Illinois is introducing a significant change to sales tax on groceries, effective January 1, 2026. The statewide one-percent sales and use tax currently applied to many grocery items will be eliminated, and municipalities and counties will have the authority to adopt their own one-percent grocery tax.

This shift brings both relief and complexity to retailers, municipalities, and consumers alike. Below is a breakdown of what’s changing, who is impacted, and what steps retailers need to take to remain compliant.

What Exactly Is Changing?

State-level Tax Removal

• As of January 1, 2026, Illinois will no longer impose the 1% reduced rate state sales tax on grocery sales (“qualifying food”) that have historically been taxed separately from other items. 
• The reduction is intended to ease the tax burden on consumers purchasing groceries.

Local Option Tax

• Despite the elimination of the state-level grocery tax, local governments (municipalities and counties) may adopt a 1% grocery tax by ordinance under Public Act 103-0781. 
• For a local grocery tax to take effect January 1, 2026, the ordinance must have been filed with the Illinois Department of Revenue (IDOR) by October 1, 2025, and approved.
• If a local government missed that deadline, they still have the ability to file — but the effective date shifts:
  • Ordnances filed by April 1 of a given year take effect July 1 that year.
  • Ordinances filed by October 1 take effect January 1 of the following year. 

In practice, many municipalities have already filed such ordinances. As of the bulletin’s publication, IDOR had received more than 600 local grocery tax ordinances. 

Which Items Are Affected?

The local grocery tax is limited in scope: it applies only to the same items currently taxed under Illinois’ “qualifying food” rules. 

Excluded items, which will continue to be taxed at the general merchandise (i.e., higher) rate, include:

• Alcoholic beverages
• Soft drinks (non-qualifying “beverages”)
• Candy
• Food prepared for immediate consumption (i.e., “hot foods”)
• Food infused with adult-use cannabis

These exclusions mirror Illinois’s existing rules under 86 Ill. Adm. Code Section 130.310. 

Separately, medical appliances and qualifying drug items that currently pay the 1% tax will continue to be subject to the 1% tax. They are not affected by this change. 

Reporting & Compliance: What Retailers Must Do

Retailers must begin using updated versions of Form ST-1, ST-2, and their amended counterparts for reporting periods on or after January 1, 2026. 

• The updated returns will include specific lines for grocery receipts and grocery tax collected. Retailers must report grocery sales differently depending on whether the location is in a jurisdiction that has adopted the local tax or not.
• If you file via MyTax Illinois, the correct version of the return will be auto-populated based on the reporting period. 

What This Means for Stakeholders

Retailers

• Retailers must update systems and point-of-sale logic to distinguish and report groceries under the new reporting structure properly.
• They need to track which jurisdictions impose a local grocery tax and, for each store location or shipping address, determine the applicable status. IDOR provides a Local Government Grocery Tax Ordinance Information report for that purpose. 
• Retailers will also receive notifications from IDOR via MyTax Illinois or mail if their location is impacted. 
• Staff training will be key to avoiding misclassification or misreporting.

Municipalities / Counties

• Those interested in adopting a local grocery tax must ensure their ordinance is filed in a timely manner to meet effective dates.
• Local governments will need to coordinate with IDOR, review revenue projections, and communicate implications to retailers and taxpayers.
• Municipalities may use the additional revenue stream to fund local services or offset other tax burdens.

Consumers

• While removing the state grocery tax reduces the tax burden in non-taxing localities, local grocery taxes may offset that relief where adopted.
• In jurisdictions that do adopt the local tax, grocery purchasers may see little or no net change, but it ensures the tax burden is more locally controlled.

Key Takeaways & Next Steps

1. State 1% grocery tax ends on December 31, 2025. 
2. Local grocery taxes (1%) are optional for municipalities and counties. They must file ordinances by the deadlines to control their effective dates. 
3. Retailers must update reporting forms, systems, and processes to capture grocery receipts and tax properly starting January 2026.
4. Jurisdictional determination matters: both store location and delivery destination can trigger the local grocery tax.
5. Use the IDOR ordinance status reports and MyTax Illinois rate finder to verify whether a local grocery tax is in place for your area. 

How Thompson Tax Can Help

Navigating new tax legislation can be complex, especially when it involves multiple jurisdictions, new filing procedures, and system updates. At Thompson Tax, we help businesses stay compliant and confident through every transition. Our team can:

• Review your sales tax collection and reporting processes for Illinois locations and remote sales.
• Identify whether your stores or delivery zones fall under new local grocery tax ordinances.
• Provide filing guidance tailored to your business operations.

As Illinois moves toward this new local grocery tax framework, proactive planning will minimize compliance risks and avoid costly errors. Contact us today to ensure your business is prepared for the January 2026 changes. We are your Trusted Tax Advisors.

When businesses embark on mergers or acquisitions (M&A), executives and dealmakers naturally prioritize financial forecasts, efficiency gains, and strategic advantages such as market share or new product offerings. While these are critical to the success of a transaction, one area is too often overlooked: sales and use tax compliance. Failing to evaluate this element of due diligence properly can expose both buyers and sellers to unexpected liabilities, diminished deal value, and post-closing disputes.

Sales and use tax issues may not command the same headlines as revenue growth or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiples, but they carry real financial consequences. Identifying these risks early in the process enables stakeholders to preserve deal value, strengthen their negotiating positions, and ensure a smoother integration following the transaction’s closure.

Why Sales and Use Tax Matters in M&A

Sales and use tax compliance is rarely straightforward. It is governed by a patchwork of state and local rules that change frequently, often with little warning. Even companies with strong accounting teams can unknowingly create exposure through minor missteps, such as missed filing deadlines, misapplied exemptions, or misinterpretations of taxability rules.

One of the most important considerations for buyers is that sales and use tax liabilities typically “follow the business.” In other words, when a company is acquired, the buyer generally assumes responsibility for existing and historical tax obligations. If these liabilities are not correctly identified during due diligence, the buyer may incur substantial costs long after the purchase agreement is signed. This is why sales and use tax must be treated as a core component of the risk assessment process, not as an afterthought.

Common Sales and Use Tax Risks in M&A

While the specific risks vary by industry and jurisdiction, several recurring themes tend to surface during M&A reviews:

1. Unreported Nexus Exposure

Since the South Dakota v. Wayfair, Inc. decision in 2018, states have increasingly enforced “economic nexus” laws that require businesses to register and collect sales tax based on sales volume or transaction count, even in the absence of physical presence. Many companies underestimate their nexus footprint, especially if they sell across multiple states. Failing to register can result in years of unpaid liabilities, as well as penalties and interest.

2. Invalid or Missing Exemption Certificates

Resellers and tax-exempt customers often purchase goods without paying sales tax; however, businesses must collect and maintain valid exemption certificates to justify these non-taxed sales. Missing, expired, or improperly completed certificates can result in substantial assessments during an audit. In an M&A transaction, buyers inheriting poor exemption management practices face the risk of costly “surprise” tax bills.

3. Incorrect Taxability Determinations

Not all products and services are taxed uniformly across jurisdictions. A service considered exempt in one state may be taxable in another. Software, SaaS, digital goods, and professional services are especially complex. Misclassifications may result in under-collected sales tax that can snowball into material liabilities.

4. Historical Audit Assessments

Any pending or unresolved audits transfer to the buyer along with the business. These can involve not only unpaid taxes but also significant penalties and interest. Without a clear understanding of audit history, a buyer may be stepping into a financial minefield.

5. Use Tax Compliance Gaps

While most attention is focused on sales tax, use tax compliance is equally critical. Businesses are required to self-assess use tax on taxable purchases where sales tax was not collected, such as purchases from out-of-state vendors. Many companies overlook this obligation, leaving behind liabilities that remain invisible until surfaced by an auditor or a diligent buyer.

Best Practices for Buyers

Buyers who want to protect their investment and negotiate from a position of strength should integrate sales and use tax reviews into their broader due diligence process. Recommended steps include:

• Conduct a Sales and Use Tax Review Early: Don’t wait until the final stages of the deal. Request detailed filing histories, nexus analyses, and compliance records early in due diligence.
• Assess Nexus and Registration Status: Confirm where the target company has nexus and whether it is registered in those jurisdictions.
• Review Exemption Certificate Management: Evaluate whether exemption certificates are current, valid, and securely stored.
• Examine Audit and Notice History: Understand whether there are ongoing audits, historical assessments, or disputes with taxing authorities.
• Quantify Potential Exposure: Where risks are identified, estimate potential liabilities and use that information to negotiate purchase price adjustments or indemnification provisions.

