At a Glance
State and local tax (SALT) controversy in 2025 reflects a fundamental shift in enforcement approaches, with revenue departments increasingly leveraging information across tax types to identify compliance gaps.
Income Tax Enforcement: Economic nexus thresholds range from $350,000 to over $735,000 depending on the state. Leading states have collected substantial revenue through transfer pricing initiatives—New Jersey ($30 million), Louisiana ($38 million), and North Carolina ($100+ million). California’s 2015 conformity date continues to diverge from federal law, creating calculation complexities.
Indirect Tax Risks: SaaS taxation remains inconsistent across jurisdictions, with states like Washington expanding coverage while others maintain exemptions. Technical exemption certificate requirements in certain states can invalidate otherwise valid transactions. Maryland’s digital advertising tax ($90 million annually) demonstrates states’ pursuit of new revenue sources.
Bottom Line: Success requires understanding both individual state requirements and how information sharing between tax types can transform routine filings into multi-state examinations. Proactive planning remains the best defense.
For growing companies operating across state lines, multistate tax compliance has always been complex. But 2025 marks a fundamental shift in how states approach enforcement—one that many CFOs and tax directors are discovering too late. While most focus on obvious triggers like economic nexus thresholds and sales tax registration, the often-overlooked coordination between income and indirect tax enforcement can reshape your entire state tax risk profile.
It’s not just that states are getting more sophisticated in their approach. It’s that leading revenue departments are actively sharing information across tax types and using data analytics to identify audit targets. With over 40 states using economic nexus for sales tax and roughly a dozen applying similar standards to income tax, multistate businesses face an increasingly complex compliance landscape—though enforcement intensity varies significantly by state.
State tax enforcement is no longer compartmentalized. Revenue departments increasingly view your business holistically, using information gathered for one tax type to build cases for others. This coordinated approach transforms routine compliance into strategic risk management.
A single transaction may trigger income tax nexus under factor presence rules while simultaneously generating sales tax obligations through reclassification. Finance leaders should recognize that SALT enforcement has become more integrated, with states sharing information and strategies across tax types when opportunities arise.
This coordination often manifests through comprehensive questionnaires that gather information supporting enforcement across income, franchise, and sales tax. By capturing facts early, states can frame issues, establish nexus, and build parallel cases on multiple fronts. What starts as a sales tax inquiry often expands to income tax, and vice versa.
Case Study: When One Tax Inquiry Triggers Multi-State, Multi-Tax Enforcement
Consider this hypothetical scenario that illustrates current enforcement patterns: A technology company headquartered in Illinois operates nationwide through remote sales and cloud-based services. The company maintains no physical presence outside Illinois but generates $75 million in annual revenue across 40 states.
In early 2025, enforcement actions cascade:
• Texas: Issues franchise tax questionnaire claiming economic nexus based on $2 million in sales, questioning whether cloud services create “physical presence” through customer devices
• California: Initiates transfer pricing audit of $5 million in royalty payments to Nevada IP holding company, demanding economic substance documentation under California’s current conformity standards
• New York: Reclassifies customer support portal from nontaxable service to taxable software, seeking four years of back sales tax
• Massachusetts: Claims P.L. 86-272 protection (the federal law limiting state income taxation on out-of-state sellers) doesn’t apply due to website cookies and online chat functions
Combined potential assessments exceed $3 million. With proper guidance, the company successfully challenges physical presence theory in Texas, documents economic substance in California, negotiates prospective-only change in New York, and establishes limited nexus activities in Massachusetts. Final resolution: less than $200,000 across all states.
This hypothetical case illustrates how routine business operations can trigger cascading enforcement actions—and why understanding specific state trends becomes critical for risk management.
The post-Wayfair playbook has fully migrated to income tax enforcement. Factor presence standards with bright-line thresholds mean physical presence is no longer required—just economic activity exceeding state-specific thresholds.
The disparities between states create compliance complexity. California sets its income tax nexus threshold at $735,019 in sales or $73,502 in property or payroll, while Michigan requires only $350,000 in gross receipts for corporate income tax. Sales tax thresholds often trigger at just $100,000 or 200 transactions, creating situations where businesses navigate different nexus standards for different tax types in the same state.
But the thresholds themselves aren’t the primary concern. States apply these standards assertively through detailed questionnaires like Michigan’s multi-page nexus verification form, which requests extensive information about digital activities, contractor relationships, and customer interactions. Non-response can trigger estimated assessments, forcing companies into costly defensive positions.
Manufacturing and distribution companies face particular scrutiny. States increasingly claim that warranty work, installation services, or even drop-shipments create nexus. A medical device manufacturer discovered this when Michigan asserted nexus based solely on field service technicians performing warranty repairs, despite no sales force or offices in the state. Private equity portfolio companies draw special attention across their entire holdings, with states coordinating audits to challenge management fee structures simultaneously across multiple portfolio companies in the same fund.
