As we move into the second quarter of 2025, state legislatures and tax authorities across the nation are aggressively reshaping the boundaries of sales and use taxation. Against a backdrop of inflationary pressure, digital commerce, and shifting political priorities, sales tax policy remains a key lever for state revenue generation and reform. This Spring 2025 National Sales and Use Tax Report provides a comprehensive overview of notable developments—legislative, administrative, and judicial—that are redefining state-level indirect tax systems in real time.

The Big Picture: Key Trends in Spring 2025

Several trends stand out in this season’s developments:

• Rate Reform and Broadening of the Tax Base: Multiple states are revisiting the structure of their tax bases, with some proposing rate reductions offset by expanded taxability of services. States like Florida, Texas, and Indiana are exploring rate cuts, while jurisdictions like Washington and D.C. are casting a wider net over digital and professional services.

• Digital Economy Integration: States are confronting the challenges of modern commerce by formalizing rules for digital advertising, streaming platforms, SaaS transactions, and marketplace facilitator obligations. Vermont, Washington, and the District of Columbia are at the forefront of this push.

• Targeted Consumer Relief: Alabama, Iowa, and Massachusetts are carving out new exemptions for basic necessities and climate tech as part of equity and sustainability initiatives.

• Administrative Simplification and Sourcing Clarity: States like Colorado, Maine, and Virginia are focusing on rule clarity, standardization, and form simplification—particularly for multistate businesses dealing with complex sourcing scenarios and hybrid service models.

• Litigation and Enforcement: Across the board, states are continuing to test the boundaries of tax enforcement, leading to a surge in case law clarifying everything from taxability of lease assignments to the scope of exemptions for government contractors.

Let’s take a closer look at the most significant developments, organized by state.

State-by-State Highlights

Alabama

Alabama’s House Bill 152 proposes a new exemption for essential personal items, including baby formula, diapers, menstrual hygiene products, and maternity clothing. The exemption will apply to the state portion of the sales and use tax beginning September 1, 2025, through August 31, 2028. Localities are allowed to opt into the exemption. This move mirrors similar efforts in other states to make tax systems more equitable for families and women.

California

In Medtronic USA Inc. v. Dept. of Tax & Fee Admin., the Court of Appeal denied a $3.3 million refund claim, holding that Medtronic’s implantable heart monitoring devices (RICMs) did not qualify as exempt “medicines.” While RICMs help physicians diagnose heart conditions, the court ruled that the devices are not used to assist organ function, and instead serve diagnostic purposes. As such, they are excluded from the definition of “medicines” under California law—a reminder of how strictly exemptions are construed against the taxpayer.

Colorado

Colorado’s DRAFT Special Rule 46 tackles a complex area: the tax treatment of mainframe computer access. The Department proposes treating access to computing infrastructure (including cloud computing) as a lease of tangible personal property when used for data processing or storage. Sales are sourced to the location of the equipment accessed. In contrast, access for the purpose of acquiring vendor-controlled data is excluded.

Also, under P.L. 24-008, Colorado redefined sourcing rules for goods delivered by third-party shippers. If a buyer hires an independent shipping company to pick up goods at a seller’s location, the transaction is now sourced to the buyer’s location—not the origin point.

District of Columbia

D.C. has taken a multi-pronged approach to revenue expansion:

• New Digital Services Taxation: Streaming platforms, cloud computing, and professional services like digital advertising and data processing are now subject to tax.

• Marketplace Facilitator Rules Expanded: Facilitators like Grubhub and online delivery platforms are now clearly responsible for collecting sales tax.

• Targeted Rate Adjustments: The tax rate for lodging and short-term rentals jumped to 15.25%.

• Exemption Tightening: Nonprofit documentation standards were tightened, with some health-related products now taxable despite earlier exemptions.

Florida

Florida legislators are considering two bills that could shift the state’s longstanding sales tax structure:

• HB 7033 proposes reducing the state sales tax rate from 6% to 5.25%.

• SB 7034 would enhance existing exemptions and extend the schedule of sales tax holidays.

Together, these measures reflect an effort to make Florida more business-friendly and competitive while balancing consumer affordability and economic growth.

Illinois

In Ally Financial Inc. v. Chicago Dept. of Admin. Hearings, the Appellate Court ruled that Ally Financial was responsible for lease tax on down payments (capitalized cost reductions) made on vehicle leases it acquired, even when the vehicles were leased outside the city but later used in Chicago. The court also upheld a use tax on “move-in” vehicles registered in the city, despite originating elsewhere.