Best Practices for Sellers

Sellers also stand to benefit from proactively addressing sales and use tax. A clean compliance record can increase company value and reduce the likelihood of last-minute deal complications. Practical steps include:

• Proactively Address Compliance Gaps: Resolve nexus exposure, file outstanding returns, and update exemption certificates before engaging in M&A discussions.
• Be Transparent: Provide buyers with complete and accurate sales tax records. Transparency not only reduces risk but also fosters buyer confidence in the business’s integrity.

By positioning themselves as tax-compliant, sellers can enhance their negotiating leverage and mitigate the risk of value erosion at the closing table.

Sales and Use Tax Considerations are Essential to a Smooth Transaction

Sales and use tax compliance should never be treated as an afterthought in mergers or acquisitions. Overlooked liabilities can derail negotiations, reduce a company’s value, and create significant post-closing risks for both buyers and sellers. Incorporating a thorough tax compliance review into due diligence ensures stronger valuations, fewer surprises, and greater long-term success for all parties involved.

Your Trusted Sales and Use Tax Advisors

Don’t let hidden sales tax risks derail your deal. At Thompson Tax, we specialize in uncovering liabilities, resolving compliance gaps, and supporting businesses through the complexities of mergers and acquisitions. Whether you are a buyer seeking to protect your investment or a seller aiming to present a clean bill of compliance, our experienced advisors provide clarity, confidence, and peace of mind.

Partner with us to safeguard your next transaction. With Thompson Tax by your side, you can move forward knowing that your investment is protected, your risks are addressed, and your business is positioned for long-term success. Contact us today to ensure your next merger or acquisition achieves its full potential.

Maryland recently adopted a new 3% sales and use tax on a wide range of information technology (IT) services, as well as data and software publishing services, which took effect on July 1, 2025. The Comptroller’s Office has issued detailed guidance that clarifies what’s taxable, how software and SaaS are treated, transition rules for existing contracts, and how buyers can allocate tax using Multiple Points of Use (MPU) Certificates. 

What’s Taxed at 3%?

The law expands “taxable services” to align with specific NAICS activity descriptions, not the seller’s chosen NAICS code, so you must look at the service itself. If a service matches the activities in NAICS sectors 518 (data processing, hosting, and related services) and 519 (other information services), subsector 5415 (computer systems design and associated services), or subsector 5132 (software publishing), it’s generally subject to the new 3% rate. The Comptroller emphasizes that taxability depends on the service performed, not the NAICS code on a contract or a seller’s tax return. 

The technical bulletin published by the Comptroller’s office includes a non-exhaustive list of taxable services. Illustrative examples include:

• Under NAICS 518: cloud computing (except software publishing and computer systems design), cloud storage, data processing/computer services, IaaS/PaaS, co-location/data center services, web hosting (excluding software publishing), and application hosting (excluding software publishing). 
• Under NAICS 519: internet search websites, web search portals, archives/libraries, and specific information services. 
• Under NAICS 5415: computer systems design/integration, software consulting, disaster recovery, custom computer software programming/support, custom SEO (excluding hosting/infrastructure support), and related IT consulting/engineering categories. 
• Under NAICS 5132: system and application software publishing services, including packaged operating systems and applications. 

Key point: A seller that does not identify with one of these NAICS codes must still collect tax if the service it sells falls within these descriptions. 

SaaS and Software: 3% vs. 6%

SaaS is treated in two ways, depending on use:

• Enterprise use: If the SaaS (or computer software) is purchased solely for use in an enterprise computer system (whether hosted by the purchaser, vendor, or a third party), it is treated as a taxable service and taxed at 3%. 
• Individual/consumer use: If the SaaS is not purchased solely for enterprise system use (e.g., an individual license), it’s a digital product taxed at 6%. Maryland requires applying the higher rate when a sale could be taxed at different rates (so SaaS sold for non-enterprise use is taxed at 6%). 

Also important: Maryland repealed the customized software exemption effective July 1, 2025. Customized/configured software and SaaS are no longer exempt on that basis. 

Transition Rules: Contracts, Subscriptions, and Change Orders

The Comptroller’s Q&A lays out timing rules to determine whether the 3% applies:

• Subscriptions: Each subscription payment is a separate sale. If the payment date is on or after July 1, 2025, the payment is generally subject to tax. Automatic renewals after July 1, 2025, are treated as separate sales and are taxable.
• Pre-July 1, 2025 fixed-price or milestone contracts: Where parties agreed on terms before July 1, 2025, and payments are tied to deliveries/milestones, amounts due under that contract are generally not subject to the new tax (even if services are delivered after July 1) unless the parties expand the scope via a change order after July 1, in which case the additional scope is a new taxable sale. 
• Vendor purchases used to perform a contract: If a prime or subcontractor purchases taxable IT/data services after July 1, 2025, and uses them to fulfill a contract (even for an otherwise exempt customer like the federal government), those purchases are taxable.  The resale exemption doesn’t apply if the service isn’t resold in the same form. 

Exemptions and Special Carve-Outs

Some exemptions apply specifically to this new tax:

• Sales of cloud computing to a qualified cybersecurity business.
• Sales to a qualified company located in the University of Maryland’s Discovery District in Prince George’s County in connection with quantum computing work.

Buyers must substantiate eligibility; if tax is paid in error, a refund claim may be filed. 

Separately, specific nonprofits (holding a Maryland SUT exemption certificate) remain exempt from sales tax on qualifying purchases used in carrying out their exempt purpose; however, vendors must retain the SUTEC number and proper records. 

Multiple Points of Use (MPU) Certificates: When and How to Use Them

Maryland introduced an MPU Certificate to address situations where a digital product, digital code, taxable data/IT service, or software publishing service will be used concurrently inside and outside Maryland or resold in its original form to related entities both within and outside Maryland. When a buyer presents a valid MPU Certificate at the time of sale, the seller is relieved of the duty to collect Maryland tax, and the buyer (or related entity, if resold) becomes responsible for remitting Maryland use tax based on the apportioned Maryland use. 

Issuing an MPU Certificate

• The buyer must have a Maryland sales & use tax account, request enablement to submit MPU applications, and then request authorization for each transaction (a single certificate can cover an ongoing subscription so long as the Maryland apportionment and terms don’t change). Applications are submitted via MD Tax Connect and must include the vendor, a description of the purchase, the taxable price, and the percentage allocated to Maryland. For resales to related entities, additional details are required. 
• The Comptroller’s TB-56 adds practical details: a buyer generally needs a separate MPU Certificate per transaction, but subscriptions can be covered with one MPU if facts remain the same. 

Vendor Verification and Acceptance

Vendors must verify an MPU Certificate’s validity (temporarily using the “Verify Sales and Use Tax Registration or Exemption” function on MD Tax Connect and the buyer’s central registration number). They should refuse an MPU Certificate when they know the service will be used entirely in Maryland. Vendors must keep copies for at least four years. 

Apportionment Methods

The Comptroller allows reasonable, consistent, and uniform methods, such as:

• Employee count: employees using the product/service in Maryland divided by total employees using it, or
• License count: number of licenses used in Maryland divided by total licenses.

There’s no minimum or maximum Maryland share required, as long as there is some use inside and outside Maryland. Buyers are not required to use an MPU Certificate; they can choose to pay tax on the entire purchase and later seek a refund from another jurisdiction if appropriate. 

Five Practical Steps to Get Ready for the New Tax

1. Map your services to NAICS activities. Build a matrix of offerings against the Comptroller’s Section IV lists to identify which items are squarely within NAICS 518, 519, 5415, and 5132. This controls taxability, not your internal NAICS self-classification. 
2. Classify your software/SaaS correctly. Determine whether each SKU is for enterprise system use (3%) or non-enterprise digital product (6%). Update your quoting and invoicing logic to apply the higher rate where required. 
3. Review contracts and renewals now. Identify subscriptions and automatic renewals scheduled on or after July 1, 2025, and add change-order procedures that account for tax on the expanded scope after that date. Train teams on the special rules for milestone contracts and change orders. 
4. Decide whether to use an MPU Certificate. For multi-state deployments, establish a standard apportionment method (employee or license-based), request MPU authorization in MD Tax Connect, and put vendor verification steps into your AR/AP playbooks. 
5. Update purchasing for contractors. Prime/subcontractors should assume that their own purchases of taxable IT/data services after July 1 are taxable, unless resold in the same form. Build this into pricing for exempt end-users. 