As states expand their income tax reach through economic presence theories, they’re simultaneously discovering transfer pricing as a powerful revenue tool.
State-level transfer pricing has evolved from occasional inquiry to systematic revenue generation in certain jurisdictions. The results from leading states speak for themselves: New Jersey collected nearly $30 million through its Voluntary Transfer Pricing Resolution Initiative, while Louisiana generated $38 million through its Transfer Pricing Managed Audit Program. North Carolina exceeded expectations, collecting over $100 million through its voluntary corporate initiative. The Multistate Tax Commission’s coordinated program demonstrates the trend’s acceleration among participating states, generating $134.6 million in proposed assessments in just the first quarter of fiscal year 2025.
Several states increasingly hire former Big Four partners as contingency fee consultants, bringing sophisticated economic analysis to challenge intercompany transactions. Unlike federal transfer pricing focusing on arm’s length pricing, these states often challenge whether transactions have economic substance at all. Common targets include management fees to holding companies, IP licensing between affiliates, and shared service allocations. Life sciences companies face scrutiny over R&D cost allocations, while PE firms see coordinated audits across portfolio companies challenging sponsor fees.
California exemplifies how conformity disconnects create controversy. With conformity frozen at January 1, 2015, businesses essentially operate under tax law that predates many federal changes. The state doesn’t recognize Tax Cuts and Jobs Act provisions, forcing entirely separate calculations.
It’s not just the obvious differences that create risk—it’s the subtle interactions between California’s older conformity date and current federal law. For instance, while the federal “One Big Beautiful Bill Act” (H.R. 1) restored immediate R&D deductibility on July 4, 2025, California’s pre-TCJA conformity means the state already allowed immediate deduction. This creates new complexity as companies need to track which R&D provisions apply in each jurisdiction.
Senate Bill 711, passed by the California Senate in May 2025, would update conformity to January 1, 2025, but with selective adoption that promises new complexity. The bill includes conformity to the Alternative Simplified Credit with reduced percentages (3% versus 14% federal), like-kind exchange limitations to real property only, and explicit exclusion from Corporate Alternative Minimum Tax conformity. Each selective adoption creates another calculation divergence and potential audit focus area.
Sales tax enforcement in 2025 focuses less on whether you should collect and more on what you’re collecting on. Classification drives risk, with states recharacterizing revenue streams to expand taxability.
Leading states have turned SaaS taxation into an enforcement priority through audit activity rather than legislative clarity. Texas maintains its 80/20 rule but interprets “taxable data processing” broadly in audits, often surprising software companies. Washington treats all SaaS as taxable and will expand coverage to custom software development and IT services in October 2025 under SB 5814. Pennsylvania creates particular uncertainty through informal guidance that contradicts published regulations, leaving taxpayers without clear compliance direction. Many other states continue to treat SaaS as nontaxable, creating a patchwork of rules across jurisdictions.
The “true object” test can significantly impact bundled offerings. A biotech company providing clinical trial management software bundled with consulting services recently faced full taxability on a $10 million contract when Pennsylvania auditors determined the software was the “true object” despite 70% of fees relating to professional services. Ecommerce platforms combining marketplace services with analytics tools face similar risks across multiple states.
States have transformed exemption requirements into areas of significant audit focus through technical enforcement. Manufacturing sector companies face challenges when production equipment certificates are rejected for minor issues like listing “Inc.” instead of “Incorporated” in the company name. Resale certificates get invalidated because they show a headquarters address instead of the specific warehouse location, even when both are in the same state.
The complexity multiplies in multi-state operations. A manufacturer with facilities in 15 states discovered each state interprets “blanket certificate” validity differently. What works as a permanent certificate in Ohio expires annually in Pennsylvania and requires product-specific detail in Texas. Managing over 50 different certificate formats across jurisdictions becomes a substantial compliance burden, with each format change creating potential retroactive exposure.
B2B companies collecting certificates during customer onboarding face timing challenges. States increasingly require certificates “at the moment of sale,” not during setup or within any grace period. The Multistate Tax Commission’s uniform certificate offers potential simplification but often requires supplemental state-specific documentation.
Maryland’s digital advertising tax generates $90 million annually, applying rates from 2.5% to 10% on companies with over $100 million in global revenue. This model attracts interest from other states seeking new revenue streams. Digital advertising taxes remain under consideration in multiple jurisdictions, while vapor products face varying excise structures from per-milliliter taxes to percentage-based systems. Online gaming and sports betting frameworks continue evolving as states adapt to newly legalized activities.
