US States Pass 163% More Tech Regulations in 2024, Imposing New Digital Taxes

A wave of new taxes and regulations targeting the digital economy swept across the United States as a majority of state legislatures concluded their 2024 sessions by the end of May. According to a report from New York University, states passed 238 new pieces of technology regulation this year, a 163% increase from 2023, creating a complex and fragmented compliance landscape for businesses nationwide.

The legislative push, driven by states seeking to address budget shortfalls and preemptively adjust to the expiration of federal tax provisions in 2025, has resulted in a patchwork of new rules for digital advertising, cloud-based software, and data services. These measures represent a significant effort by state governments to capture revenue from a digital economy that has historically fallen outside the scope of traditional sales and service tax frameworks.

In Illinois, Governor JB Pritzker recently signed sweeping legislation that will impose new taxes on digital advertising and social media services, a move expected to generate hundreds of millions in new revenue. Similarly, Maryland enacted a new “tech tax,” effective July 1, to help close a projected $3 billion budget deficit. The law in Maryland, along with a similar expansion of digital economy taxes in Washington state, has already drawn legal challenges. Comcast filed a lawsuit against Washington, arguing the tax on internet advertising services is discriminatory and violates the federal Internet Tax Freedom Act by taxing online ads while exempting most forms of traditional advertising.

For businesses operating across state lines, this patchwork of new rules is more than an accounting nuisance; it's a significant financial and operational risk. We've seen companies blindsided by new nexus standards for digital services that they didn't even know existed until an audit notice arrived. The assumption that a digital product sold from one state to another is free from local sales or service tax is now dangerously outdated. This rapid fragmentation of state tax law requires constant vigilance, as a rule change in one state can have immediate implications for revenue recognition and compliance nationwide.

California is also moving to tax the digital sector more heavily. A budget plan that recently gained support in the state Assembly includes a new tax on cloud-based software as a service (SaaS). Texas took a different route, expanding its existing data processing tax not through new legislation but by updating a regulatory rule that took effect on April 2nd of this year. These actions reflect a broader trend where states are reinterpreting existing tax laws to apply to modern technology services.

Experts note that the treatment of software and digital services varies widely. States like South Dakota, Hawaii, and New Mexico already tax nearly all software, and it is expected that services based on generative artificial intelligence will be treated as taxable pre-written computer software in these and other jurisdictions. The central issue for many businesses is the potential for “tax pyramiding,” where taxes are levied on business-to-business transactions. This imposes multiple layers of taxation on services that are inputs for a final product, increasing costs for businesses and ultimately leading to higher prices for consumers.

The proliferation of state-level action is occurring partly in response to dynamics at the federal level. According to analysis from the Institute on Taxation and Economic Policy (ITEP), state income tax codes are heavily dependent on federal definitions, such as Adjusted Gross Income (AGI). With major components of the 2017 Tax Cuts and Jobs Act set to expire, states face significant uncertainty and potential revenue loss, motivating them to establish more durable, independent sources of tax revenue.

The core challenge here is that these new digital taxes are often vaguely defined and aggressively applied, creating uncertainty that can stifle growth. In our experience, waiting for clarity is not a viable strategy. Businesses must proactively assess their exposure in every state where they have customers. This involves a detailed analysis of service delivery, customer location, and the specific wording of each state's legislation. Navigating this landscape is a central part of our tax preparation and compliance services, and we strongly advise companies to get ahead of this issue. For a comprehensive review of your company's state tax obligations, contact C&S Finance Group LLC at csfinancegroup.com.

Other states are exploring different avenues for tech-related revenue. In Virginia, the state Senate has proposed a tiered impact fee on data centers as part of a budget compromise, seeking to capture revenue from the rapidly growing industry without repealing a valuable sales tax exemption. Meanwhile, Minnesota’s Governor Tim Walz has proposed a new monthly social media tax on large platforms. These varied approaches underscore the lack of a national standard, forcing mid-sized companies that operate nationally to track dozens of distinct and evolving regulatory regimes.

As the year progresses, businesses will be watching the courts for rulings on the legality of these new digital taxes, particularly the challenges in states like Washington. While most legislative sessions have ended, the implementation and enforcement of these 238 new laws will be the next major hurdle. The trend of states acting as the primary drivers of technology policy is expected to continue, placing a growing compliance burden on companies that lack dedicated in-house tax policy teams.