The Bottom Line

Maryland’s new framework shifts the focus to what you do, not how you’re labeled. Many cloud, hosting, integration, and publishing services now incur a 3% state sales/use tax, while SaaS services can be taxed at 3% or 6%, depending on the use. The MPU Certificate rules are a meaningful tool for multi-jurisdictional deployments, but they require setup, documentation, and consistent methods to work smoothly. 

Connect with Thompson Tax today and remain compliant with ease. We’re your Trusted Tax Advisors, ready to guide you every step of the way.

On August 15, 2025, the United States Court of Appeals for the Fourth Circuit issued a significant ruling that will have far-reaching implications for companies subject to Maryland’s Digital Advertising Tax (DAT). The court held that a Maryland statutory provision prohibiting sellers from itemizing the DAT on invoices violates the First Amendment. This ruling not only impacts digital advertisers but also highlights broader issues around tax compliance, transparency, and businesses’ rights to communicate with their customers.

Background: Maryland’s Digital Advertising Tax

Maryland made national headlines in 2021 when it became the first state to impose a tax on digital advertising services. The DAT applies to gross revenues derived from digital advertising in Maryland, targeting large companies that provide banner ads, search engine ads, interstitial advertising, and other forms of digital marketing.

Despite strong opposition, the Maryland legislature enacted the tax by overriding the governor’s veto. From the beginning, the law raised serious constitutional questions, both under the Commerce Clause and the First Amendment. Critics argued that the DAT unfairly targets a specific form of commerce and imposes complex compliance burdens.

To add to the controversy, the legislature passed a provision that prohibited sellers from passing the tax on to customers through a separate line item, surcharge, or fee. In other words, a digital advertising provider could not explicitly show the DAT on an invoice, even if that provider wanted to be transparent about the costs. Instead, businesses were left with the option of simply increasing their prices and absorbing or indirectly passing on the tax.

Summary Timeline

The Challenge: Free Speech and Transparency

The U.S. Chamber of Commerce and several trade associations challenged the pass-through prohibition in federal court. Their argument was straightforward: prohibiting taxpayers from showing the DAT as a separate line item is a restriction on speech. Businesses, they claimed, have the right to explain to customers what portion of their bill represents state-imposed taxes.

The Fourth Circuit agreed. The court found that the law impermissibly restricted protected speech by forbidding companies from expressing the cost of the tax in three specific ways —separate fee, surcharge, or line item —while still allowing other explanations of price increases. This made the law “content-based,” triggering a heightened level of constitutional scrutiny.

The judges concluded that Maryland’s prohibition could not survive even intermediate scrutiny, much less strict scrutiny. They held that the pass-through ban was unconstitutional “in all of its applications” and struck it down.

What Happens Next?

Although the ruling invalidates the pass-through ban, the broader battle over the DAT itself is far from over. Other taxpayers are continuing to litigate the DAT’s overall constitutionality in the Maryland Tax Court, with challenges focused on federal preemption and the discriminatory nature of the tax.

For now, businesses that provide digital advertising services in Maryland face a complicated environment:

• The DAT remains in effect and must be collected and remitted.
• The pass-through prohibition is unconstitutional, meaning businesses can now show the DAT on invoices if they choose.
• Future rulings may still strike down the DAT entirely, adding uncertainty to long-term compliance strategies.

Practical Considerations for Businesses

This case highlights the tension between state tax innovation and constitutional protections. For businesses, the immediate considerations include:

1. Invoice Practices – Companies may now choose to itemize the DAT on customer invoices. However, they should carefully weigh whether doing so is beneficial from a client relationship standpoint.
2. Compliance Burden – Even if the DAT is ultimately struck down, businesses must continue to comply for now. This involves monitoring gross revenues, accurately calculating liabilities, and filing returns in a timely manner.
3. Communication Strategies – Transparency with customers is key. Businesses must determine how to communicate price changes or added costs, whether through separate line items, explanatory notes, or bundled pricing.
4. Potential for Taxpayer Refunds – If the DAT itself is invalidated, refunds may become available. Companies should keep thorough records to support any potential refund claims.

How Thompson Tax Can Help

At Thompson Tax, we recognize that navigating new and evolving state tax regimes is one of the most significant challenges businesses face today. The Maryland DAT is just one example of how quickly the tax landscape can change, and how important it is to have trusted advisors by your side.

Here’s how we can assist:

• Compliance Management: We help businesses track, calculate, and file complex sales and use taxes, including emerging taxes like the DAT. Our team ensures you stay compliant while minimizing risk.
• Policy and Planning: We guide companies on whether and how to itemize taxes on invoices, balancing compliance with customer communication strategies.
• Audit Support: State tax authorities are likely to scrutinize digital advertising revenues closely. We provide audit defense, document preparation, and representation to safeguard your interests.
• Refund Opportunities: If future rulings invalidate the DAT altogether, we can help businesses file refund claims and recover overpaid amounts.
• Multi-State Expertise: Maryland is unlikely to be the last state experimenting with digital tax policy. We assist companies operating nationwide in staying ahead of legislative changes that could impact their bottom line.

The Bottom Line 

The Fourth Circuit’s ruling marks a significant victory for taxpayer speech and transparency. Businesses can now communicate openly with customers about the Maryland DAT. But the broader fight over the DAT’s constitutionality, and the trend of states experimenting with novel tax structures, remains ongoing.

Whether your business is navigating Maryland’s Digital Advertising Tax or simply looking for greater confidence in your overall sales and use tax strategy, Thompson Tax is here to help. Our team turns tax complexity into clarity so you can focus on growth with peace of mind.  Contact us today!

Colorado Appellate Court Reverses District Court Ruling: Online Streaming Subscriptions Constitute Taxable TPP

In Netflix, Inc. v. Department of Revenue of the State of Colorado, No. 24CA1019, decided on July 3, 2025, the Colorado Court of Appeals overturned a District Court ruling. It decisively held that online streaming subscriptions, such as Netflix’s, qualify as tangible personal property (TPP) and are therefore subject to Colorado’s retail sales tax. 

The core question: Does a subscription to streaming video content meet Colorado’s nearly century-old definition of TPP? 

Statutory Framework & Historical Context

Colorado’s Emergency Retail Sales Tax Act of 1935 imposed sales tax on “tangible personal property,” defined in the statute as “corporeal personal property”, a term later interpreted broadly. 

Since then, the Department of Revenue (DOR) has considered various digital goods, such as e-books, PDFs, digital videos, and photographs, as taxable. In 2021, it formalized this by issuing a rule clarifying that the delivery method doesn’t affect taxability, expressly including internet streaming as an example. Later that year, the legislature amended the sales tax law to define “digital goods” as items delivered or stored by digital means, including video, music, or electronic books. 

However, both parties in this case focused on the original definition of TPP, primarily the meaning of “corporeal.”

District Court vs. Court of Appeals

The district court, granting summary judgment to Netflix, held that streaming services are not considered TPP because they can’t be touched, arguing that TPP must be “seen and handled”.

The Colorado Court of Appeals disagreed. Interpreting “corporeal” broadly, the court relied on 1933 Black’s Law Dictionary, which defines corporeal property to include things “perceptible by any of the bodily senses,” not solely touch. Because Netflix’s content is seen and heard, even if impermanent, the court found it sufficiently corporeal to qualify as TPP. 

Judge Matthew Grove, writing for the unanimous panel (joined by Judges Welling and Johnson), rejected Netflix’s physicality-only argument and warned that excluding digital content solely due to its delivery method leads to “absurd results”. The court emphasized that modern commerce routinely sells content, such as photos, videos, and music, in digital form, and the legislature intended sales tax to apply to these forms.

Administrative and Legal Precedent

The recent appellate ruling:

• Provides a judicial endorsement of the Department of Revenue’s digital tax rules, lending support to DOR’s broader enforcement initiatives.
• Offers a precedent that may influence other jurisdictions, especially those with similarly dated statutory definitions of tangible personal property.
• Signals to courts and policymakers that even older statutes can flex to accommodate modern digital commerce, provided that delivery does not obscure the nature of what is being sold.

