The Same Digital Service, Different Tax Result:Why State-by-State Taxability Reviews Matter in 2026

Franklin Chow on September 14, 2026

Digital products and technology services continue to blur the traditional line between taxable property and nontaxable services. For multistate businesses, the practical problem is simple: the same cloud-based product can produce very different sales tax results depending on where the customer is located, how the product is described, and what the customer is purchasing.

That issue has become even more important in 2026.

Washington: Expanded Sales Tax on Technology Services

Washington significantly expanded its retail sales tax base effective October 1, 2025, bringing services such as custom software, customization of prewritten software, information technology services, and certain digital automated services into the retail sales tax regime. The Washington Department of Revenue continued rulemaking and interim guidance through 2026, meaning technology companies should not assume their historical treatment remains correct.

California and Colorado: Software Tax Changes Beginning in 2027

California and Colorado are now preparing for major changes of their own. California SB 122, signed June 29, 2026, will subject prewritten software delivered electronically or accessed remotely, including SaaS, to sales and use tax beginning January 1, 2027, while retaining exclusions for items such as custom software and certain digital infrastructure. Colorado HB 26-1223, likewise, changes software taxability beginning January 1, 2027 by repealing the state exemption for most downloadable software, while preserving exemptions for software developed for a particular user and software governed by a negotiable license agreement. These changes are discussed in greater detail in Source Advisors’ recent article on California and Colorado software taxability, available here.

New York: Sales Tax on Prewritten and Remotely Accessed Software

New York takes another approach. Prewritten software is taxable whether delivered on physical media, electronically, or through remote access. New York also sources remotely accessed software based on where the purchaser uses or directs the use of the software. A business with users in multiple states may therefore need employee-location or user-location data rather than simply relying on the customer’s headquarters or billing address.

Texas: Taxation of SaaS and Data Processing Services

Texas adds a different layer of complexity. The Texas Comptroller treats many SaaS offerings as taxable data processing services. Twenty percent of the charge for taxable data processing services is exempt, so tax generally applies to the remaining 80 percent. Texas also distinguishes taxable data processing from professional services that merely use computers as tools, which can be significant for companies selling analytics, automation, bookkeeping, consulting, or AI-enabled services.

Wisconsin: Treatment of SaaS and Prewritten Software

Wisconsin demonstrates why a national “SaaS is taxable” rule is equally unreliable. Wisconsin guidance generally treats charges for remotely accessing prewritten software as nontaxable when the customer does not operate or control the provider’s server and the provider is not otherwise selling a taxable product or service. Downloaded prewritten software and certain digital goods, however, can be taxable. The contract, product functionality, and method of delivery therefore matter.

Pennsylvania: Sales Tax on Digital Products and Software

Pennsylvania broadly taxes digital products transferred electronically, including canned software, apps, digital media, and certain subscriptions. For sourcing purposes, Pennsylvania generally looks to the customer’s billing address on file. Compare that with New York’s focus on where remotely accessed software is actually used, and it becomes clear why one customer-address field may not be sufficient for every jurisdiction.

Illinois: Economic Nexus Changes for 2026

Illinois presents another 2026 compliance issue. Effective January 1, 2026, the state eliminated the 200-transaction economic nexus threshold for remote retailers and marketplace facilitators, leaving the $100,000 gross-receipts test. Changes like this illustrate that a company’s sales tax obligations may shift even when its products, customers, and business model have not changed.

Changing Sales Tax Rules Create Compliance Risk

These differences create practical risks. Product descriptions used by sales teams may not match the tax characterization applied in billing systems. Bundled invoices may combine taxable software, implementation, training, support, and consulting. Customer location data may be incomplete. Tax engines may still be configured using assumptions that were correct when implemented but have since changed.

Multistate Sales Tax Compliance

Businesses should periodically review their products and services state by state, particularly after launching new offerings, entering new markets, changing contract language, or implementing new billing and tax automation systems. A useful review should evaluate nexus, product taxability, sourcing, exemptions, invoice presentation, and the underlying data used by the tax engine. It should also document why each conclusion was reached so the business is prepared if a state later questions the treatment.

For technology and service companies, sales tax compliance is no longer simply a question of whether “software” is taxable. The better question is what the customer receives, where the customer receives or uses it, and how that state classifies the transaction.

Source Advisors can help businesses evaluate multistate sales taxability, sourcing, nexus, and system configuration to reduce exposure and build a defensible compliance approach as state rules continue to evolve.

Sources

Washington Department of Revenue, “ESSB 5814 interim guidance and upcoming rule-making.”
California SB 122 summary, Avalara, June 30, 2026.
Colorado General Assembly, HB 26-1223, “Modifying Certain Tax Expenditures.”
Source Advisors, “States Are Expanding Sales Tax to SaaS and Digital Products: What Businesses Need to Know.”
New York State Department of Taxation and Finance, Tax Bulletin ST-128, “Computer Software.”
Texas Comptroller of Public Accounts, “Taxable Services – Data Processing Services.”
Wisconsin Department of Revenue, “Sales and Use Tax Treatment: Computer Hardware, Software, Services.”
Pennsylvania Department of Revenue, “Tax on Digital Products.”
Illinois Department of Revenue, FY 2026-12, “Destination-Based Retailers’ Occupation Tax Changes.”

