2025 was an eventful year for state tax changes as all 50 state legislative bodies were in session in 2025 and many were required to pass new budgets. The resulting legislation included numerous significant state tax changes aimed at raising revenue while balancing taxpayer interests. These changes were widespread and included income tax changes (e.g. apportionment changes, rate changes) and sales tax changes (e.g. services newly subject to tax), among others. In addition to state legislative sessions, the federal tax reform passed in July added another level of state tax complexities for taxpayers to evaluate.
Below are a few key changes and considerations resulting from the 2025 state legislative sessions.
1. SALT considerations of OBBBA
On July 4, 2025, President Trump signed into law H.R. 1, commonly referred to as the One Big Beautiful Bill Act (P.L. 119-21) (the Act). The Act includes the extension and permanency of many Tax Cuts and Jobs Act (TCJA) provisions previously scheduled to sunset at the end of this year, enhanced business tax breaks, limitations on individual and business deductions and significant changes to international tax provisions, all of which have varying effective dates and expiration dates.
From a state perspective, the starting point for determining state taxable income is generally federal taxable income. As such, any changes to the determination of federal taxable income as a result of the Act will likely have a state impact depending on how a state incorporates the federal changes to the Internal Revenue Code (IRC).
States generally conform to the IRC in three different approaches, each resulting in different state tax impacts. Specifically:
Rolling conformity: Statutorily, a rolling conformity state will adopt the IRC as it is amended (i.e. on a “rolling” basis) and generally conforms to IRC law changes automatically.
Fixed–date conformity: Statutorily, a fixed-date conformity state conforms to the IRC as of a specific date. As such, any changes to the IRC after the conformity date will not automatically be adopted. Rather, in order to adopt a specific federal change after the IRC conformity date, the state would need to legislatively adopt specific provisions of the IRC.
States in this category adopt a hybrid approach, adopting only certain specific provisions of the IRC.
As the majority of states concluded their 2025 legislative sessions prior to July 4, 2025, the timeline for states to address the tax reform changes included in the Act will be varied.
Some states have been quick to address conformity to specific provisions of the Act. For example, Colorado, a rolling conformity state, had a special legislative session in August which resulted in a handful of legislative changes including decoupling from specific provisions of the Act (i.e. QBI and FDDEI). See full details here.
Additionally, Massachusetts has issued a draft TIR detailing its conformity with certain provisions of the Act with public comments due Nov. 21, 2025. Michigan has decoupled from various provisions of the Act through recent legislation. Maine issued guidance for 2025 acknowledging that additional analysis will be required for 2026 and prospectively. Rhode Island has issued guidance on its decoupling from the domestic research and experimental expense changes and other provisions of the Act.
While this is not an exclusive list of guidance, many states will likely address conformity with the Act in 2026 or later as states continue to evaluate the implications of the Act to their taxing regimes and overall state budget.
2. Key sales tax changes
Washington sales tax on specific services
Washington’s 2025 legislative session resulted in many significant changes for Washington taxpayers. Notably, among the legislative changes was SB 5814 (the Bill) which newly imposes retail sales and use tax on several specific services beginning Oct. 1, 2025, through the expansion of the term “sale at retail.” These services include:
Advertising services
Live presentations
Information technology (IT) services
Custom website development services
Investigation, security and armored car services (“security services”)
Temporary staffing services
Sales of custom software and customization of prewritten software (custom software)
Additionally, the Bill modified the exclusions from the definition of digital automated services (DAS).
Due to the quick timeline from passing of the Bill in May 2025, to the enactment of the sales tax changes on Oct. 1, 2025, the Washington Department of Revenue (the Department) has devoted resources to developing and publishing interim guidance for taxpayers. The interim guidance, issued by the Department, is critical for taxpayers to evaluate the impact of the changes in the Bill on their businesses. To date, Washington has published interim guidance on many of the changes, including the impact on existing contracts. The Department’s landing page on services newly subject to tax provides high-level guidance on what is included in taxable services and what is excluded in each category above, as well as the interim guidance for each.
Maryland – new 3% sales tax on specific technology services
Similar to Washington, Maryland expanded its definition of taxable services. Specifically, in May 2025, Maryland passed HB 352 (the Legislation), which includes a new 3% sales tax on data and information technology services effective July 1, 2025. The Legislation expands the definition of “taxable services” for sales and use tax to the following:
A data or information technology service, as described under NAICS Sector 518, 519, 5415;
A system software or application software publishing services, as described under NAICS sector 5132.
In response to the Legislation, Maryland issued Technical Bulletin 56 which provides thorough guidance and detailed examples in order to aid taxpayers in understanding which services are impacted by the Legislation. Additionally, the guidance provides an extensive list of services that fall under the broad NAICS code categories above and details the impact on existing contracts.
3. Looking ahead
The penny shortage & sales tax
In February 2025, President Trump announced that he had directed the Secretary of the Treasury to discontinue manufacturing pennies. On April 29, 2025, the House introduced a bill that would direct the Treasury to stop minting the penny, ensure that the penny still be considered legal tender and require all cash transactions to be rounded to the nearest five cents. The most recent version of the bill dated Sept. 4, 2025, appears to exclude the language requiring all cash transactions to be rounded to the nearest five cents.
While the proposed federal legislation progresses through the legislative process, the underlying objective is the elimination of penny production. If enacted, the lack of penny production will present issues for any cash transactions that result in totals that don't end in increments of five cents, as correct change will be difficult. Further, certain industries that commonly accept payment in the form of cash from customers (e.g. retailers) will face challenges accepting payment in the absence of exact change.
From a tax perspective, tax calculations are generally rounded to the nearest cent, and any change to such calculations will likely require legislative action. For sales tax, the elimination of pennies presents a need for formal guidance as it relates to rounding and sales tax collection. However, to date, no guidance, legislatively or administratively, has been issued to businesses on the best approach to rounding transactions and/or sales tax collection.
As a result, businesses are deciding whether to implement cash transactions/cash rounding policies while they wait for guidance. Since the penny remains a legal tender, an option may be to have the register systems round to the nearest five cents, which may be favorable or unfavorable to the customer, depending on the transaction. However, some retailers are hesitant to implement a policy without formal guidance.
While businesses continue to monitor and wait for formal guidance, it may be advantageous to begin to model out the different rounding policies to understand the potential impact of the elimination of pennies in the future.
What’s next?
The information provided above highlights select changes and considerations related to state income and sales tax. Given the extensive legislative updates enacted in 2025, it is strongly recommended that all taxpayers consult with their state tax advisor regarding applicable developments and the potential impact on their businesses.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