Potential downstream issues, such as Netflix’s “Taxpayer Bill of Rights” (TABOR)-based argument (claiming new taxes were imposed without voter approval) or challenges regarding statutory conflicts, were not addressed in the appellate opinion and remain unresolved.

The case has now been remanded to the district court for further proceedings consistent with the appellate ruling. 

Implications for Tax Policy and Digital Economy

The Appellate Court ruling underscores a pivotal shift in applying analog-era tax laws to the digital economy. While the legal focus was on defining “tangible personal property,” the broader impact touches several areas of sales and use tax administration and compliance.

1. Expansion of the Sales Tax Base

By classifying streaming subscriptions as tangible personal property, the Colorado Court of Appeals effectively expands the scope of what is subject to sales tax under existing law. This interpretation:

• Validates the Colorado Department of Revenue’s inclusion of digital goods and services (e.g., e-books, music, streaming video) as taxable, regardless of delivery method.
• May encourage Colorado to audit and assess other subscription-based or digital service providers, especially those previously operating under the assumption that their services were nontaxable.

2. Sales Tax Collection Responsibilities for Vendors

The decision places heightened compliance pressure on:

• Streaming platforms like Netflix, Hulu, Spotify, and others that charge recurring subscription fees.
• Marketplaces and aggregators that facilitate digital content distribution.
• Out-of-state sellers, particularly after the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, which eliminated the physical presence requirement for sales tax nexus.

Vendors with economic nexus in Colorado will need to:

• Reevaluate their product taxability matrices to ensure proper classification and application of tax.
• Update point-of-sale and billing systems to collect sales tax on digital content sales.
• Possibly remit use tax on past transactions if they were not properly taxed and a retroactive assessment is considered.

3. Use Tax Considerations for Consumers and Businesses

Where vendors fail to collect sales tax on streaming subscriptions or similar digital services, Colorado consumers and businesses may have a use tax liability. This can occur when:

• The subscription is purchased directly from an out-of-state provider.
• Sales tax wasn’t charged due to a mistaken taxability classification.
• Tax was calculated at a rate lower than required.

With this decision in place, auditors may take a stricter view of digital subscription purchases and push for greater enforcement of use tax compliance.

Planning Considerations for Tax Departments

In-house tax departments and legal teams should:

• Reexamine taxability reviews for digital goods and services.
• Review exposure for prior tax periods, especially for clients who’ve historically treated streaming and other intangible media as exempt.
• Consider implications for bundled offerings, where streaming access is part of a package including physical goods, hardware, or licensing rights.
• Monitor further proceedings, especially Netflix’s unresolved TABOR argument, which could challenge the enforceability of new interpretations without voter approval.

Opening the Door for Further Sales and Use Tax Changes

As commerce continues its rapid migration to digital platforms, this case sends a clear message: the nature of a transaction matters more than its mode of delivery. The Colorado Court of Appeals has signaled that tangible personal property does not need to be physical; if consumers can access, see, hear, or otherwise perceive digital goods, those goods may fall squarely within the state’s sales tax base.

Whether content is delivered via disc, download, or streaming over a fiber optic connection, the ruling confirms that substance overrides form. As such, Colorado’s interpretation opens the door for broader taxation of digital content, including:

• Streaming video and music services
• Cloud-based gaming subscriptions
• E-books and digital publications
• Software-as-a-Service (SaaS) platforms, particularly those offering user-facing interfaces

The takeaway is clear: as states modernize their tax laws to reflect the digital economy, gray areas are being transformed into enforceable rules. Staying compliant requires proactive planning, thoughtful structuring, and ongoing monitoring of regulatory changes to ensure ongoing compliance.

Scope Clarification

This ruling interprets Colorado state sales and use tax statutes and Department of Revenue rules only. It does not bind or interpret Colorado’s home-rule municipalities or other local jurisdictions, which administer separate tax codes and enforcement. As a result, local taxability, rates, and obligations may differ, requiring a separate review of each locality’s ordinances and guidance.

Stay Ahead of the Curve… and the Auditor

Colorado’s ruling marks a shift in how states may approach taxing the digital marketplace, and the landscape is rapidly evolving. If your business sells digital goods or services, now is the time to ensure you’re not caught off guard.

Contact Thompson Tax today for all of your sales and use tax needs. We are Your Trusted Tax Advisors.

Effective July 1, 2026, the State of Georgia will launch its newly established Tax Court, replacing the existing Georgia Tax Tribunal. This is more than an administrative change; it’s a major structural shift that repositions tax appeals within the judicial branch, offering a more formal, streamlined, and potentially more favorable forum for taxpayers disputing sales and use tax assessments.

What’s Changing?

• New Judicial Forum: The new Georgia Tax Court is a constitutional court within the judicial branch, which enhances the impartiality and legal weight of its decisions. Unlike the administrative Tax Tribunal, the new Court will follow the Georgia Civil Practice Act and rules of evidence—providing a more predictable legal environment for resolving tax disputes.
• Streamlined Appeals: Previously, most tax decisions from the Tribunal were appealed to Superior Court, which involved additional steps and delays. Under the new structure, appeals from the Georgia Tax Court go directly to the Court of Appeals, helping to accelerate resolution and reduce litigation costs.
• Broader Authority: The Tax Court is empowered to consider constitutional, federal, and equitable claims, in addition to statutory tax law, so you should expect more formal court procedures and discovery, mirroring other civil litigation. This is especially relevant for complex sales and use tax cases involving nexus, apportionment, exemptions, or due process concerns, providing taxpayers with a full legal forum for their arguments.

How Georgia’s New Tax Court Impacts Sales & Use Tax Disputes

If your business:

• Is undergoing or expects a Georgia DOR sales/use tax audit;
• Has a pending case with the Georgia Tax Tribunal; or
• Anticipates a sales tax assessment dispute in the coming year –

Then this new court structure may benefit you by:

• Preserving access to appeals without prepayment of disputed taxes;
• Offering greater procedural fairness; and
• Providing faster resolution timelines for appeals.

Transition Timeline and Key Deadlines

• Deadline: All Tribunal cases not resolved by June 30, 2026, will be transferred to the new Tax Court automatically.
• New Cases: Sales and use tax appeals filed on or after July 1, 2026, must go directly to the Georgia Tax Court.
• Appeal Timing: Most assessments must be appealed within 45 days – so planning and prompt action are key.

How To Prepare for the Transition to Georgia’s New Tax Court

• Review Open Matters: If you have an active sales/use tax case with the Tribunal, consult with us to determine whether resolution or transfer makes strategic sense.
• Prepare for New Procedures: Understand the rules of civil practice and begin treating tax disputes more like formal litigation.
• Assess Audit Exposure: Consider a proactive audit readiness review to identify potential issues ahead of time.
• Stay Informed: Court rules, procedures, and judge confirmations are still developing—we will monitor and advise you on what to expect.

Contact Thompson Tax Today.  We are Your Trusted Tax Advisors.

Whether you’re responding to an audit, appealing an assessment, or considering a refund claim, our team is here to help you navigate the transition and advocate for your business before the new Georgia Tax Court.

Contact us today to schedule a consultation and stay ahead of the curve. 

As part of a broader effort to modernize its tax structure, Washington State has enacted changes that significantly impact how digital services are taxed. Beginning October 1, 2025, a variety of technology-related services, previously exempt or treated differently, will become subject to retail sales tax and reclassified for Business & Occupation (B&O) tax purposes. These updates, implemented through ESSB 5814, aim to align tax treatment with the evolving digital economy and will have implications for both compliance and cost planning, particularly for businesses operating in the IT, software, web development, and digital advertising sectors.

This article outlines the key changes and what businesses offering digital services need to know to prepare for the upcoming shift.

Overview of Key Tax Updates

1) Expanded Retail Sales Tax

Beginning October 1, 2025, Washington State will broaden its retail sales tax base to include a variety of digital and tech-related services under ESSB 5814, including:

• Information technology services (e.g., training, technical support, data processing)
• Custom website development
• Custom software sales and customization of prewritten software
• Advertising services
• Some digital automated services previously excluded

2) B&O Tax Classification Changes for Digital Providers

For businesses offering the above digital services, gross income from these activities will now fall under the Retailing B&O classification, in addition to retail sales tax obligations.

