Multistate tax practice is always evolving. The Catalyst state team stays on top of trends, consulting with leading SALT practitioners and incorporating their insights, along with our in-depth analysis, into Checkpoint Catalyst topics that integrate into CoCounsel Tax.
This installment of our Multistate Tax Trends Q&A series features Sarah Vergel del Dios, a State and Local Tax Managing Director at KPMG US, based in Houston, Texas, with a focus on indirect tax. Sarah has deep experience in multi-state consulting, controversy, and reverse audit services for clients across various industries, including energy and manufacturing. She excels in advising clients on strategies and systems that can flex with shifting state tax rules.
Here Sarah and Catalyst’s Rebecca Newton-Clarke discuss how federal tax changes and tariffs are reshaping renewable energy project economics and sales tax exposure, as well as the retreat of data center incentives amid public scrutiny, the rise of state efforts to tax AI-powered services, and strategic considerations for voluntary disclosure in an era of expanding nexus.
Federal tax incentives have historically driven solar and wind project economics, but as you wrote last year, the OBBBA curtailed these incentives by compressing timelines and adding new compliance obligations. At the same time, tariffs have created new supply chain challenges. From your perspective advising renewable energy developers, how have these shifts changed potential sales and use tax exposure and broader project planning?
For years, federal incentives have dominated the conversation about taxes in the renewable energy space, but now we are seeing the consequences of how projects handled sales and use tax on the front end. A growing number of renewable facilities are under audit, and states are taking a hard look at claimed exemptions.
At the same time, we are seeing more willingness to push back on existing guidance. Positions that may have felt too aggressive to build into an initial model are now being raised in audits and refund claims, and it will be interesting to see where some of those challenges ultimately land.
As much as I would like to say that the industry has caught up and proactive sales and use tax planning is the norm, the reality is that it varies widely. Developers have different levels of tax sophistication, risk tolerance, and bandwidth. Effective sales and use tax planning is crucial, but it is still an area that can slip down the priority list when other issues, such as managing supply chain and tariff pressures, responding to a constantly shifting federal landscape, and simply getting projects built and financed, take center stage.
From where I stand, sales and use tax matters now more than ever. The dollars at play are significant, and the ability to limit exposure or recover tax paid can make a real difference in project economics. And as states continue to audit more aggressively, the risk of getting it wrong is not going anywhere.
Your work often involves energy production and incentives. What are some broader indirect tax considerations you’re keeping an eye on for the energy segment?
Some themes that have popped up a lot lately are battery storage, indirect taxes other than traditional sales and use tax, and the trend toward mobile power generation.
On the storage side, we are seeing much more investment in battery energy storage systems, and the indirect tax questions are not always straightforward. Storage equipment does not always fit neatly into existing manufacturing or renewables-specific exemptions, and the answers can vary widely by state and even by component. Because the dollars at stake are significant, it is important to take a careful look at how equipment is classified in each jurisdiction and what opportunities may be available for savings.
I am also talking a lot about other indirect taxes as new players enter the power generation and energy supply space for the first time. Many of these businesses are already focused on sales and use tax, but selling electricity or similar products can also trigger utility taxes, gross receipts taxes, or other industry-specific charges at the state or local level. Understanding that broader indirect tax landscape early can prevent surprises once power starts flowing.
The recent trend toward mobile power generation is another area that raises unique questions. Regularly moving assets across state lines can bring old issues back to the forefront, such as first use rules, qualification for manufacturing exemptions, and how to characterize transactions involving a rental with an operator. Those distinctions matter for both how much tax is owed and where the tax falls in the supply chain, and they are becoming more important as mobile solutions become a larger part of the energy mix.
Several states have paused or discontinued their sales tax incentives for data centers in light of rapid shifts in public opinion and concerns about energy costs. What kinds of conversations are you having with data center operators and developers amid these actual and potential policy changes?
Start planning now, particularly in the states that are already foreshadowing changes. Consider other available exemptions or incentives, and what the economics will look like if existing data center incentives are phased out.
The shift in public opinion also changes the conversation. Some clients may choose to delay applications or forego incentives altogether while issues like energy and water usage are getting so much public scrutiny.