4 States Offering Limited Windows for Tax Amnesty

Franklin Chow on September 3, 2026

4 States Offering Limited Windows for Tax Amnesty

Four states are currently offering programs that can eliminate or reduce sales and use tax penalties and interest are presently open. Indiana closes first, on September 9, 2026, while Illinois, New York, and Washington run later into 2026 under narrower terms.

The benefit of open amnesty over a voluntary disclosure agreement (VDA) is highly dependent. Amnesty waives penalties and interest but generally requires the full tax with no lookback limit and closes once the state makes contact. A voluntary disclosure agreement usually caps the lookback at three to four years, offer reduced or eliminated penalties for failure to file and or pay, and some offer reductions in interest due on tax owed. VDA’s also add audit protection for the covered period. More recent exposure can favor amnesty, while historic exposure often favors the capped lookback periods offered in a VDA.

Indiana Tax Amnesty 2026 (closing September 9, 2026)

Running July 15 through September 9, 2026, the program waives penalties, interest, and collection fees on liabilities for periods ending before January 1, 2024. It covers income, sales and use, and other Department of Revenue administered taxes. Participants must be current on filings and pay in full or set an approved plan during the window. Participants in Indiana’s 2005 or 2015 amnesty programs are excluded, and the Department recently moved the closing date up from September 15 to September 9.

Illinois Remote Retailer Amnesty (August 1 – October 31, 2026)

Under 86 Ill. Adm. Code 131.185, remote retailers with economic nexus and no Illinois physical presence may resolve unpaid state and local Retailers’ Occupation Tax (ROT) on sales from January 1, 2021, to June 30, 2026, remitting at a simplified rate with penalties and abated interest. Servicepersons and physical-presence retailers are ineligible.

New York Vendor Reregistration Discount (due December 31, 2026)

The fiscal year 2026 to 2027 budget grants a 100 percent penalty abatement and a 50 percent interest reduction on sales and use tax liabilities paid in full by December 31, 2026, under the state’s new vendor reregistration program. The full tax amount is still due.

Washington ESSB 5814 Relief (ends September 30, 2027)

Relief covers unpaid retail sales and use tax for periods from October 1, 2025, to December 31, 2026, for businesses affected by the services made taxable on October 1, 2025, with penalties waived and interest still due.

Source Advisors can assess your specific situation and identify and quantify historic sales and use tax liabilities. Taxpayers with varying levels of exposure in multiple states can benefit from the assistance in determining the best patch forward. Source Advisors can also facilitate VDA’s, offers in compromise or waivers, as well as navigating State administered amnesty programs.

sourceadvisors.com | 800.806.7626

Unlocking Refunds and Mitigating Risk with a Use Tax Review

Franklin Chow on August 24, 2026

What Is Consumer Use Tax?

Consumer use tax is a complementary tax owed on taxable goods and services when the vendor does not collect sales tax at the time of purchase, commonly occurring with out-of-state vendors, online orders, or untaxed digital software.

Why Consumer Use Tax Creates Audit Risk

During an audit, state examiners routinely target expenses and fixed asset additions, specifically scrutinizing out-of-state spend. Because auditors extrapolate sample-period error rates across the entire multi-year audit window, even a modest pattern of unaccrued recurring purchases can compound into substantial tax deficiencies, statutory interest, and penalties.

How a Proactive Use Tax Review Can Reduce Exposure

A proactive use tax review mitigates audit exposure by identifying and quantifying unaccrued tax liabilities internally before a state taxing authority initiates an audit. By sampling accounts payable and fixed asset data, practitioners can isolate recurring compliance gaps and remediate them through prospective adjustments or voluntary disclosure agreements (VDAs) to limit lookback periods and waive costly penalties. Furthermore, because a comprehensive review also identifies overpaid taxes on exempt purchases, these newly uncovered refund credits can directly offset outstanding historical liabilities, significantly reducing or eliminating net cash outlays.

At Source Advisors, our review operates on a dual-track strategy: we quantify unaccrued liabilities to remediate audit exposure and limit penalties, while simultaneously executing a reverse audit to secure direct refunds or vendor credits for historical overpayments. Finally, we feed our findings back into your purchasing workflows, exemption certificate management, and tax engine configurations to ensure sustainable, long-term compliance.

Using Tax Automation to Strengthen Ongoing Compliance

To maintain continuous compliance post-review, organizations can leverage modern tax automation tools directly integrated with their ERP and procurement systems. These platforms evaluate vendor master data and general ledger account mappings, applying customized taxability rules to incoming purchase orders and AP vouchers. When an invoice is processed without sales tax, the software automatically assesses the item’s taxability based on ship-to location, GL expense code, and vendor profile, calculating and self-accruing the exact consumer use tax owed without requiring manual AP intervention. Because self-assessed use tax is a primary trigger for aggressive state audit assessments, proactive evaluation is essential for safeguarding your organization’s bottom line.