B&O Rate Adjustments Under “Service & Other Activities”

While digital services fall under Retailing B&O, businesses also active in “Service and Other Activities” may face new rate tiers:

• Less than $1M prior-year gross income: 1.5%
• $1M–$4.999M: 1.75%
• $5M or more: 2.1%

Implications for Digital Service Providers

• New Tax Obligations: Businesses offering IT, web development, custom software, or advertising services must collect and remit retail sales tax and report this income under Retailing B&O, even if previously exempt.
• Classification Clarity Needed: Depending on their service mix, businesses may need to allocate income between Retailing and Service & Other Activities, potentially facing higher rates if grossing above certain thresholds.
• Rate Impact: Digital providers with higher revenue could face Retailing B&O, combined with a 2.1% Service rate, while financial institutions see additional surcharge burdens.

Suggested Action Steps

• Review pricing and invoicing systems to ensure applicable services correctly reflect new sales and B&O classifications.
• Determine classification boundaries: Differentiate digital services under Retailing versus traditional services.
• Model the impact: Forecast tax liability across service lines to understand total exposure.
• Stay informed via DOR for Interim Guidance Statements and Special Notices to be published ahead of October 1, 2025.

Summary Table

How We Can Help

At Thompson Tax, we understand that navigating the evolving landscape of Washington’s B&O and sales tax laws, especially those affecting digital services, can be complex and time-consuming. As Your Trusted Tax Advisors, our mission is to simplify that process and help you stay confidently compliant.

Here’s how we can assist your business with the upcoming October 1st changes:

1. Clear Taxability Guidance

We help you determine exactly which of your digital services are now subject to retail sales tax and how they should be classified for B&O purposes. Whether you’re selling custom software, offering IT services, or running a digital advertising agency, we’ll provide clear and accurate taxability guidance so you can apply the rules correctly from day one.

2. Nexus & Exposure Review

Many digital businesses don’t realize they’ve triggered economic nexus in Washington until it’s too late. We assess your operations and revenue sources to determine where and when compliance obligations began and help address any prior-period exposure with minimal risk.

3. Sales & B&O Tax Compliance Setup

From registering with the Department of Revenue to classification mapping, we make sure you’re collecting, reporting, and remitting the correct taxes and that your income is properly reported across Retailing and Service & Other B&O related activities.

4. Customized Structuring Advice

With the new taxability rules, how you structure your offerings and contracts matters more than ever. We work closely with your team to evaluate bundling practices, subscription models, and service agreements, ensuring they’re tax-efficient and compliant.

5. Audit Defense & Documentation

Increased complexity often leads to increased scrutiny. If Washington’s Department of Revenue comes knocking, we’re here to help. We provide comprehensive audit support, manage communications with tax authorities, and help organize supporting documentation so you’re always prepared.

6. Ongoing Legislative Monitoring

The upcoming changes are significant, but not the end of the story. Our team continuously monitors legislative updates, DOR guidance, and administrative rules to keep you informed and ahead of the curve.

Let’s Talk

At Thompson Tax, we don’t just offer sales and use tax services; we become an extension of your team, focused on minimizing risk, identifying savings opportunities, and building a proactive compliance strategy tailored to your business.

Whether you’re a tech startup, SaaS provider, digital agency, or enterprise business, we’re ready to help you navigate these upcoming changes with clarity and confidence.

Reach out to schedule a consultation or learn more about how we can support your compliance with Washington’s 2025 tax reforms.

The Shift Toward Taxing Digital Goods and Services

Historically, state sales tax systems were designed to target tangible personal property, leaving many digital products untaxed. However, as consumer behavior and business models evolve, more states are moving to include digital goods, such as streaming content, SaaS, and cloud services, in their tax bases. This shift reflects a broader effort to modernize tax codes and address budgetary needs without increasing base tax rates.

Today, digital advertising, remote access software, online education platforms, and even NFT marketplaces are being considered for taxation in several jurisdictions.

Legal Challenges and Considerations

The move to tax digital goods and services has not been without controversy. Some businesses and industry groups argue that expanding sales tax to digital services creates an undue burden on companies operating across multiple jurisdictions. Legal challenges, such as the ongoing case in Maryland regarding digital advertising taxes, highlight the complexities in determining the taxability of digital transactions.

Moreover, certain states have encountered difficulties in defining what constitutes a taxable digital good or service. For instance, software-as-a-service (SaaS) is taxed differently across states, with some classifying it as a tangible product and others considering it a non-taxable service. This inconsistency creates challenges for businesses selling digital products nationwide.

Recent Legal Developments and Policy Challenges

Key Legal Cases

• Maryland’s Digital Advertising Tax remains under legal scrutiny. In Comptroller v. Comcast, businesses argue the tax violates the Internet Tax Freedom Act and the U.S. Constitution’s Commerce Clause. As of mid-2025, the case is pending appellate review following setbacks in the lower court for the state.
• New York’s Proposed Streaming Tax, initially introduced in 2024, stalled amid concerns over its impact on consumers and First Amendment implications. Revised legislation may resurface in 2026.

Ongoing Issues

The classification of SaaS continues to vary state-by-state. For example, below is a list of how several states generally treat sales of SaaS products:

• • Taxable as a service in Texas and Connecticut.
  • Considered a non-taxable license or exempt in California (unless bundled).
  • May be taxable or exempt in New Jersey, depending on delivery and use.

This lack of uniformity across states complicates compliance, especially for businesses operating nationwide.

States Expanding Digital Sales Taxation in 2025

• • Maryland: Implemented a digital advertising tax, though its legality is being challenged in court.
  • New York: Proposed a tax on streaming services, which could significantly impact major providers.
  • Texas: Expanded definitions now include AI-based analytics and remote platform use.
  • Washington: Updated guidance covers SaaS, AI tools, and digital subscription boxes.
  • Illinois: Effective since Jan 1, 2025: tax on online courses and cloud infrastructure.
  • Florida: Proposed taxation of virtual event services and in-app purchases.

As more states analyze revenue potential from digital activity, legislation becomes increasingly sophisticated and aggressive in targeting new digital sectors.

Compliance Strategies for Digital Businesses 

Track Multistate Nexus Expansion

With the proliferation of economic nexus rules, even limited digital sales can trigger tax collection obligations. Businesses must evaluate where they’ve established nexus via virtual presence, remote employees, or digital delivery by:

• Regularly Reviewing Tax Policies

As digital tax laws are rapidly evolving, businesses must regularly review their tax policies and be prepared to implement any necessary changes. Keeping customers informed about potential tax changes on digital purchases can also help maintain transparency.

• Monitoring AI-Driven Digital Offerings

New services, such as generative AI subscriptions, data processing platforms, and virtual co-working apps, may soon fall within taxable categories. Review your catalog regularly to assess exposure.

• Seeking Professional Tax Guidance

Especially for SaaS, PaaS, or streaming providers, working with advisors who specialize in multistate sales tax is crucial. These experts can also help document exemptions and prepare for audits in states with new tax laws.

• Educating Internal Teams

Sales, product, and finance teams should be trained in how taxability may affect pricing, invoicing, and customer communications.

The Road Ahead: Outlook for Digital Taxation

The drive to tax digital goods and services shows no signs of slowing. States are expected to push toward broader and potentially more uniform digital tax regimes. However, federal-level guidance or legal intervention may be necessary to curb patchwork rules and prevent double taxation.

International developments (e.g., OECD Pillar One tax reforms and EU digital levies) may also influence U.S. state policies in the coming years.

How Digital Taxation Affects Your Business

The inclusion of digital goods and services in state sales tax regimes reflects a long-term structural shift in how tax authorities approach revenue collection in a digital-first world. Businesses that proactively adapt by investing in compliance tools, refining taxability assessments, and staying informed about policy shifts will be better positioned to manage risk and seize growth opportunities in 2025 and beyond.

Contact Thompson Tax today for all of your sales and use tax needs. We are your Trusted Tax Advisors.

In recent years, the restaurant industry has undergone a significant transformation, driven by changing consumer behaviors, the growth of delivery platforms, and increased reliance on third-party food preparation models. Alongside these changes, state and local tax authorities have intensified sales and use tax audit efforts, particularly in areas where third-party food preparers are involved. These audits reveal gaps in tax compliance that many restaurant operators may not even realize exist.

Let’s examine the trends, risks, and best practices emerging from recent sales and use tax audits, with a focus on the growing involvement of third-party food preparers in today’s restaurant operations.

