As the 2025 legislative year unfolds, state and local tax (SALT) policy is undergoing a wave of significant transformation. Businesses navigating this environment face heightened challenges, from expanding tax bases to renewed debates over international income taxation. A review of the latest developments reveals several key trends shaping the future of SALT policy across the United States.

Business Tax Burden Continues to Climb

Businesses continue to shoulder a substantial share of state and local tax revenue. In fiscal year 2023 alone, U.S. businesses contributed over $1.09 trillion in state and local taxes, a 3.7% increase from the prior year. Despite this growth, business income taxes declined by 7.7%, reflecting broader structural shifts in how states generate revenue.

One persistent issue is the disproportionate property tax burden on businesses. Business real property is often taxed at significantly higher effective rates than residential property. For instance, if businesses were taxed at homeowner rates, they would have saved an estimated $120 billion nationwide in 2023. When combined with the cascading (“pyramided”) impact of sales tax on business inputs, excess taxation on business property and transactions totals more than $260 billion annually—an inefficiency that distorts investment and growth decisions.

The Enduring Impact of the TCJA

The 2017 federal Tax Cuts and Jobs Act (TCJA) fundamentally reshaped the taxation of multinational enterprises, notably through the creation of the Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) regimes. While the corporate tax rate reduction to 21% was permanent, many provisions critical to individuals and small businesses are scheduled to sunset at the end of 2025, including lower personal income tax rates, the 20% pass-through deduction, and the cap on the state and local tax (SALT) deduction.

At the state level, conformity to TCJA provisions, such as interest expense limitations, inadvertently expanded corporate income tax bases. The looming expiration of TCJA provisions has raised concerns about further state tax instability, particularly if federal reforms alter corporate or individual tax bases once again.

Adding to fiscal uncertainty, potential reductions in federal grants to states could pressure local governments to raise taxes or cut services—creating a cascading effect across jurisdictions.

The Resurgence of Mandatory Worldwide Combined Reporting

In a shift that seemed unthinkable a decade ago, several states are reconsidering the idea of mandatory worldwide combined reporting (WWCR). Bills introduced in Connecticut, Hawaii, Maryland, Minnesota, New Hampshire, New York, and Oregon would require multinational corporations to report and combine the income of their global affiliates when calculating state taxable income.

This resurgence stems largely from concerns about corporate profit shifting to low-tax jurisdictions. However, adopting WWCR at the state level risks substantial compliance costs, uncertain revenue outcomes, and diplomatic tensions with foreign trading partners. Critics argue that international efforts like the OECD’s Pillar Two Global Minimum Tax are better suited to address profit shifting comprehensively, avoiding the risk of making individual states hostile to foreign investment.

Expanding the Reach of State Taxes: Digital Services, Retail Fees, and Beyond

States are also aggressively expanding their indirect tax bases. Traditionally focused on goods, many states are now targeting services, particularly digital goods and digital services like software-as-a-service (SaaS), streaming platforms, and online advertising.

Several states—such as Maryland, California, and Minnesota—have proposed or enacted taxes targeting digital advertising revenues or the sale of personal data. Retail delivery fees, once rare, are also proliferating; Minnesota, for example, is set to impose a 50-cent retail delivery fee in 2024, joining states like Colorado.

Digital services taxes have sparked considerable controversy, raising concerns about double taxation, constitutional challenges under the Commerce Clause, and potential conflicts with the federal Internet Tax Freedom Act.

Meanwhile, the sales taxation of business digital inputs is increasingly commonplace. In nearly every state taxing digital products, both consumer and business purchases are subject to sales tax—a trend that raises costs for businesses investing in technology and software.

The Ongoing Shift Toward Single Sales Factor Apportionment and Market-Based Sourcing

States continue moving away from traditional three-factor apportionment formulas toward single-sales factor (SSF) apportionment. In 2024, Arkansas, Massachusetts, Montana, Tennessee, and Virginia adopted or expanded SSF regimes, simplifying corporate income tax calculations and making states more attractive for companies with large property and payroll footprints but smaller in-state sales.

Additionally, market-based sourcing is rapidly replacing the older “cost of performance” approach for sourcing service revenue. Under market-based sourcing, income is taxed based on where customers receive the service, not where the service was performed—an increasingly important distinction for digital and service-heavy industries.

New Waves of Proposed Taxes and Fees

States are actively experimenting with novel tax structures, reflecting the need for new revenue sources and the desire to tax evolving economic models:

• Digital Taxes: Legislative proposals in New York, Massachusetts, and California seek to impose taxes on social media advertising, digital services, and online data collection.

• Retail Delivery Fees: Following Colorado’s model, several states including Minnesota and Connecticut are pursuing delivery fee legislation.

• False Claims Acts Expansion: Some states, such as California and Michigan, are pushing to lift existing barriers that prevent state false claims actions from being brought over taxes, potentially opening the door to whistleblower tax litigation.

• Interchange Fee Restrictions: A growing number of states are moving to prohibit or modify interchange fees applied to the sales tax portion of transactions, a development with implications for credit card processing costs.

Broader Legislative Trends and Advocacy Initiatives

Amid the flurry of new tax proposals, advocates for sound tax policy are pushing for several common-sense reforms, including:

• Extending state corporate income tax filing deadlines by one month beyond the federal extended due date

• Establishing a 30-day safe harbor for nonresident traveling employees to eliminate burdensome withholding requirements

• Adopting a uniform 90-day appeal period after tax assessments to ensure taxpayers have adequate time to respond

• Standardizing the reporting of federal adjustments (such as audit changes) to streamline compliance

These initiatives seek to create greater consistency, predictability, and fairness across state tax systems at a time when complexity is rapidly escalating.

Conclusion

The 2025 state and local tax landscape reflects a dynamic and evolving environment. Businesses must monitor legislative developments closely, not only at the federal level but across the patchwork of state and local jurisdictions. From new tax bases targeting the digital economy to revived calls for global income reporting, the coming year promises to redefine the challenges—and opportunities—of SALT compliance.

© 2025 Jeanette Moffa. All Rights Reserved.