Sales tax is coming for your small business clients

Sales and use tax once sat at the back of the small business tax conversation. It now has taken a seat in the front row.

Processing Content

Six years ago, in Accounting Today, I urged tax firms to build or expand a sales and use tax practice. The drivers were South Dakota v. Wayfair and the pandemic-era shift of small businesses into online selling. Firms that acted then are better positioned today. The 2025 data show why the rest of the profession needs to catch up.

For years, the small business tax agenda belonged to income tax. Entity choice. Owner compensation. Depreciation. Retirement plans. Pass-through planning. State income tax apportionment. Those issues still matter. They no longer carry the full weight of the client relationship.

A small business can become a multistate seller before it becomes a sophisticated business. It can sell through its website. It can sell through marketplaces. It can sell subscriptions, digital goods, software, services, bundled products and remote access. It can have customers in states where it has no office, no employees and no property. That business can owe sales and use tax in states the owner has never visited.

2025 data confirms the trend

Vertex reported 681 total sales tax rate changes and new rates in 2025. The count covers the United States, Puerto Rico and Guam. Cities, counties and districts introduced 335 new taxes, a 10-year high. New district taxes totaled 219, the highest number since 2017. The average combined sales tax rate, based on jurisdictions that impose a sales tax, rose from 9.9687% in 2024 to 10.1544% in 2025.

The longer record tells the same story. From 2015 through 2025, Vertex reported 6,775 total rate changes and new rates, an average of 616 a year. 

Small businesses do not experience those numbers as tax policy. They experience them as wrong invoices, wrong shopping cart calculations, wrong exemption treatment, wrong returns, audit notices and penalties.

Technology has caught up. Judgment has not

Sales tax software is far more capable than it was five years ago. Modern platforms deliver real-time rate determination. They handle address-level sourcing. They map product taxability. They help manage exemption certificates. They ingest marketplace data. They prepare returns. They file across thousands of jurisdictions.

AI is now embedded in the leading tools. It classifies products. It flags anomalies. It predicts nexus exposure from sales patterns. It reads and helps validate exemption certificates. It drafts audit responses. It surfaces compliance risk before a return is filed. E-invoicing will push more of this into real time. These are real advances. They raise the bar.

However, software does not set the client’s registration posture. AI does not decide when a voluntary disclosure agreement is the right move. Neither interprets a new statute, regulation or ruling against the client’s facts. Neither plans transactions. Neither represents the small business in a sales tax audit. Neither negotiates with the state, responds to information document requests, manages the statistical sample, challenges the assessment, pursues administrative appeals or litigates when the state is wrong. Neither evaluates successor liability in a deal. Neither tells the owner to walk away from a sales channel when the compliance cost exceeds the margin.

The modern sales tax engagement is a partnership. The practitioner sets the strategy. The practitioner validates the inputs. The practitioner interprets the outputs. The practitioner represents the client before the state. The technology executes at scale. Firms that treat the software as the answer will be surprised by the audit. Firms that use the software as leverage for professional judgment will win.

The revenue picture

Sales tax is a central piece of state finance. The U.S. Census Bureau’s 2025 Annual Survey of State Government Tax Collections reported total state tax collections of about $1.536 trillion. Sales and gross receipts taxes accounted for about $697.4 billion, or 45.4%. General sales and gross receipts taxes accounted for about $475.2 billion, or 30.9%. Individual income taxes accounted for about $517.4 billion, or 33.7%. Corporation net income taxes accounted for about $163.7 billion, or 10.7%. 

Sales and gross receipts taxes remain the largest state tax category. Income taxes remain material. Property taxes remain a principal local government tax.

The numbers should be read against the income tax trend. Tax Foundation research reports that 23 states have reduced their top marginal individual income tax rates since 2021. Small business clients feel sales tax changes faster than they feel most income tax changes.

Wayfair set the rules

The Supreme Court changed the sales tax world in South Dakota v. Wayfair in 2018. The Court rejected the physical-presence rule. A state may require an out-of-state seller to collect sales tax if the constitutional nexus standard is met, even without physical presence.