Understanding Third-Party Food Preparation Models

What Are Third-Party Food Preparers?

Third-party food preparers refer to external entities that assist restaurants with food production. These include:

• Ghost kitchens: Facilities that cook meals for delivery or pickup under one or more virtual restaurant brands.
• Commissary kitchens: Shared kitchen spaces used by multiple businesses to prepare food products.
• Co-packers and contract kitchens: Companies that produce food products on behalf of a restaurant or food brand, often for distribution or resale.

These models offer significant operational benefits, such as cost savings, scalability, and flexibility. However, they also introduce complex sales and use tax implications.

Sales and Use Tax Issues in Third-Party Food Preparation

Taxability of Prepared Food and Services

One of the primary challenges with third-party preparers lies in determining which services and products are taxable. Depending on the jurisdiction, the following items may be subject to sales or use tax:

• Prepared meals delivered to customers, 
• Food preparation services rendered by ghost or commissary kitchens,
• Packaging, utensils, and non-food items provided with meals, and
• Transfers of tangible personal property between preparers and restaurant operators.

The taxability of these items varies from state to state. For instance, in some jurisdictions, if a third-party preparer merely provides a service (e.g., preparing meals for a brand’s customers), their charges may be subject to taxation. In other cases, if the preparer acts as a subcontractor selling a finished product to the restaurant, the transaction might be exempt if a resale certificate is executed properly.

Resale Certificates and Audit Exposure

Resale certificates are often used to exempt purchases from sales tax when the item will be resold to an end consumer. However, misuse or poor documentation of resale certificates is a common issue identified under audits.

When restaurants engage third-party kitchens or co-packers, they may assume that their purchases are exempt from tax under a resale exemption. However, tax authorities frequently scrutinize these transactions to determine whether:

• The correct documentation exists,
• The transaction truly qualifies for resale,
• The preparer is acting as a vendor versus a service provider.

Failure to correctly apply or validate resale exemptions can lead to significant tax assessments, including penalties and interest.

Audit Trends in the Restaurant Industry

Why Tax Authorities Are Paying Attention

Sales and use tax auditors have become increasingly focused on:

• Underreported taxable purchases from third-party preparers.
• Uncollected taxes on delivery, packaging, or service fees.
• Misclassified transactions between restaurants and preparers.
• Marketplace facilitator gaps, particularly where delivery platforms, ghost kitchens, or contract preparers are involved.

For example, some restaurants operating virtual brands may not realize that if a ghost kitchen prepares and delivers food directly to consumers under the restaurant’s name, they might be viewed as the actual seller for tax purposes, shifting the obligation to collect and remit sales tax.

Common Audit Findings

In audits where third-party preparers are involved, some common issues include:

• Improper or missing resale certificates,
• Non-taxed charges for preparation or packaging,
• Unreported use tax on untaxed purchases, and
• Discrepancies between point-of-sale records and actual operations.

These findings often lead to substantial assessments when documentation is lacking or misunderstood.

Best Practices for Navigating Compliance

Clarify the Nature of Third-Party Relationships

Restaurants should clearly understand whether their third-party preparers are:

• Selling a product (i.e., taxable goods),
• Providing a service (i.e., food preparation),
• Or acting as a hybrid (e.g., ghost kitchens selling under a license or brand).

This distinction is critical in determining tax responsibility.

Obtain and Maintain Proper Documentation

Maintain up-to-date, properly executed resale certificates when claiming exemptions. Ensure that:

• The certificate is correctly filled out,
• The vendor is registered in the state,
• The transaction aligns with the exemption claimed.

Review Contracts and Invoices for Tax Implications

Scrutinize agreements with third-party preparers to ensure tax responsibilities are clearly defined. Invoices should indicate what is being charged (e.g., prepared food, labor, packaging) and whether sales tax is charged appropriately.

Conduct Internal Reviews and Seek Advisory Support

Engaging in periodic internal reviews of your sales and use tax treatment for third-party preparers can reveal potential exposures before an audit. Consider consulting a sales tax advisor with expertise in the restaurant industry to review your documentation, contracts, and reporting processes.

What This Means for You

As restaurant operations become increasingly outsourced, decentralized, and digitally driven, the role of third-party food preparers continues to grow. With this evolution comes increased attention from tax authorities eager to ensure proper sales and use tax compliance.

Restaurant operators must stay ahead of the curve by understanding how these relationships impact their tax obligations. By implementing strong documentation practices, reviewing third-party agreements, and conducting regular compliance checks, restaurants can minimize audit risk and focus on what they do best… serving their customers.

If your restaurant uses ghost kitchens, commissaries, or contract food preparers, now is the time to assess your sales and use tax exposure. A proactive approach can save your business time, money, and stress when the auditors come knocking.

Contact Thompson Tax today for expert guidance on your sales and use tax needs.  We’re just a phone call away!

The Illinois Department of Revenue will launch a new Tax Amnesty Program this fall, offering a limited-time opportunity for taxpayers to come into compliance without facing interest or penalties. Authorized by House Bill 2755 this Amnesty is set to run from October 1, 2025, through November 15, 2025.

Key Features of the 2025 Illinois Amnesty Program

• Eligibility: The program covers taxes imposed by or authorized under Illinois law and collected by the Department of Revenue.
• Qualifying Tax Periods: Tax liabilities for periods after June 30, 2018, and before July 1, 2024, are eligible.
• Benefits: If a taxpayer pays all taxes due for applicable periods during the amnesty window, the Department will waive all related interest and penalties. Additionally, no civil or criminal prosecution will be pursued for these periods.
• Conditions:
  • Full payment is required for each eligible period to qualify.
  • Taxpayers under current criminal or civil litigation related to nonpayment or fraud are not eligible.
  • Amnesty does not preclude taxpayers from filing for refunds on unrelated issues or from overpayments based on estimated liabilities (per 35 ILCS 5/506(b)).

Why Participate?

This amnesty program presents a valuable opportunity for individuals and businesses to resolve outstanding liabilities at a reduced cost. Whether addressing overlooked filings or previously unpaid balances, now is the time to act.

Don’t Wait—Get Compliant Today

Now is the ideal time to review your records and identify any liabilities that fall within the eligible timeframe. At Thompson Tax, we are your Trusted Tax Advisors, ready to guide you through the amnesty process with insight and confidence.

Contact us today to schedule a consultation and make the most of Illinois’ 2025 Tax Amnesty Program.

Effective July 1, 2025, Utah is simplifying its sales and use tax economic nexus threshold by eliminating the 200-transaction requirement. Under S.B. 47 (Laws 2025), economic nexus will now be based solely on gross revenue, aligning Utah more closely with the streamlined standards for remote sellers and marketplace facilitators in other states.

New Utah Economic Nexus Threshold for Remote Sellers and Marketplace Facilitators

Beginning July 1, 2025, a voluntary remote seller or marketplace facilitator is required to collect and remit Utah sales and use tax if, in either the current or previous calendar year:

• The seller earns more than $100,000 in gross revenue from the sale of tangible personal property, electronically transferred products, or taxable services for storage, use, or consumption in Utah, and/or
• The marketplace facilitator makes or facilitates gross sales exceeding $100,000 in Utah, either on its own behalf or on behalf of one or more third-party sellers.

What Changed in Utah’s Sales Tax Economic Nexus Law?

Previously, a remote seller or facilitator triggered economic nexus in Utah by either:

• Exceeding $100,000 in Utah gross sales, or
• Conducting 200 or more separate transactions into the state.

Starting July 1, 2025, the transaction-based threshold is eliminated. Only the $100,000 gross revenue threshold will apply. This means businesses no longer need to track the number of individual transactions into Utah, just total revenue.

Who Is Affected by the Change?

• Remote sellers making sales into Utah, and
• Marketplace facilitators selling or facilitating sales on behalf of others.

Companies should review their 2024 and 2025 sales activity to determine whether they meet the new Utah nexus threshold and need to begin collecting and remitting tax.

How Thompson Tax Can Help with Utah Economic Nexus Compliance

Navigating evolving economic nexus laws across multiple states can be challenging. At Thompson Tax, we are your trusted resource for sales and use tax consulting.

Our experts help businesses:

• Evaluate multi-state economic nexus exposure,
• Determine Utah sales tax obligations under the new threshold,
• Register for sales tax in Utah (and other states) and ensure timely and accurate compliance, and
• Implement customized, efficient tax strategies tailored to your business model.

