey also advanced legislation aimed at removing its 200-transactions threshold. Lawmakers cited consistency and fairness as core drivers. Many businesses exceed 200 small transactions long before they generate meaningful revenue.

The bottom line: Expect more states to drop transaction-count thresholds in 2026. Companies selling high-volume, low-value products will need to adjust their compliance triggers, while sellers just below revenue benchmarks may benefit from lower filing requirements. Revenue-only thresholds are rapidly becoming the national standard.

4. Cloud computing taxation expands as Manitoba modernizes its RST framework

The brief: Manitoba is moving forward with plans to apply its 7% retail sales tax to cloud computing services — covering SaaS, PaaS, IaaS, hosting, cloud storage, and subscription-based gaming — effective January 1, 2026. Updated bulletins have already been issued to guide businesses ahead of implementation.

The backstory: Manitoba’s 2025 budget introduced the most comprehensive cloud computing tax expansion in the province. Manitoba Finance has updated its information bulletins, signaling intent to adopt the measure.

The tax will apply to both resident and non-resident providers if services are “used in Manitoba” — a concept determined using the billing or shipping address or, when available, the customer’s actual location of use. The inclusion of subscription-based gaming platforms, online hosting, cloud infrastructure, and SaaS platforms underscores the jurisdiction’s view that digital access services are part of the standard taxable economy.

The bottom line: Manitoba’s approach signals increased global momentum toward bringing cloud infrastructure firmly into tax bases. Cloud and SaaS providers should prepare for expanded registration, sourcing complexity, and billing adjustments. Businesses selling into Manitoba will need to register for RST ahead of the January 2026 effective date, and should ensure their systems are ready to support ongoing filing and compliance.

5. Global VAT and GST systems continue structural reform

The brief: Belgium, Bhutan, and Finland advanced major VAT/GST changes in late 2025 — including rate adjustments, consolidation of reduced rates, new registration obligations for foreign digital service providers, and early moves toward real-time e-invoicing as governments modernize their digital reporting systems.

The backstory: A growing number of countries are upgrading VAT administration by adopting real-time e-invoicing:  systems where invoice data is transmitted directly to tax authorities at or near the moment of issue. These models give governments better visibility into transactions, reduce fraud, and streamline audits, so jurisdictions are building out the infrastructure even when timelines remain fluid.

Belgium introduced a proposal to increase its standard VAT rate from 21% to 22%, merge reduced rates into a single 9% category, expand 0% VAT treatment for essential goods, and introduce real-time e-invoicing. The reforms aim to strengthen fiscal stability but have generated political resistance, leaving timing uncertain.
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Bhutan approved a 5% GST regime effective January 2026 to replace its sales and excise tax systems. The reform eliminates numerous exemptions while granting businesses input tax recovery rights. Foreign digital service providers selling into Bhutan must register once they exceed the BTN 5 million threshold.

Finland proposed a 0.5% VAT reduction to its reduced VAT rate (moving from 14% to 13.5%) effective January 1, 2026. This is the country’s second major VAT policy change in as many years. Last year, the country raised its standard VAT rate to comply with Eurozone deficit limits. Across these jurisdictions, the changes reflect a shared trend: rebalancing VAT systems to ensure fiscal health while preparing for more advanced digital reporting frameworks, including real-time invoicing and platform-based compliance.

The bottom line: Digital service providers selling internationally must revisit their registration triggers, invoicing processes, and VAT calculation systems. Structural VAT and GST changes are accelerating globally, and companies should expect more jurisdictions to adopt new rules in 2026.

6. States tighten software classification rules for SaaS and app-based services

The brief: New York and Tennessee issued rulings in 2025 that signal a broader shift in how states distinguish between taxable software and nontaxable services. Both states determined that when the software functionality is essential to delivering the experience, the transaction should be treated as a taxable software sale — even when marketed as a service or subscription.

The backstory: In April 2025, New York determined in the NetVoyage (NetDocuments) case that a document-management provider was selling taxable software, not a nontaxable service. The state emphasized that customers could not use the platform without the underlying software, making that component the true deliverable.

Tennessee reached a similar conclusion in an October 2025 ruling involving a mobile heart-health app. While the taxpayer argued the product was a nontaxable “data-processing service,” the Department found that the app’s biometric tracking and analysis features were software-driven activities and therefore taxable.

The bottom line: SaaS, app-based, and AI-driven platforms should expect greater scrutiny of how states classify software-enabled services in 2026. Businesses may need to revisit product descriptions, billing structures, and taxability mapping as more jurisdictions adopt a functionality-first approach to determining whether digital services fall within their taxable software definitions.