By partnering with Source Advisors to conduct a comprehensive use tax review, you transform a hidden compliance vulnerability into a strategic advantage, simultaneously mitigating historical liability exposure and uncovering valuable tax refunds.

Exemption Certificates Under Scrutiny: Five Documentation Failures That Create Sales Tax Exposure

Franklin Chow on August 6, 2026

Exemption Certificates Under Scrutiny: Five Documentation Failures That Create Sales Tax Exposure

Exemption certificates are often treated as routine paperwork: a customer claims an exemption, the seller collects a form, and the transaction proceeds without tax. During a sales tax audit, however, that form may be the primary evidence separating a valid exempt sale from an assessment.

The issue is increasingly important in 2026 as businesses expand into new states, automate customer onboarding, and rely on tax engines to suppress tax once a customer is coded as exempt. That protection is not automatic. Sellers must obtain the correct documentation, review it for obvious defects, and retain it so it can be connected to the applicable transactions.

Five common documentation failures can turn otherwise supportable exemptions into costly sales tax exposure.

1. Accepting an incomplete certificate

A certificate with missing names, addresses, identification numbers, exemption reasons, signatures, or dates may not be valid. The Streamlined Sales Tax framework generally provides seller relief when a fully completed certificate, or the required data elements, is obtained within the prescribed period. Illinois similarly requires specific information on a resale certificate, including the seller and purchaser information, a description of the property, the resale statement, signature, date, and an applicable registration or account number. Validation should occur when the certificate is received, not years later during an audit.

2. Ignoring registration prerequisites

A critical contract and onboarding question is whether the purchaser must be registered before it can issue the certificate. The answer varies by state and certificate type. New York Form ST-120 generally requires the purchaser to be registered for New York sales tax, although a qualified out-of-state purchaser may use the form in limited circumstances. Tennessee requires registration for a sales tax account before the Department issues a resale certificate, and registration triggers an ongoing return-filing obligation, even for periods with no sales. Florida provides its Annual Resale Certificate only to registered sales and use tax dealers. Washington businesses generally obtain a reseller permit through their Department of Revenue excise tax account.

California illustrates why companies should not apply a blanket national rule. A purchaser normally lists a valid seller's permit number, but California guidance recognizes that a purchaser not required to hold a permit may still issue a valid resale certificate if it explains why no permit is required. Before a contract promises tax-exempt treatment, the seller should confirm whether registration, a permit, or a state-specific exception is required.

3. Using the wrong certificate or exemption type

Resale, governmental, manufacturing, agricultural, and nonprofit exemptions are not interchangeable. A purchaser's exempt status also does not mean every purchase it makes is exempt. Florida governmental entities must obtain a Consumer's Certificate of Exemption, while New York governmental purchases may require a governmental purchase order or another prescribed document rather than the exempt-organization certificate. Sellers should identify both who is making the purchase and why the specific item or service qualifies.

4. Accepting a certificate without considering good faith

A completed form does not excuse facts that plainly contradict the claimed exemption. California advises sellers to consider the purchaser's business and question certificates presented for items not normally sold in that line of business. Texas similarly warns against accepting a resale certificate when the seller knows or has reason to know the purchase is not for resale. Unusual quantities, conflicting invoice descriptions, or an implausible exemption reason should trigger additional review.

5. Applying certificates too broadly or failing to maintain them

Blanket certificates can reduce administrative burden, but they should not become permanent, universal exemptions. A certificate may apply only to a particular legal entity, state, product category, or transaction type. Illinois recommends keeping blanket certificates current and generally updating them at least every three years. Florida resale certificates expire each December 31, while Washington reseller permits are generally valid for four years, with shorter periods for certain businesses. Companies should track expirations, retain prior versions, and ensure records remain accessible after system conversions, acquisitions, or customer-account changes.

A defensible exemption-certificate process requires coordination among sales, contracting, customer onboarding, billing, accounts receivable, and tax. Companies should determine registration prerequisites before promising exempt treatment, use approved state forms, validate certificates against the purchaser and transaction, monitor renewal dates, and periodically test whether exempt sales remain properly supported.

Source Advisors can help businesses evaluate multistate exemption requirements, strengthen certificate-management procedures, and reduce sales tax exposure before an auditor identifies the gaps.