We closely monitor state tax law changes, so you don’t have to. Whether you’re a growing e-commerce seller or a high-volume marketplace facilitator, we’re here to ensure your business stays compliant.

Contact Thompson Tax today. We are your Trusted Tax Advisors.

Virginia has enacted legislation extending an important sales and use tax exemption that impacts advertising businesses operating in the state. With the passage of Ch. 307 (H.B. 2675) and Ch. 318 (S.B. 871), the exemption for certain printed materials purchased by advertising businesses from Virginia printers, when those materials are distributed outside of the Commonwealth, has now been extended through July 1, 2028. The exemption was previously set to expire on July 1, 2025.

This legislative change is a welcome update for advertising businesses that rely heavily on print media as part of their broader marketing and outreach strategies, especially those with multi-state distribution. It reflects Virginia’s recognition of the role these businesses play in both the state’s economy and the regional advertising ecosystem.

What the Exemption Covers

The extended exemption specifically applies to printed materials purchased by any advertising business from a Virginia-based printer, so long as those materials are distributed for use outside of Virginia. These printed materials can include catalogs, brochures, promotional flyers, postcards, and other forms of physical advertising collateral.

It’s important to note that this exemption only applies when the printed items are destined for out-of-state distribution. If the materials are intended for use within Virginia, the exemption does not apply, and the transaction may be subject to retail sales and use tax.

This distinction is key for businesses with operations spanning multiple states. Proper documentation and compliance are necessary to support exemption claims and avoid potential liabilities in the event of an audit.

Legislative Background and Policy Intent

The original exemption was enacted to support Virginia’s printing and advertising sectors by encouraging businesses to source print production locally, even when the final distribution is interstate. The rationale is that such transactions bring value to the Virginia economy by sustaining jobs and business activity in the printing industry, without undermining the state’s tax base (since the materials are used outside the Commonwealth).

The extension through July 1, 2028, provides stability and planning flexibility for advertising firms. Businesses now have an additional three years to benefit from the tax savings associated with this exemption. This extension also indicates legislative support for preserving a competitive business environment in Virginia’s advertising and print sectors.

Compliance Considerations

While the exemption presents a significant opportunity for cost savings, it also comes with compliance responsibilities. Advertising businesses must ensure that the documentation associated with each exempt transaction is complete and accurate. This typically includes:

• Invoices clearly identifying the printer and buyer,
• Proof of out-of-state distribution (e.g., shipping documentation, client contracts, or delivery records), and
• Proper exemption certificates or related documentation as required by Virginia tax authorities.

Failure to maintain adequate records can result in the disallowance of the exemption during a tax audit, potentially leading to unexpected tax assessments, penalties, and interest.

Moreover, the nature of advertising operations, often involving multiple vendors, states, and distribution methods, can make tracking exemption eligibility complex. That’s why having a solid system in place and the support of knowledgeable tax professionals is critical.

How Thompson Tax Can Help

Thompson Tax specializes in sales and use tax consulting, and we understand the nuanced requirements businesses face when navigating exemptions like the one extended in Virginia.

We assist advertising and media businesses by:

• Reviewing transactions and vendor relationships to determine taxability and exemption eligibility,
• Developing documentation best practices to ensure compliance with state requirements,
• Training internal teams on how to manage exempt purchases and maintain proper records,
• Representing clients in audits and providing support during inquiries from tax authorities, and
• Identifying additional opportunities for tax savings across jurisdictions.

Whether you are purchasing printed materials for a multi-state campaign, reassessing vendor contracts, or conducting a compliance health check, our team is here to help you navigate the complexity of sales and use tax with confidence.

Planning for the Future

With the new expiration date set for July 1, 2028, businesses have time to incorporate the exemption into their long-term budgeting and sourcing decisions. However, tax laws are always evolving, and proactive planning is essential.

We recommend that advertising businesses operating in Virginia or sourcing from Virginia printers:

• Reassess existing contracts to ensure that exempt transactions are structured appropriately,
• Update internal tax procedures and controls, and
• Monitor future legislative updates that may affect tax policy or exemption eligibility.

Staying ahead of these changes ensures your business remains compliant while maximizing cost-efficiency.

At Thompson Tax, we support all your sales and use tax needs. With a deep understanding of multi-jurisdictional tax rules and a commitment to personalized service, our team is ready to be your trusted partner in navigating Virginia’s tax landscape and beyond. Contact us today!

On April 1, 2025, the California Department of Tax and Fee Administration (CDTFA) adopted Emergency Regulation 1808, clarifying reporting, publication, and penalty requirements under Revenue and Taxation Code (RTC) section 7213. This regulation enforces new transparency measures regarding local tax revenue sharing agreements, which are often used by jurisdictions to incentivize retailers.

Why the Emergency Regulation?

Emergency Regulation 1808 was adopted to ensure clarity and compliance ahead of the first significant reporting deadline on April 30, 2025. It addresses ambiguities in RTC section 7213, defines key terms (such as “rebated sales and use tax revenues”), and specifies how and when local agencies must report and publish information related to tax revenue sharing agreements.

Key Provisions of Regulation 1808:

• Annual Reporting Deadline: Local agencies must submit a Tax Revenue Sharing Agreement Reporting Form to the CDTFA by April 30 each year, covering the previous fiscal year.
• Website Publication Requirement: Agencies that share tax revenue must publish agreement details on their website by April 30, including a prominent homepage link.
• CDTFA Publication: The CDTFA will post statewide summary data by June 1 annually.
• Penalties for Non-Compliance: Agencies failing to report or publish required information may face fines:
  • $1,000/day for the first 180 days of non-compliance.
  • $4,000/day from day 181 to 365.
• Extension Requests: Agencies may request a 30-day extension for good cause by submitting a written statement to the CDTFA via email.

Clarifications Included in the Regulation

• Defines key terms such as “Department,” “person,” and “fiscal year.”
• Clarifies what constitutes an indirect rebate of tax revenues.
• Excludes agreements between local agencies under Article XIII, Section 29 of the California Constitution from the reporting requirements.

Impact and Benefits

Emergency Regulation 1808 enhances transparency and accountability in local government tax agreements and ensures timely and uniform reporting. While the regulation imposes no reimbursable mandate on local agencies or school districts, the CDTFA estimates a modest one-time cost of approximately $484 for internal website updates.

The emergency regulation will remain in effect for two years and may be readopted thereafter.

How Thompson Tax Can Help

Navigating new regulatory requirements can be complex—especially when it involves compliance deadlines, potential penalties, and public transparency obligations. Thompson Tax is here to assist local agencies and stakeholders with:

• Evaluating existing tax revenue sharing agreements to determine compliance status,
• Preparing and submitting the CDTFA-required reporting forms accurately and on time,
• Developing or reviewing website publication strategies to meet RTC 7213 visibility standards,
• Advising on potential indirect rebates and how they may trigger reporting obligations, and
• Requesting extensions or addressing CDTFA notices with well-documented responses.

As Your Trusted Tax Advisors, we partner with you to reduce risk, ensure compliance, and streamline your reporting process with confidence and accuracy.

Have questions or need support? Contact our team today to schedule a consultation.

Arkansas has taken steps to streamline the sales and use tax exemption process for farmers. With the passage of Act 621 (H.B. 1594), the state will now issue a Farmer Sales Tax Identification Card, which farmers can present in lieu of a traditional exemption certificate when making qualifying purchases.

This new initiative is designed to simplify tax compliance for farmers and ensure consistent application of exemptions across the state.

Eligibility Requirements

To obtain the Farmer Sales Tax Identification Card, an individual or entity must meet the following criteria:

1. Be actively engaged in farming activities,
2. Demonstrate the capacity to produce food, fiber, grass sod, or nursery products in commercially marketable quantities, and
3. Provide documentation such as a Schedule F (Form 1040), Form 1065, or another equivalent federal tax form showing farming activity for the most recent three-year period.

For new farmers with less than three years of experience, a detailed business plan may be submitted in place of prior tax documentation to demonstrate future production capability.

The card will be valid for eight years from the date of issuance. The fee is $20 for a new card and $10 for renewals.

