State tax changes predicted for 2025

More states are expected to simplify their sales tax laws and leverage artificial intelligence for doing tax audits, according to a new report from Avalara, a provider of tax compliance technology.

The annual Avalara Tax Changes report for 2025, released Tuesday, predicts this could be the year for meaningful simplification in home rule states like Colorado. In home rule states, cities, counties and other local government entities have the authority to administer local sales tax, including auditing businesses, creating their own forms and defining terms differently from the state. That can lead to more sales tax complexity for businesses selling into those states. The report noted that a handful of home rule states — Colorado, Alabama, Louisiana, Arizona and Alaska — are making moves toward simplification, though businesses selling into home rule states still face a heavier tax compliance burden.

States are also starting to turn to AI to help with tax audits, just as the Internal Revenue Service has begun to do. The New York State Department of Taxation and Finance has employed AI since 2022 to increase audits, even with fewer auditors. The state is reportedly “sending out hundreds of thousands of AI-generated letters looking for revenue,” and getting results.

“States rarely comment on how they choose someone to audit or how they conduct audits,” said Scott Peterson, vice president of U.S. tax policy at Avalara, in a statement. “But it’s very safe to say they have long used tools to help in both and AI should be a natural fit.”

The report also looks at state tax nexus issues for cross-border transactions. As of December 2024, in 22 states, having only $100,000 in annual sales is enough to give a remote retailer a sales tax obligation. In another 20 states, the economic nexus threshold is $100,000 in sales or 200 sales transactions. However, the transaction threshold is losing ground, with 13 states having already eliminated it. Alaska dropped it, effective Jan. 1, 2025, while New Jersey is moving to drop it in 2025. 

The report also examines the rise of e-invoicing internationally and in the U.S., in which businesses are more frequently required to submit electronic versions of audit files, invoices, credit notes, debit notes, and payment receipt data to tax authorities. In addition, it covers the phased-in threshold for Form 1099-K reporting of gig economy payments, along with other topics.