Sources

Streamlined Sales Tax Governing Board, "Relaxed Good Faith Requirement." View source
Illinois Department of Revenue, Form CRT-61, Certificate of Resale and instructions. View source
New York State Department of Taxation and Finance, Form ST-120, Resale Certificate, revised January 2026. View source
Tennessee Department of Revenue, "Tennessee Sales and Use Tax Certificate of Resale." View source
Florida Department of Revenue, "Annual Resale Certificate for Sales Tax." View source
Washington Department of Revenue, "Reseller Permits." View source
California Department of Tax and Fee Administration, Publication 103, "Valid Resale Certificates." View source
California Department of Tax and Fee Administration, "Tax Guide for Out-of-State Retailers." View source
Florida Department of Revenue, "Sales Tax Exemption Certificates for Governmental Entities." View source
Texas Comptroller of Public Accounts, "Texas Sales and Use Tax Frequently Asked Questions: Resale Certificates." View source
Washington Department of Revenue, "Reseller Permit: Your Questions Answered." View source

sourceadvisors.com | 800.806.7626

State Tax Amnesty and Penalty Relief Programs: Indiana, Illinois, and Washington

Franklin Chow on July 31, 2026

State Tax Amnesty and Penalty Relief Programs: Indiana, Illinois, and Washington

Several states are offering limited-time tax amnesty and penalty relief programs that allow eligible taxpayers and businesses to resolve outstanding tax obligations while reducing or eliminating penalties. Although these programs share the goal of encouraging voluntary compliance, each has unique eligibility requirements, covered tax periods, and application rules.

Indiana Tax Amnesty 2026

The Indiana Department of Revenue’s Tax Amnesty Program runs from July 15, 2026 through September 9, 2026. The program applies to eligible state tax liabilities for tax periods ending before January 1, 2024. Taxpayers who participate and meet the program requirements can receive a full waiver of penalties, interest, and collection fees.

To qualify, taxpayers must pay all eligible tax liabilities in full during the amnesty period or establish an approved payment plan by September 9, 2026. Payment plans must be completed by June 7, 2027, to maintain amnesty benefits. Taxpayers who participated in Indiana’s previous amnesty programs in 2005 or 2015 are not eligible. Eligible taxpayers who fail to participate may be subject to additional penalties after the program ends.

Illinois Remote Retailer Tax Amnesty Program

Illinois has established a specialized amnesty program running from August 1,2026 through October 31,2026 for remote retailers that have reached economic nexus ($100,000 annual sales) and have made taxable sales into Illinois without a physical presence in the state. The program covers sales tax reporting periods from January 1, 2021, through June 30, 2026. It is designed to simplify compliance for businesses that may have incomplete historical location data needed to calculate local sales tax. Qualifying retailers can resolve past liabilities while receiving waivers of penalties and interest. The program also provides simplified tax rates of 9% for general merchandise and 1.75% for qualifying food, medicines, and certain medical products, making compliance easier for participating businesses.

Washington ESSB 5814 Penalty Relief Program

Washington’s Department of Revenue has introduced the ESSB 5814 Penalty Relief Program for businesses affected by the expansion of retail sales tax to certain services under ESSB 5814. Beginning October 1, 2025, many services became subject to Washington retail sales tax, creating compliance challenges for businesses unfamiliar with the new requirements.

Unlike traditional tax amnesty programs, Washington’s initiative provides penalty relief only. Businesses remain responsible for paying the underlying tax liability and any applicable interest. The program covers reporting periods from October 1, 2025, through December 31, 2026, and businesses must submit an application by September 30, 2027 to qualify. Certain penalties, including evasion, negligence, and tax avoidance penalties, are specifically excluded from relief. Applicants must voluntarily disclose the liability, complete the online application process, sign a Penalty Relief Agreement within 30 days if approved, and pay the assessed tax and interest by the due date to receive the penalty waiver.

Amnesty Programs vs. Voluntary Disclosure

These limited-time amnesty and penalty relief programs differ from a state’s traditional voluntary disclosure agreement (VDA) program. Amnesty programs are available only during specified enrollment periods and may offer broader relief, including the waiver of penalties and, in some cases, interest. By contrast, VDAs are generally available year-round, typically require taxpayers to come forward before being contacted by the state, and often provide penalty relief and a limited lookback period while still requiring payment of the tax and applicable interest.

Because the benefits and eligibility requirements vary by state and by a taxpayer’s specific circumstances, businesses should carefully evaluate their options before participating. If your business may qualify for one of these programs, contact Source Advisors to determine whether an amnesty relief program—or a state voluntary disclosure is the most advantageous approach to resolving historical state tax liabilities.

sourceadvisors.com | 800.806.7626

Washington Expands Retail Sales Tax to Services

Franklin Chow on July 20, 2026

Washington Expands Retail Sales Tax to Services

States are increasingly reaching beyond the traditional, narrowly enumerated list of taxable services to expand the taxable base. Washington’s ESSB 5814 is one of the most aggressive recent examples: effective October 1, 2025 (and amended effective July 1, 2026), it redefined what constitutes a “retail sale” under Washington’s revised code (RCW 82.04.050) to pull seven previously exempt service categories into the sales tax base. Additionally, the enrolled bill rewrote key parts of the Digital Automated Services (DAS) framework. The Washington legislature has also passed a follow-up bill that sunsets most of this expansion effective January 1, 2029 (advertising services excepted).