How Thompson Tax Can Help

At Thompson Tax, we understand that navigating exemption rules and documentation requirements can be challenging, especially for busy farmers. Our expert team is here to support you with:

• Eligibility assessments to determine whether you or your business qualify under the new law,
• Application assistance, including gathering and submitting the necessary supporting documentation,
• Strategic guidance for new farmers, including the development and review of business plans, and
• Ongoing compliance support, ensuring you are prepared for audits, renewals, and any changes in state tax regulations.

We’re here to help you maximize your exemption benefits and guide you through every step of the process.

Contact Thompson Tax today, your Trusted Tax Advisors for all of your sales and use tax needs.

In the complex world of international trade and taxation, few policies have had the lasting impact of the “Chicken Tax.” The tax, proclaimed in 1963, was imposed in 1964 as a retaliatory measure during a trade dispute over poultry. This obscure U.S. tariff continues to influence automotive trade policy and supply chain strategies to this day. For companies managing cross-border operations, sales and use tax exposure, and import compliance, the Chicken Tax provides a powerful case study in the long-term consequences of tariff regulations.

A Trade War Hatched Over Poultry

U.S. poultry exports flooded European markets during the late 1950s and early 1960s, especially in West Germany and France. American producers, backed by industrial-scale farming and government support, offered chicken at prices local European farmers couldn’t match. In response, the European Economic Community (EEC)—a precursor to today’s European Union—implemented tariffs on U.S. chicken imports.

In retaliation, President Lyndon B. Johnson responded with a series of targeted tariffs on European goods, including brandy, dextrin, and potato starch. Most notably, he imposed a 25% tariff on imported light trucks—a move aimed squarely at German automakers like Volkswagen, whose vans and pickups were gaining popularity in the U.S. market.

This 25% tariff, which came to be known as the “Chicken Tax,” far outlasted its original purpose and has remained in effect for over 60 years.

The Lasting Effects on Trade and Tax Policy

For businesses engaged in international trade, the Chicken Tax highlights how tariffs—like sales and use taxes—can dramatically alter business models, supply chains, and market dynamics. Its continued enforcement has had several notable impacts:

1. Protection for Domestic Manufacturers

The Chicken Tax insulated U.S. truck makers from global competition. Domestic giants like Ford, GM, and Chrysler retained dominance in the light truck and pickup segment, reaping the rewards of limited foreign competition. This is an example of how indirect tax policy can create structural advantages for certain industries.

2. Creative Compliance and Tariff Planning

Global automakers seeking access to the lucrative U.S. truck market have employed creative tariff avoidance strategies to reduce their tax exposure. These methods often involve reclassifying vehicle types or modifying vehicles post-importation to qualify for lower tariff rates. This practice, known as tariff engineering, saved millions until U.S. Customs eventually closed the loophole. These practices reflect the critical need for effective trade compliance and indirect tax consulting strategies in international business.

3. Manufacturing Localization

Rather than incur the 25% duty, many foreign automakers opted to build production facilities within the U.S. This not only avoided the tariff but also contributed to job creation and local economic growth. For tax professionals, this underscores the importance of state and local tax planning, especially when evaluating tax incentives for in-state manufacturing or distribution centers.

4. Limited Consumer Choice and Higher Costs

By restricting foreign competition, the Chicken Tax arguably reduced innovation and price competition in the U.S. light truck market. With fewer international players, prices remained high, and consumer options were limited. For businesses importing goods, this highlights how trade tariffs and use taxes can shape consumer markets just as significantly as corporate tax rates.

Why This Matters for Tax Advisors and Global Businesses

Although the poultry dispute that triggered the Chicken Tax ended decades ago, the tariff remains—largely due to political inertia and the strength of domestic lobbying. For companies engaged in import/export operations, understanding long-term trade policy is essential for risk management and tax compliance.

At its core, the Chicken Tax is a textbook example of how tariff policy intersects with indirect taxation, customs planning, and business strategy. Just as businesses must manage their sales and use tax obligations at the state level, they must also consider how federal tariffs can impact pricing, sourcing, and profitability.

Whether your company is importing machinery, distributing consumer goods, or navigating multi-state tax regulations, it’s critical to evaluate the broader tax landscape—beyond income taxes alone.

The Chicken Tax: A Cautionary Tale for Modern Trade

Today, the global supply chain is more interconnected than ever. Yet the Chicken Tax remains a barrier—proof that once a tariff is in place, it can be difficult to undo, even if its original purpose becomes obsolete. In many ways, it is a cautionary tale for companies that fail to anticipate the ripple effects of changing tax and trade policies.

Navigating the Complex World of Sales, Use, and Tariff Taxes?

At Thompson Tax, we specialize in sales and use tax consulting and indirect tax strategy. Our experienced professionals help businesses reduce risk, maximize efficiency, and stay ahead of evolving regulations. Whether you’re expanding into new markets, restructuring your supply chain, or facing a sales tax audit, we are Your Trusted Tax Advisors.

Contact us today to see how our tailored solutions can support your business goals.

The California Department of Tax and Fee Administration (CDTFA) has recently updated its guidance on the application of sales and use tax to transactions involving building construction contractors, subcontractors, and restaurant equipment contractors. These updates, published in CDTFA Publication 9, Construction and Building Contractors (February 2025, ¶408-016), provide crucial clarifications that impact tax compliance and financial planning for businesses operating in these sectors.

Key Updates in CDTFA Publication 9

The revised guidance includes significant clarifications regarding how sales and use tax applies to:

1. Material vs. Fixtures vs. Machinery and Equipment
   • Materials: Items that become an inseparable part of real property remain taxable to the contractor at the time of purchase.
   • Fixtures: Defined as items that are accessory to a building and do not lose their identity when installed, fixtures are generally taxable upon sale or installation.
   • Machinery and Equipment: In some cases, these items may be considered tangible personal property, triggering different tax obligations compared to materials and fixtures.
2. Tax Treatment for Subcontractors
   • The new guidelines reinforce that subcontractors should carefully distinguish whether they perform as retailers or consumers of construction materials.
   • If a subcontractor functions as a retailer, they must obtain a seller’s permit and collect sales tax reimbursement from their customers.
   • When acting as a consumer, use tax liability applies at the time of purchase.
3. Restaurant Equipment Contractors
   • The updated publication provides more detailed direction on the treatment of installed restaurant equipment, such as stoves, refrigeration units, and exhaust systems.
   • Certain equipment bolted, cemented, or otherwise affixed to real property may be considered a fixture rather than tangible personal property, altering the tax implications.

Compliance Implications for Contractors

• Recordkeeping: Contractors and subcontractors must maintain clear records distinguishing between materials, fixtures, and equipment to ensure proper tax reporting.
• Contract Structuring: The taxability of a transaction often hinges on contract terms. Understanding whether a job is a lump sum contract (where the contractor is considered the consumer) or a time-and-materials contract (where tax applies differently) is critical.
• Seller’s Permit Considerations: Contractors that sell fixtures or restaurant equipment should ensure they have the necessary seller’s permits and are collecting and remitting tax correctly.
• Audit Preparedness: With increased scrutiny from tax authorities, businesses should proactively ensure that their invoices, purchase records, and sales documentation align with CDTFA guidelines to avoid potential penalties.
• Industry-Specific Considerations: Businesses involved in specialty contracting, such as electrical, plumbing, or HVAC, should review whether recent changes impact how their purchases and installations are taxed.

Next Steps for Contractors and Businesses

With the updated guidance now in effect, contractors and restaurant equipment suppliers should:

• Review Existing Contracts: Determine whether changes in tax treatment necessitate contract modifications or renegotiations.
• Train Accounting Teams: Ensure finance and accounting personnel understand the revised tax treatment to prevent costly compliance errors.
• Consult Tax Experts: Given the complexities of California sales and use tax, consulting a tax professional can help ensure the accurate application of the latest regulations.
• Evaluate Pricing Strategies: Contractors should assess whether tax obligations affect pricing structures and how they present tax-related costs to clients.
• Stay Updated on Future Changes: The CDTFA continues to refine tax policies, so staying informed about future updates can help businesses avoid unexpected liabilities and maintain compliance.

Looking Forward

The CDTFA’s updated guidance offers critical insights into the taxation of construction and restaurant equipment transactions. Contractors and subcontractors should take proactive steps to align their tax practices with the new regulations to avoid compliance issues and optimize tax obligations. The evolving tax landscape highlights the importance of continuous education and strategic financial planning to ensure businesses remain competitive and compliant.

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