7. Washington's advanced computing surcharges reshape tax exposure for major technology companies

The brief: Washington is significantly expanding its tax reach for large technology and cloud businesses starting January 1, 2026. The advanced computing surcharge under HB 2081 jumps from 1.22% to 7.5% for affiliated groups with over $25 billion in worldwide revenue, and the annual cap increases from $9 million to $75 million. The state is also introducing a new 0.5% surcharge on Washington taxable income over $250 million, applied only to the portion above that threshold and in effect through 2029.

The backstory: These measures reflect Washington’s broader push to capture more revenue from advanced computing, cloud infrastructure, and AI-driven businesses. The widened surcharge caps and income-based thresholds mean companies will no longer be able to rely on historical exposure models; instead, they will need to reassess their Washington presence, income sourcing, affiliated-group definitions, and service classifications under the state’s B&O framework. The new rules also interact with Washington’s evolving digital advertising tax and sourcing debates, signaling a coordinated state effort to modernize revenue collection from digital-first industries.

The bottom line: These surcharges introduce significant new compliance pressure and cost considerations for companies operating in Washington, especially cloud and AI providers. Businesses should prepare for higher B&O liabilities, more precise income tracking, and faster pivots as Washington refines how digital activity is sourced and taxed.

Forecasting

As we move into 2026, here are some key trends to watch:

• Expansion of VAT/GST obligations for SaaS and digital goods: More countries are expected to require non-resident SaaS and digital goods providers to register, collect, and remit VAT/GST. This builds on the wave of rules introduced in 2025 and reflects growing alignment with OECD standards on cross-border digital services. Companies should expect more structured registration, invoicing, and reporting frameworks aimed at creating consistent obligations for international providers.
  
  
• Acceleration of global e-invoicing mandates: E-invoicing adoption will increase sharply as countries roll out structured invoice formats to strengthen VAT/GST compliance. The UK will join the wave of mandatory e-invoicing regimes soon with all VAT invoices required to be electronic starting April 2029. Expect other jurisdictions to follow suit as invoice-level automation becomes the global norm.
  

• Import VAT reforms for physical goods: The EU is preparing significant changes to e-commerce import rules in 2026, including discussions to phase out the €150 de minimis exemption for low-value goods. This shift would introduce customs duties for shipments that historically did not face them. At the same time, greater reliance on the Import One-Stop Shop (IOSS), new customs data systems, and proposals like a €2 per-package handling fee signal a push toward centralized enforcement and more consistent VAT collection on cross-border sales.
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• Emerging guidance on cash-rounding after penny discontinuation: With the U.S. Treasury discontinuing penny production in late 2025, states are expected to issue rounding rules for cash transactions. Rounding to the nearest nickel introduces uncertainty in sales tax calculation — rounding up creates untaxed revenue, while rounding down shifts cost to merchants. States will likely issue guidance in 2026 defining acceptable rounding methods, ensuring parity between cash and electronic payments, and clarifying tax liability. These rules may also extend to e-commerce, where updating invoicing and payment systems to accommodate rounding conventions could add complexity. Businesses should prepare to update point-of-sale systems for state-specific rules.
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• Greater clarity on sourcing rules for digital advertising services: Washington may issue sourcing guidance for advertising services, potentially adopting a multiple-points-of-use (MPU) approach similar to its treatment of software under the Digital Products and Remote Access Software exemption. This would focus taxation on users located within the state.
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• Broader adoption of MPU exemptions for SaaS and software: More states that tax SaaS and electronically delivered software are expected to allow MPU exemptions, giving businesses clearer mechanisms to allocate tax based on where services are actually used.
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• State guidance on generative AI and cloud-delivered intelligence tools: Following Indiana’s recent ruling, more states may begin clarifying how AI services fit into existing software and digital services frameworks. Expect guidance that focuses on whether AI is downloaded versus accessed online, which users derive value from the service, and whether the AI component is the primary deliverable.
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• Potential disruption from federal tariff litigation: A major wildcard for 2026 is the Supreme Court’s upcoming decision on Trump-era tariffs imposed under IEEPA. If ruled unconstitutional, companies that paid tariffs may be entitled to refunds. For businesses that passed those costs through to customers — and included them in the sales tax base — refunding tariffs may require refunding associated sales tax. This is most likely to affect B2B sellers that itemized tariff-related price increases, creating additional reconciliation and filing complexity.

The second half of 2025 brought meaningful changes across the broader tax landscape — spanning state sales tax, cloud and software treatment, cross-border VAT reforms, and new administrative rules. Preparing early for these updates will help teams stay compliant and avoid last-minute adjustments as 2026 approaches. If you have questions or need guidance on your specific obligations, reach out to our tax experts.

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