The Newly Taxable Categories:

Advertising — design, campaign planning, lead generation, internet ad placement (web hosting, domain registration, and most traditional media ads excluded)
IT services — help desk, support, training, consulting, data processing (hosting and payment processing excluded)
Custom website development (same hosting/domain-registration exclusions as above)
Live presentations — workshops, seminars, interactive courses (accredited classes, tutoring, performances, sporting events excluded)
Investigation, security, and armored car services (locksmiths excluded)
Temporary staffing (direct hires, independent contractors, paymaster arrangements excluded)
Custom software / customization of prewritten software (unmodified off-the-shelf software excluded)

The Washington State Department of Revenue (DOR) has issued interim guidance statements for each category pending permanent rules. Full guidance.

Digital Automated Service (DAS) Changes and the Professional Services Carve-Out

ESSB 5814 also eliminated the DAS exclusion for services “primarily involving human effort,” meaning a digitally delivered service can no longer avoid tax just because a human performs the work. One exception survived: DOR confirmed professional services (law, accounting, engineering, architecture) were not added to the retail sale definition and can continue reporting under the prior B&O (Business & Occupation tax) classification. A new telehealth/telemedicine exclusion was also added.

Litigation Is Pending — Keep Collecting

Comcast sued Washington in Thurston County Superior Court (filed 9/9/2025), arguing the advertising tax violates the federal Internet Tax Freedom Act (a federal law that bars states from imposing discriminatory or multiple taxes on internet access and electronic commerce) by taxing digital ads while exempting most traditional media. However, statutes are presumed constitutional, and taxpayers should continue collecting and remitting under current guidance unless and until the court rules otherwise. WA DOR established a temporary Penalty Relief Program to assist taxpayers who did not implement these updated taxability determinations before or as they took effect. The program covers uncollected/unpaid tax for periods 10/1/2025–12/31/2026, waives penalties only (tax and interest still due), and requires application via DOR’s Voluntary Disclosure portal by September 30, 2027. Program details.

Consumers of these newly taxed categories should also be aware of the updates; If a client purchases a newly taxable service (IT support, custom software, staffing, advertising, etc.) for use in Washington and the vendor’s invoice shows no sales tax, the obligation shifts to the purchaser as consumer use tax. This is a common audit finding worth checking during an accounts payable review.

Part of a Broader Trend

This expansion of taxable services is not isolated to Washington. Maine repealed its Service Provider Tax effective January 1, 2026 and folded those services into the general sales tax base, also adding digital audiovisual and audio works (streaming subscriptions) to its taxable category. Texas and Maryland began taxing select B2B services in 2025. Bills were also introduced in Georgia, Kansas, Pennsylvania, and Wyoming that could expand those states’ taxable bases. State legislatures continue to weigh extending sales tax to digital goods and prewritten software as one option for adjusting to a services-driven economy.

sourceadvisors.com | 800.806.7626

Sales Tax Changes for SaaS and AI Software: Colorado and California Lead the Way

Franklin Chow on July 7, 2026

States Are Expanding Sales Tax to SaaS and Digital Products: What Businesses Need to Know

The sales and use tax landscape is undergoing a fundamental shift as states aggressively expand their tax bases to capture modern, digital revenue streams. Historically, sales tax taxation focuses on tangible goods, with many digital products and services particularly cloud-based offerings falling outside the scope of taxation. That is changing. States are redefining “tangible personal property” to include digital products, software accessed remotely, and even AI-driven tools, effectively pulling Software as a Service (SaaS) and similar offerings into the tax net. For businesses, this shift introduces new compliance obligations, increased audit exposure, and the need to reassess how contracts, billing systems, and revenue streams are structured across jurisdictions.

Colorado

Colorado House Bill 26-1223, signed into law on June 4, 2026, fundamentally reshapes Colorado’s digital tax landscape by adding computer software directly to the statutory definition of taxable tangible personal property, effective January 1, 2027. This change eliminates the state’s long-standing requirement that software must be delivered via a physical medium to be taxable. Instead, the law expands the tax base to include software delivered by any means, explicitly targeting software accessed remotely through the internet or the cloud. Under this new framework, Software as a Service (SaaS) business become subject to the state’s 2.9% sales and use tax. The bill leaves narrow exemptions only for custom software developed for a single user and software transferred under a negotiated license agreement.

The carve-outs for custom software and negotiated license agreements in HB 26-1223 are designed to draw a clear line between mass-market, commercial off-the-shelf software and tailored corporate enterprise contracts.

Understanding how the Colorado Department of Revenue differentiates these categories is crucial for structuring compliance or identifying non-taxable transactions:

Custom Software Exemption: The law retains an exemption for custom software, but it applies to a strict definition. To qualify, the software must be developed for use by a single, particular user.

Negotiated License Agreement Exemption: This is the most critical exemption for business-to-business (B2B) transactions, but it places a massive documentation burden on sellers. The law explicitly contrasts “negotiated” licenses with standard, boilerplate terms.

What does not qualify: The statute explicitly excludes click-through, browse-wrap, and similar non-negotiable agreements from qualifying for the exemption. If a user buys software by checking a box, clicking “I Accept,” or signing an unalterable, off-the-shelf Master Services Agreement (MSA) or End User License Agreement (EULA), the transaction is fully taxable.