Before Wayfair, many small sellers treated sales tax as a home-state issue. That assumption is dangerous today. Economic nexus creates filing duties based on sales volume or transaction counts. Marketplace facilitator laws reduce collection duties for marketplace sales. They do not eliminate the need for analysis. Many businesses sell through marketplaces and directly. Many have exempt sales, wholesale sales, taxable sales and mixed transactions.

Digital services are the next pressure point

States are expanding the tax base to match how commerce works. The activity in 2025 was significant and continues.

Maryland led the way. Under Chapter 604 of the 2025 Acts and Maryland Comptroller Technical Bulletin No. 56, effective July 1, 2025, Maryland applies a 3% sales and use tax to data services, information technology services, and system and application software publishing services described in specified NAICS sectors and subsectors. Efforts to repeal or carve back the law in the 2026 session failed.

Washington followed. Engrossed Substitute Senate Bill  5814, enacted in 2025, extended the state retail sales tax to certain information technology services. The Washington Department of Revenue has issued interim guidance on the scope and application of ESSB 5814.

Louisiana expanded its sales tax base to digital products effective Jan. 1, 2025, under Act 10 of the 2024 Third Extraordinary Session. Chicago increased its personal property lease transaction tax from 9% to 11% effective Jan. 1, 2025, and then to 15% effective Jan. 1, 2026. That tax reaches SaaS and similar digital offerings.

New York has pending legislation to tax digital advertising gross revenues. Other states are considering similar measures.

Separately, Maryland’s earlier digital advertising gross revenues tax remains subject to litigation. That case is distinct from the 2025 data and IT services sales tax.

The direction is clear. The rules are state-specific. The advisor’s job is to ask what the client sells, how it is delivered, where the customer is located, and how each state classifies the transaction.

Small business clients buy and sell software, hosting, cloud storage, data processing, web services, digital subscriptions, online tools and IT support. Many owners still treat those items as outside the sales tax system. That view is no longer safe.

The failures are predictable

Small business sales tax failures are almost always basic.

The client registers only in its home state. The client ignores economic nexus thresholds. The client assumes marketplace collection covers all sales. The client treats digital goods as nontaxable because nothing is shipped. The client assumes services are never taxable. The client accepts exemption claims without valid certificates, or holds certificates that are expired, incomplete or issued to the wrong entity. The client never reviews consumer use tax on purchases. The client files returns that do not reconcile with books, marketplace reports or shopping cart reports.

None of those mistakes is complex. All of them are expensive.

Sales tax audits punish bad process. Exposure is transaction-based. Documentation matters. Exemption support matters. Registration history matters. If the business should have collected tax from customers and did not, the business often owns the tax, interest and penalties. The customers may be gone. The records may be incomplete. Prevention is cheaper than defense.

What advisors should do now

In 2020, I set out a three-part structure for a sales and use tax practice: planning, compliance and audit support. That structure still holds. The 2025 and 2026 environment sharpens each piece, and modern technology makes each piece more executable at scale.

First, pull the client list. Flag every small business with out-of-state sales, marketplace sales, website sales, drop shipments, digital products, subscriptions, software, remote services or exempt customers.

Second, run a nexus review. Compare sales by state to economic nexus rules. Separate marketplace sales from direct sales. Identify registration gaps. Use the technology to scan the data. Use professional judgment to decide what to do about it.

Third, review taxability by jurisdiction. Classify products and services state by state. Pay close attention to digital goods, software, cloud services, data services and IT services.

Fourth, review exemptions. Confirm that exempt sales have valid, current certificates covering the right products and the right entity. AI-enabled certificate tools help, but the practitioner owns the conclusion.

Fifth, review use tax. Test purchases of software, equipment, supplies, services, promotional items and online tools where the vendor charged no tax.

Sixth, reconcile. Sales tax returns should tie to sales reports, marketplace reports, payment data and the general ledger. Differences should be explained before the state asks.

Sales and use tax is now a core small business advisory issue. It affects pricing, contracts, invoicing, cash flow, software selection, diligence, audits and successor liability. It belongs in every serious small business tax review. The technology is better than ever. That is precisely why skilled tax professionals are needed more than ever.