Separately, Illinois issued GIL ST 25-0022, clarifying that import tariffs are included in the taxable base when the seller is the importer of record—but not when the buyer is.

Indiana

Indiana continues to embrace structural reform:

• HB 1229 would repeal property taxes and expand the sales tax base to services.

• HB 1345 proposes eliminating the state income tax, replacing it with a higher sales tax rate.

These radical shifts reflect a broader trend in red states aiming to move away from income and property taxation in favor of consumption-based models.

Iowa

Three new bills propose exemptions for household essentials:

• H.F. 1022 exempts laundry detergent.

• H.F. 1019 exempts toilet paper.

• H.F. 1021 exempts dietary supplements and vitamins.

Iowa’s push mirrors Alabama’s, focusing on household affordability and regressive tax relief.

Maine

Under proposed Rule 326, Maine will change its approach to taxing leased property. Starting January 1, 2025, lessors may buy property tax-free and instead collect sales tax from lessees on each rental payment. The rule also revises sourcing rules to clarify that recurring lease payments are sourced to the “primary property location” of the lessee.

Maryland

In Broadway Services v. Comptroller, the court denied an exemption claim by a contractor purchasing on behalf of nonprofit hospitals, finding no actual agency relationship. This underscores the requirement for formal documentation in agency-based tax exemption claims.

Maryland also introduced several impactful tax bills:

• HB 352 imposes a 3% tax on IT services and increases the adult-use cannabis sales tax to 15%.

• The bill also introduces an 11.5% tax on short-term car rentals.

• HB 1554/SB 1045 would tax business-to-business services at 2.5%.

Massachusetts

Effective January 1, 2025, tangible personal property bought by certified climate tech companies will be exempt from sales tax. This incentive, part of a green economy initiative, is designed to support technologies that reduce carbon emissions and foster environmental sustainability.

New Jersey

Recent court decisions include:

• In La Troncal Food Corp, the court disallowed audit evidence due to auditor unfamiliarity with the underlying workpapers.

• In Gill v. Director, the court affirmed that there is no limitations period on issuing responsible person assessments.

Legislative changes include:

• Repealing the zero-emission vehicle (ZEV) sales tax exemption.

• Ending the annual sales tax holiday for school supplies.

• Expanding exemptions for affordable housing construction inputs.

New York

Two major cases reshaped digital and professional service taxation:

• Dynamic Logic Inc. confirmed that advertising research services are taxable information services.

• Site Safety LLC confirmed that on-site safety inspections are taxable under the “protective services” category—though the case was dismissed for failure to exhaust administrative remedies.

As of March 2025, New York’s $2 nightly hotel tax now applies to Airbnb and similar short-term rentals.

Texas

In GEO Group Inc. v. Hegar, the Texas Supreme Court denied a $4 million refund, holding that private prison operators—even with state and federal contracts—do not qualify as governmental entities under Tex. Tax Code § 151.309.

Legislatively, HB 3437 would reduce the state sales tax rate from 6.25% to 5.25%.

Vermont

• Effective July 2024, all prewritten software—downloaded or cloud-based—is subject to tax.

• Effective August 2024, short-term rentals will carry a 3% surcharge, except for licensed hotels.

Virginia

Virginia is modernizing its sales tax forms with a new consolidated Form ST-1, replacing multiple legacy forms. The aircraft parts exemption has been extended to 2030. An ongoing procedural dispute also highlights the importance of correctly navigating the state’s tax appeal process before the Local Tax Commissioner.

Washington

SB 5814 and HB 2083 are sweeping proposals that would:

• Expand the retail sales tax to a wide range of digital and professional services.

• Introduce a one-time prepayment requirement for large businesses.

• Risk running afoul of the Internet Tax Freedom Act due to unequal treatment of digital vs. traditional advertising services.

Wyoming

HB 11 extends the manufacturing equipment sales and use tax exemption through 2042, providing long-term certainty for manufacturers operating in the state.

Final Thoughts

Sales and use tax remains one of the most dynamic areas of state and local taxation, with changes driven by evolving technologies, political ideologies, and economic necessities. Spring 2025 has been marked by significant rate proposals, aggressive tax base expansions, and a continued rethinking of how traditional tax structures apply to a 21st-century economy.

Businesses, advisors, and tax professionals must remain vigilant as state tax systems become more aggressive, more digitized, and, at times, more difficult to navigate. With uniformity remaining elusive, multistate compliance and planning will remain a top priority throughout the rest of the year.

© 2025 Jeanette Moffa. All Rights Reserved.