What qualifies: To prove a license agreement is genuinely “negotiable,” there must be evidence of a back-and-forth legal review and modification of terms. For example, the agreement is individually bargained and executed by authorized representatives of each party.

California

Expanded Definition: Signed into law on June 29, 2026, SB 122 fundamentally alters California’s tax landscape by expanding the definition of tangible personal property to include digital products.

SaaS Inclusion: Under this expanded scope, digital products are explicitly defined to include prewritten computer software that is transferred on physical media, downloaded electronically, or accessed remotely, effectively subjecting cloud-based Software as a Service (SaaS) to the state’s sales and use tax. Also included are AI tools.

Effective Date: The new tax treatment goes into effect on January 1, 2027, giving businesses and software vendors a short window to map their digital revenue streams and update billing configurations.

Exclusions Remain: While prewritten software and SaaS subscriptions will now face full state and local sales tax rates, the law explicitly excludes custom software tailored to a single client, infrastructure as a service (IaaS), and other digital goods like eBooks, video games, and streaming media.

Large Purchaser Rule: The bill introduces a unique remittance shift: if a purchaser buys more than $5 million in digital products annually from a single retailer, the seller is relieved of collection liability, and the buyer must self-remit the use tax directly to the California Department of Tax and Fee Administration (CDTFA).

How Source Advisors Can Help

As states like Colorado and California lead the expansion of sales tax into digital services, proactive planning and execution are critical. Source Advisors supports clients through every phase of this transition:

Nexus analysis and multistate exposure assessments.
SaaS and digital product taxability studies by jurisdiction.
Contract and licensing structure review to evaluate exemption opportunities
Voluntary disclosure agreement (VDA) strategy and execution for historical exposure.
Sales tax registration and compliance implementation.
Billing system and tax engine configuration (Avalara, TaxJar, Vertex, etc.).
Exemption certificate strategy, collection, and audit defense.
Ongoing compliance outsourcing and managed services.
Audit support and controversy management.
Transaction structuring for enterprises and large purchaser scenarios (including use tax obligations).

sourceadvisors.com | 800.806.7626

5 Steps to Determine Sales Tax Nexus for an eCommerce Business

Franklin Chow on July 17, 2025

As eCommerce continues to grow, so does the complexity of state and local tax compliance. One of the most important considerations for online sellers is determining which states they are required to collect and remit sales tax. This begins with understanding how to determine sales tax nexus, a critical step in managing risk and ensuring regulatory compliance.

Below, we outline a clear, five-step process to help online businesses identify nexus across multiple jurisdictions.

How to Determine Sales Tax Nexus for My Online Business

Sales tax nexus refers to the minimum level of connection a business has with a state that creates an obligation to collect sales tax. Nexus can be established through a variety of factors, including physical presence, economic presence (i.e., sales), or even affiliate relationships. The rules vary widely by state, making it essential for all businesses, especially online businesses, to periodically evaluate their operations for exposure.

Step 1: Assess Physical Presence

Physical presence remains a foundational element of sales tax nexus. A business may have nexus in a state if it maintains:

A permanent or temporary office or facility
Employees or agents operating in the state
Inventory stored in a warehouse or fulfillment center
Participation in trade shows or events
Technicians entering a state to provide maintenance, repair, or installation services

For online retailers, inventory stored in third-party logistics facilities such as Amazon FBA warehouses can create unexpected nexus in multiple states.

Step 2: Evaluate Economic Nexus Thresholds

Since the Supreme Court’s decision in South Dakota v. Wayfair, Inc. (2018), all states that have a sales tax have adopted economic nexus standards in addition to their established physical nexus standards. This means a business can establish a nexus based solely on sales volume and / or transaction count, even without a physical presence.

In making their ruling, the Supreme Court explicitly excluded “small businesses” by establishing minimum revenue and sales thresholds of at least $100,000 in revenue or 200 transactions.

To ensure compliance, businesses should conduct regular reviews of their sales data by state and compare against current thresholds, which can change frequently.

Step 3: Understand Marketplace Facilitator Laws

If you sell through third-party marketplaces such as Amazon or Etsy, it is important to understand marketplace facilitator laws. In many states, the marketplace itself is responsible for collecting and remitting sales tax on behalf of sellers.

However, businesses may still be required to register, file informational returns, or report exempt sales—even if the marketplace handles the tax collection for the majority of / all their sales.

Step 4: Consider Affiliate and Click-Through Nexus

Some states impose nexus when businesses engage affiliates or referral partners within the state. These rules, often referred to as affiliate nexus or click-through nexus, typically apply if:

You have a formal agreement with an in-state party that drives sales to your website
Sales generated from those referrals exceed a state-defined threshold

This can affect businesses that use influencers, bloggers, or affiliate networks.

Step 5: Monitor Temporary Activities That May Trigger Nexus

Short-term activities, such as sending staff for training, hiring remote contractors, or attending conferences may create nexus in certain states. These events can still trigger tax obligations, especially if they recur or involve revenue-generating activities.

