Mid-year sales tax and VAT report: 2025

The bottom line

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

1. Starting July 1, 2025, Maryland will implement a 3% sales tax on previously non-taxed data services, IT services, and software publishing when sold for commercial use. 
2. Beginning January 1, 2026, Maine’s 5.5% sales tax will start applying to streaming platforms like Netflix, Hulu, and Spotify. 
3. The Canadian province of Manitoba is set to tax digital services at 7% RST, including cloud storage, SaaS, platform-as-a-service (PaaS), and gaming subscriptions starting January 2026. 
4. Louisiana’s new digital products tax bill went into effect on January 1, 2025. Digital products and services including SaaS and subscription-based digital goods are now taxable in the state.
5. Several countries, including Sri Lanka and the Philippines, are implementing new tax policies in 2025, requiring foreign technology companies to pay VAT on non-resident electronic service providers even without a physical presence.
6. In the state of Washington, lawmakers passed a bill that expands the state’s retail sales tax to include digital advertising services (among others).
7. The global tax landscape has revealed contrasting trends as it relates to VAT rates: some countries are implementing VAT increases (Estonia and Romania), while others (South Africa) faced political resistance after attempting to raise rates. 

Line items

1. Maryland taxes IT services, Manitoba targets cloud computing, and Maine taxes digital streaming services

The brief: Maryland began taxing additional IT and software services when sold for commercial use at 3% on July 1, 2025. Starting January 1, 2026, the Canadian province of Manitoba will expand its retail sales tax to include cloud computing services and Maine will start applying the state’s 5.5% sales tax to digital streaming services like Netflix, HBOMax, and Spotify. 

The backstory: Maryland, Manitoba, and Maine are more than just alliterative – all three have started (or will soon start) taxing specific digital service categories. 

Maryland began taxing sales for individual consumption of software and digital products in 2021, but carved out significant exceptions when sales were made to business enterprises. In May of this year, Maryland passed HB 352 which significantly expands the state’s tax base by redefining “taxable service” to include software publishing services (3%), data processing and hosting (3%), and—notably for content creators—licensing of audio, video, and text intellectual property (3%) when sold to business enterprises. The legislation specifically targets “remote access to and use of computer software,” closing loopholes that previously exempted cloud-delivered services when sold for commercial use. 

In Manitoba, Finance Bulletin No. 033 details how the province will apply its 7% retail sales tax to “the right to access computing infrastructure, software, or information in an online environment.” The guidance explicitly includes subscription fees for cloud storage, SaaS applications, PaaS offerings, and even video game subscription services. The province has established specific rules for determining when services are “used in Manitoba,” basing taxability on either customer billing address or actual location of use when known to the vendor.

And in Maine, the state will soon apply its 5.5% sales tax rate to streaming platforms (like Hulu or Disney+). Maine has historically only taxed digital goods for permanent use; however, as part of this legislative change, the state has redefined “digital audiovisual and audio services” to include subscription-based electronic transfers where users don’t gain permanent ownership, making these subscription services taxable as well. 

The bottom line: For Maryland customers, businesses should begin updating their tax determination systems immediately, as collection requirements began on July 1, 2025. Manitoba-serving businesses have more preparation time but should review their customer data now to identify potentially affected accounts based on the province’s specific sourcing rules. Similarly, Maine residents have until January 1 of next year until their streaming services get a little more expensive. 

2. Sri Lanka and Philippines extend VAT to foreign digital service providers

The brief: Sri Lanka will require non-resident electronic service providers to register for and collect VAT beginning October 1, 2025. Similarly, the Philippines started implementing a 12% VAT on digital services for non-residents on June 1, 2025.

The backstory: These developments represent part of an emerging effort to eliminate competitive disadvantages faced by local businesses and capture tax revenue from the rapidly growing digital economy. 

Sri Lanka's Inland Revenue Department has mandated that non-resident providers of electronic services to Sri Lankan customers must register and charge 18% VAT on their services. Businesses should register if their service value exceeds Rs. 60 million in the last 12 months or Rs. 15 million in the last three months leading up to the change. The Sri Lankan system requires quarterly filing using their electronic VAT filing portal. Service providers must determine customer location through the billing address of the customer, IP address, payment information, or other reliable indicators.