Beyond traditional audit triggers, states deploy increasingly sophisticated tactics that require heightened awareness. Leading states use data analytics and automated matching to identify audit targets by comparing state returns, credit card processing data, third-party information services, and federal data available through information-sharing agreements. The sophistication varies by state—while some employ advanced analytics, others rely on more basic cross-referencing.
Industry-wide enforcement initiatives represent another evolution in state strategy. Some states target entire sectors when patterns emerge, recently focusing on marketplace facilitators, digital health platforms, and cryptocurrency exchanges. When one company in your industry faces scrutiny in a particular state, similar businesses should be aware of potential increased attention from that state’s revenue department.
States’ evolving interpretations pose particular challenges. States apply new interpretations to past years, taking the position that these requirements always existed. Washington’s SaaS expansion and Texas’s evolving service definitions exemplify this trend, but the real complexity comes from states applying interpretations without formal guidance. Companies following published regulations may find themselves facing assessments based on internal department positions that weren’t publicly available.
Interstate information sharing through formal and informal channels means findings in one state can influence inquiries elsewhere. A transfer pricing adjustment in New Jersey may lead to similar reviews in states like Louisiana and North Carolina, particularly among states participating in coordinated programs. However, the extent of coordination varies significantly based on state resources and participation in multistate initiatives.
With these enforcement patterns accelerating, companies need comprehensive strategies to manage their exposure effectively.
The 2025 enforcement landscape requires strategic approaches beyond traditional compliance. Returns must be accurate and timely, but that baseline no longer provides adequate protection when states coordinate enforcement and reinterpret long-standing positions.
Effective risk management starts with comprehensive assessment tailored to your industry. Manufacturing and distribution companies should map third-party logistics arrangements that might trigger nexus claims while documenting business purpose for intercompany transactions. The complexity increases when dealing with drop-ship arrangements across multiple states, each applying different interpretations of physical presence requirements.
Technology and e-commerce businesses face different challenges. These companies should analyze SaaS revenue streams for taxability classification and document the allocation between software and service components in bundled offerings. Establishing clear marketplace facilitator compliance protocols becomes essential as states expand these requirements, sometimes retroactively.
Life sciences and private equity firms confront scrutiny around cost allocations and fee structures. Creating R&D cost allocation documentation before it’s requested prevents scrambling during audits. PE firms particularly benefit from establishing transfer pricing studies and documenting portfolio company fee structures proactively, as states increasingly examine whether sponsor fees have adequate economic substance.
Working with experienced advisors to review nexus positions and taxability determinations creates confidence in filing positions. When questionable areas exist, voluntary disclosure agreements can limit look-back periods and penalties. Strategic restructuring might optimize positions before audits begin.
Documentation proves essential without requiring excessive administrative burden. Clear contemporaneous workpapers explaining filing positions, conformity applications, and classification decisions provide crucial support during examinations. When states issue questionnaires, having advisors help craft responses prevents inadvertent admissions while demonstrating good faith compliance efforts.
Modern technology that manages different conformity dates, tracks certificates, and calculates apportionment under varying rules delivers returns through efficiency gains and reduced audit exposure. The investment in proper systems often pays for itself through prevented assessments and reduced professional fees during controversies.
State tax controversy in 2025 reflects fundamental shifts in how states approach multistate businesses. Revenue departments coordinate across tax types, leverage technology for audit selection, and pursue evolving interpretations of established rules. Federal and state conformity disconnects add layers of complexity.
Yet these challenges create opportunities for well-prepared companies. Organizations that understand enforcement trends can transform them into competitive advantages by:
• Identifying vulnerabilities through systematic review before states discover them
• Maintaining contemporaneous documentation that supports positions taken
• Converting audit situations from costly surprises into manageable processes with predictable outcomes
The companies successfully navigating this environment share common characteristics: they invest in appropriate technology, maintain audit-ready documentation, and partner with advisors who understand both technical requirements and practical enforcement realities. State tax has evolved well beyond routine compliance. Recognizing this evolution—and adapting accordingly—is what separates companies bogged down in constant controversies from those managing state tax obligations with confidence.
At Sapowith Tax Advisory, we help clients transform state tax challenges into strategic advantages. Our state and local tax strategy services include pre-audit risk assessments, nexus studies, taxability reviews, and proactive planning that prevents controversies before they begin. When controversies do arise, our deep experience ensures efficient resolution. Contact us today to discuss how we can help you navigate state tax complexities with confidence.
This article is for general information only; it is not tax, legal, or accounting advice. Reading it does not create a client relationship with Sapowith Tax Advisory. Consult your own qualified advisers before acting on any information contained here. Sapowith Tax Advisory disclaims all liability for actions taken, or not taken, based on this content.