Keeping a record of all out-of-state business activity is essential for evaluating potential exposure.

Staying Ahead of Sales Tax Nexus Obligations

Determining where your business has sales tax nexus is not a one-time exercise. As laws evolve and your business grows, so does your nexus footprint. Proactive monitoring and professional guidance are key to avoiding penalties and ensuring accurate compliance.

If your business needs support assessing nexus and managing multi-state sales tax obligations, a firm like Source Advisors can help you navigate these complexities with confidence.

Want clarity on your sales tax obligations? Speak with a tax specialist to assess your nexus footprint and develop a compliant strategy for your online business.

Budget Reconciliation 2025: What CPAs Need to Know to Guide Their Clients

Franklin Chow on June 26, 2025

Budget Reconciliation 2025

What CPAs Need to Know to Guide Their Clients

As the 2025 budget reconciliation process unfolds in Washington, CPAs should closely track evolving legislation that could have a meaningful impact on both individual and business taxpayers. The House and Senate have each released their proposed tax packages, and while there is alignment on some provisions, several key differences remain unresolved. This article provides a look at where things stand, select key differences in each version, and the potential implications for your clients.

I. Where Things Stand: Legislative Timeline & Political Context

Deadline Moved: The White House has reportedly moved from its initial goal of July 4th and now expects a final version of the bill to pass before the August recess.
Senate Finance Action: The Senate Finance Committee released its tax language on June 16th.
Political Gridlock: Key sticking points like the State and Local Tax (SALT) deduction and deficit concerns have created friction, especially cuts to Medicaid within the Senate.
Potential Delays: Senate Majority Leader John Thune has threatened to keep senators in session through the planned recess to force progress.

Urge clients with time-sensitive investments or strategic tax planning (e.g., R&D spending, major capital projects) to remain flexible. Delays may affect the effective dates of various provisions.

II. Individual Taxpayer Provisions: Key Differences & Planning Notes

Tip and Overtime Income Deductions

House Version: Allows deductions for employees earning under $160,000 in 2025.
Senate Version:
- Tips: Up to $25,000 deductible, with phase-out starting at $150K (single) / $300K (joint).
- Overtime: Up to $12,500 (single) / $25,000 (joint), with the same phase-out as tips provision.

SALT Deduction Cap

House: Increases cap to $40,000 for joint filers, with phase-out starting at $500K.
Senate: Retains the $10,000 cap — potentially a placeholder pending further negotiation.

Senior Standard Deduction Boost

- House: Adds $4,000 with phase-out beginning at $75k.
- Senate: Adds $6,000 with phase-out beginning at $75K.

III. Small Business and Pass-Through Entities

Section 199A Deduction (Pass-Through Income)

House: Makes the 23% deduction permanent.
Senate: Keeps it at 20%, but also permanent.

PTET (Pass-Through Entity Tax) Limitations

House: Disallows PTET deduction for specified service trades or businesses “SSTB” (e.g., law, accounting, medical).
Senate: Limits the PTET deduction for all businesses to the greater of $40K or 50% of the PTET allocation.

SSTB clients—especially high-earning professionals—may lose significant deductions under either version. Watch closely for final rules and consider timing entity-level tax payments accordingly.

IV. Depreciation & Property Incentives

100% Bonus Depreciation Returns

Applies to property acquired after January 19, 2025.
House: Applies through 2029 (2030 for longer production period assets).
Senate: Permanent.

Qualified Production Property (QPP)

For new non-residential buildings primarily used for manufacturing, refining, or production.
Excludes areas like offices, parking, software development, sales, and lodging.
House bill includes 100% Bonus depreciation if construction begins after January 19, 2025, and before January 1, 2029, and the property is placed in service by January 1, 2033.
Senate bill includes the same provision, but the property must be placed in service by January 1, 2031.

If your client is building or renovating manufacturing facilities, advise on timing to capture the maximum bonus. Keep an eye out for regulatory definitions of QPP.

V. Energy Tax Incentives: §45L, §179D, and Clean Energy Credits

Section 45L Credit (New Homes)

House: Ends Dec. 31, 2025 (or 2026 if construction began before May 12, 2025).
Senate: Ends 12 months after enactment.

Section 179D (Commercial Energy Deduction)

Senate Only: Ends for buildings beginning construction 12 months after enactment.

Clean Energy Credits – §45Y and §48E

House: Phases out credits for projects started 60 days after enactment and placed in service after 2028.
Senate: Keeps current rules (phaseout after 2032) but imposes an early phaseout for solar/wind:
- 2026: reduced to 60%
- 2027: reduced to 20%
- 2028: reduced to 0%
Senate: Repeals the special 5-year cost recovery period.

VI. Section 174 Expensing (R&D Costs)

House: Temporary repeal of amortization for domestic R&D (2025–2029).
Senate: Permanent repeal, plus:
- Retroactive application for small businesses (under $31M gross receipts) to tax years starting 2022.
- Option for all taxpayers to accelerate the remaining unamortized balance of Section 174 costs as of 12/31/24 over 1 – 2 years.