In the Philippines, the new 12% VAT will apply regardless of whether a digital service provider has a physical presence in the country. Foreign providers earning over PHP 3 million in revenue in the Philippines are required to register with tax authorities, report B2B sales, collect business customers’ tax ID Numbers, and obtain additional verification (such as a questionnaire or tick box on their website or platform to confirm the customer is a business) even though these transactions are not taxable under the reverse charge mechanism. SaaS and digital services companies should be prepared for immediate tax compliance to ensure they meet all filing requirements and implement proper VAT procedures. The Philippines’ system requires quarterly filing, with penalties of up to 50% for non-compliance or misfiling.

The bottom line: These changes create immediate compliance challenges for impacted companies. To start, they require sophisticated tax determination systems capable of distinguishing between different revenue streams and calculating correct tax treatment based on complex location and service-type rules.

Even for companies that fall below either country’s registration thresholds, tracking annual revenue by country now becomes essential for ongoing compliance monitoring. The trend signals the complete erosion of the once-common exemption for foreign digital service providers and makes tax compliance an unavoidable aspect of international digital business.

3. Washington targets digital advertising and updates software tax exemption guidance

The brief: Washington state has enacted legislation (SB 5814) targeting digital advertising services with sales tax, while traditional advertising media remain exempt. Simultaneously, the state has updated guidance on software tax exemptions, narrowing qualifications for custom software and related services. 

The backstory: Unlike Maryland and other states that have attempted to create new digital advertising taxes independent from their sales tax base, Washington’s SB 5814 expands the sales tax base to specifically target digital advertising services. This new legislation is set to go into effect on October 1, 2025, and will require companies selling digital advertising in the state to collect between 7.5% and 10.6% sales tax when providing services like creating digital ads, analyzing performance, or planning online campaigns. 

The legislation has sparked concern among technology companies and industry groups who argue that because the legislation excludes “traditional” physical advertising media, like billboards and newspaper placements, it will result in unfair tax treatment across the advertising spectrum. The bill is likely ripe for challenges under the federal Internet Tax Freedom Act (ITFA), which prohibits states from “discriminatory taxes on electronic commerce.” What makes Washington’s approach particularly significant is the state’s historical influence on tech policy—with major technology companies headquartered there, Washington’s tax policies often serve as templates for other jurisdictions exploring digital taxation.

Washington’s Department of Revenue has also issued updated guidance on software tax exemptions to clarify when custom software and related services qualify for sales and use tax exemptions. The state refined its criteria for distinguishing between taxable and exempt software activities, specifically addressing cloud-based and SaaS implementations. The updated rules emphasize that to qualify as exempt “custom software,” the development must be for a specific customer and not involve the adaptation of prewritten solutions. The guidance also provides clearer distinctions between exempt installation services and taxable implementation services. This move further signals a move away from broad categories of non-taxable software and corresponding services, and Washington lawmakers who supported the changes emphasized that these revisions align the state’s tax code with the realities of the modern internet economy.

The bottom line: Companies providing digital advertising services to Washington residents should begin preparing for tax collection while monitoring potential legal challenges. Simultaneously, SaaS providers operating in Washington should review their service offerings against the updated exemption guidance. Companies may need to segment their service components for tax purposes, potentially separating custom development work (exempt) from standard implementation services (taxable), which could require updates to invoicing practices and tax calculation systems.

4. EU finalizes ViDA package adoption with implementation timeline

The brief: On March 11, 2025, the European Union formally adopted the VAT in the Digital Age (ViDA) package, establishing an implementation timeline for this significant overhaul of EU VAT rules.

The backstory: The ViDA package introduces three main components: 

1. Mandatory e-invoicing requirements will be phased in between 2026 and 2030, requiring structured electronic invoicing for cross-border B2B transactions with near real-time reporting to tax authorities. 
2. There will be updated VAT rules for platform economies, creating new obligations for digital marketplaces facilitating sales of goods and services. 
3. It will expand the One-Stop Shop (OSS) system to simplify compliance for businesses operating across multiple EU countries, reducing the need for multiple VAT registrations.

Member states must transpose these directives into national law according to the established timeline, with initial provisions taking effect in 2026. Several countries, including France, Italy, and Spain, have already announced accelerated implementation ahead of the EU-wide deadline.

The bottom line: Businesses operating in the EU should begin planning for these changes now. The e-invoicing mandate will require upgrades to accounting systems and internal processes to support structured electronic formats and real-time reporting. Companies should audit current invoicing practices, assess technology gaps, and develop implementation approaches aligned with both EU-wide deadlines and any accelerated country-specific timelines. The expanded OSS provisions may ultimately reduce administrative burdens by limiting the need for multiple VAT registrations across the EU, but businesses must first navigate the technical complexities of this digital transformation.

5. States issue guidance on tariff impact on sales tax calculation

The brief: States are issuing guidance on how tariffs impact sales tax calculation. In many states, tariffs have often been included in the sales tax base through informal guidance or otherwise. But, with the recent global attention and increasing tariffs in the U.S., certain states are being more vocal about the expectation in their regions. New Jersey and Illinois both recently issued statements confirming tariffs must be included in taxable sales price calculations, even when separately itemized on invoices.

The backstory: The Illinois Department of Revenue published a general information letter addressing whether tariffs are deductible when calculating sales tax. The state clarified that tariffs paid by retailers are included in taxable gross receipts. Similarly, New Jersey’s Division of Taxation has clarified that when sellers pass along tariff costs to consumers, these charges are fully subject to sales tax, even when separately itemized. New Jersey law defines “sales price” as the total amount customers pay, which must include all business expenses, including government tariffs paid by sellers.

The bottom line: If your business imports goods and pays the tariffs (even if separately itemized on customer invoices), those tariff costs must be included in your taxable receipts in many states. However, if your customer handles the importation and pays tariffs directly to U.S. Customs, only the amount you charge the customer is taxable in these states.

6. Countries continue to adjust VAT rates while South Africa deals with political fallout

The brief: After facing pressure from the International Monetary Fund (IMF), Romania plans to raise its VAT rate to 21% from 19% starting August 1, 2025. Meanwhile, Estonia has also confirmed a VAT increase and South Africa has canceled its planned VAT increase following significant political opposition.

The backstory: In South Africa, the government has canceled its planned VAT increase following political opposition. The proposed 1% increase over two years, aimed at raising government revenue, faced significant resistance as the country struggles with slow economic growth and rising living costs.

In the EU:

• Romania’s government plans to raise its standard VAT rate from 19% to 21% on August 1, 2025. The move is part of broader fiscal reforms aimed at reducing the country’s budget deficit.
• Estonia’s standard VAT rate rose from 22% to 24% effective July 1, 2025. This increase will apply until December 31, 2028.

The bottom line: Companies operating in these countries should update their systems to reflect these rate changes, ensuring accurate VAT collection and remittance. For Estonia, businesses should note that no new transition provisions will be added for the upcoming increase, with Estonian tax authorities expecting businesses to manage this risk in their commercial agreements. South Africa’s VAT rate will remain at 15%, with the finance ministry stating that no immediate alternative revenue sources will replace the canceled VAT increase.

Forecasting

As we move into the second half of 2025, here are some key trends to watch:

• Continued expansion of digital taxation: More U.S. states are likely to follow Maryland and Louisiana’s lead in expanding their tax base to include IT services, SaaS, and other digital products.
  
  
• Growing focus on cross-border enforcement: The EU’s ViDA package and new VAT requirements in countries like Sri Lanka and the Philippines signal a global trend toward more sophisticated digital tax administration and enforcement. Expect more countries to implement similar measures, potentially requiring significant changes to business processes and systems.
  

• Evolving definitions of taxable digital services: As digital business models continue to evolve, tax authorities are likely to expand their definitions of taxable digital services. Companies should stay alert to new interpretations or guidance from tax authorities regarding emerging technologies and service offerings.
  
  
• Increased audit activity: With new reporting requirements and tax frameworks in place, governments may step up enforcement through audits and compliance checks. Companies should ensure they have robust documentation of their tax positions and compliance processes.
  
  
• Streamlining of administrative processes: As seen with tariff guidance in states like Illinois and New Jersey, tax authorities are working to clarify administrative procedures. This trend may continue, potentially simplifying compliance in some jurisdictions while introducing new requirements in others.
  

Remember, staying informed and proactive is key to navigating the complexities of sales tax in the digital economy. If you need assistance understanding these changes or managing your company’s sales tax compliance, don’t hesitate to reach out to our team of experts.

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