VII. Final Considerations for CPAs

Watchpoints and Uncertainties

Reconciliation Rules: The bill must pass both chambers with identical text. There is no formal plan for a House–Senate conference committee.
The Byrd Rule: Procedural roadblocks (e.g., the recent strike-down of Medicaid savings) could derail tax provisions as well.
IRS Readiness: With over 26,000 staff departures and vacant leadership roles, IRS implementation and guidance could lag significantly.

What CPAs Should Do Now

Scenario Plan Across Versions
Run what-if models using House and Senate proposals for key client types: real estate developers, manufacturers, SSTBs, and R&D-heavy companies.
Monitor QPP and Energy Guidance
Be ready to interpret new regulations once Qualified Production Property and energy phaseouts are better defined.
Prep for Retroactivity
If the Senate’s 174 provision is included, amended returns could unlock significant cash flow for some clients.
Communicate with High-Income Individuals
Discuss SALT, standard deduction boosts, and PTET limitations now—before the final bill language is released.
Reassess Long-Term Planning
For large asset purchases or energy investments, the permanence of bonus depreciation or early phaseouts will shape 5–10 year tax strategy.

The evolving 2025 budget reconciliation bill presents opportunities and uncertainties. As lawmakers continue to negotiate, CPAs must prepare to pivot client strategy quickly. Staying proactive will allow you to guide clients through this shifting landscape—and turn tax law into a planning advantage.

sourceadvisors.com | 800.806.7626

Which States Have the Most Complex Sales Tax Laws?

Franklin Chow on June 13, 2025

Which States Have the Most Complex Sales Tax Laws?

The sales tax landscape in the United States presents a maze of regulations that can differ dramatically from one state to another. Recognizing which states have the most complex sales tax laws is crucial for both businesses and individuals, as these intricacies can significantly affect financial planning and compliance efforts.

Top 10 States with the Most Complex Sales Tax Laws

Sales tax regulations vary widely from state to state, with some states having particularly complex systems that challenge businesses. The following ten states are often noted for their complex sales tax laws:

California: With high sales tax rates and numerous local jurisdictions imposing additional taxes, compliance in California is notably challenging due to the combined state and local sales tax rate.
Texas: Texas has a base state rate and various local taxes, requiring businesses to navigate an evolving patchwork of regulations that contribute to a high combined state and local sales tax rate.
New York: New York’s sales tax system includes numerous exemptions and varying rates by county, complicating compliance for businesses and increasing the tax burden by state.
Florida: Florida’s seemingly straightforward state sales tax is complicated by local surtaxes that can significantly affect the total rate, influencing the combined state and local sales tax rate.
Illinois: Illinois has a tiered sales tax system with different rates for different product types, potentially confusing for businesses and adding to the tax burden by state.
Ohio: Ohio administers sales tax at both state and local levels, with numerous local jurisdictions imposing their own rates, impacting the combined state and local sales tax rate.
Pennsylvania: While Pennsylvania has a flat state rate, varying local taxes and exemptions pose compliance challenges for retailers, affecting the overall tax burden by state.
Washington: Washington’s sales tax structure involves multiple local taxes and specific rules for certain goods and services, contributing to the combined state and local sales tax rate.
Massachusetts: Known for unique sales tax exemptions and varying rates, Massachusetts challenges businesses navigating its system, impacting the tax burden by state.
New Jersey: New Jersey’s sales tax laws are complex, with numerous exemptions and local variations adding layers of difficulty and affecting the combined state and local sales tax rate.

Businesses operating in these states frequently face challenges like adapting to frequent changes in tax rates, understanding the nuances of exemptions, and ensuring accurate reporting. Staying informed and seeking expert guidance is vital for effectively navigating these complex sales tax landscapes.

Strategies for Navigating Complex Sales Tax Laws

Navigating the intricate landscape of sales tax laws across various states requires a strategic approach to ensure compliance and efficiency. Staying informed about the specific sales tax regulations in each state where your business operates is crucial. This includes understanding the rates, exemptions, and filing requirements that may differ significantly. Regularly reviewing changes in tax laws is essential to avoid costly penalties.

Leveraging technology can greatly simplify the management of sales tax. Various tools and software are designed specifically for tracking sales tax obligations, calculating rates, and automating the filing process. These solutions help businesses accurately assess their tax liabilities, ensuring compliance with state laws while saving valuable time and resources.

For businesses seeking additional support, consulting services can provide expert guidance in navigating complex sales tax issues. Professionals in this field offer tailored advice, assist with audits, and help businesses implement effective tax strategies. Additionally, numerous resources are available, such as online courses, webinars, and industry publications, which can enhance your understanding of sales tax compliance.

By adopting these strategies—staying informed, utilizing technology, and seeking expert guidance—businesses can effectively manage the complexities of sales tax laws, leading to better compliance and smoother operations.