So the discussions are part tax and part broader strategy: model the loss or reduction of incentives now, understand the non-tax obligations and reputational considerations that come with any remaining programs, and, where possible, build enough flexibility into your plans to adapt as state policies continue to evolve.
An increasing number of states tax electronically delivered goods and services such as downloads and software as a service, but there’s little uniformity in defining or sourcing these taxable goods. What are the most significant inconsistencies you’re seeing, and how should multistate businesses manage this complexity across states?
This is definitely a hot topic, and it makes proactive planning challenging. Effective planning requires you to be nimble because tomorrow’s sales tax landscape may look very different from today’s. New legislation and guidance seem to be popping up constantly, with states like California and Colorado among the latest states to make big changes.
The inconsistencies show up in a few related ways. States use different definitions, so the same product might be treated as software, a digital good, a taxable service, or a nontaxable service, and in some places those terms are not defined clearly at all. The rules are also spread across statutes, regulations, administrative guidance, and case law, and those sources often do not keep pace with the rapid changes we see in the industry. Sourcing and MPU rules add another layer, and even where a state provides a clear sourcing rule, the practical implications of what information the state demands in an audit can be complex.
In that environment, a few principles still hold. Documentation is critical, and more detail is usually better than less. Keeping a close watch on multistate developments is essential. And it is important to look beyond the wording of the statute to how the rules are actually being applied in practice. Businesses that build flexible systems, revisit their classifications regularly, and align their tax positions with both the law and the lived experience in each state are better positioned to manage the complexity.
A few states—Maryland, Texas, and Washington—have explicitly extended their sales taxes to automated and AI-powered services. What kinds of conversations are you having with clients about the rise of these taxes?
Difficult ones. Many clients have decades of experience under a relatively stable understanding of when their services are taxable. Automated and AI-enabled delivery is disrupting that. Customers still want the same service they did ten years ago, but the delivery model has changed from a human-driven professional service to an automated platform. Tried and true frameworks like the true object test do not always capture that nuance. We have seen this explicitly in Texas, where the new data processing regulations look to the activities performed by the service provider rather than what the customer wants.
That raises practical questions: how to describe the offering in contracts, what can reasonably be separated as nontaxable, and what kind of data they need to support sourcing and exemptions. There are also commercial considerations. Trying to carve out nontaxable components can require a level of transparency into pricing that some providers are not comfortable sharing.
So the conversations are a mix of technical and strategic. We are helping clients understand how these new rules apply to their specific models, where they may have room to take reasonable positions, and what data and processes they need to put in place to manage both compliance and risk as more states follow.
Unexpected sales tax nexus is an evergreen issue for businesses, now with more pathways than ever. How do you advise a business that’s considering voluntary disclosure versus waiting for an audit notice?
The pathways have changed, but my answer has not. The decision to pursue a voluntary disclosure is still a business decision based on a risk versus benefit discussion.
First, the question of nexus is not always simple, even in the era of economic nexus. In many cases, the nexus analysis is dragged into the fray with complex taxability issues, particularly where a state’s economic nexus standard is based on something other than gross sales.
Second, it is crucial to understand how the specific program works. A voluntary disclosure is not always the right answer if you are excluded because of a prior registration, previous contact with a state, or if the program does not offer meaningful penalty or interest relief. We should also consider what other practical routes may be available to come into compliance.
Finally, risk tolerance is always part of the conversation. A client that is regularly audited in other states, or that anticipates due diligence reviews as part of tax equity financing or an acquisition, may have a very different view of how problematic a sales tax miss can be. All of those factors feed into the decision about whether the benefit of a voluntary disclosure outweighs the cost.
Looking ahead three years, what do you think will be the most significant developments in state sales and use taxes, and how should businesses and their advisors prepare?
Like most people in this space, I am watching carefully to see how states will treat new technologies. I expect more states to try to expand their tax base by taxing SaaS and AI-enabled services, whether that means shoehorning new offerings into old definitions or passing new legislation.
Businesses and advisors should keep an eye on the opportunities that come with those changes. If a state shifts to treating a product as tangible personal property, does that open up resale or manufacturing positions that were not available before? If a product’s classification changes, is it worth revisiting sourcing or MPU exemptions?
These changes are coming whether we like them or not, but we can and should pay close attention to where they create new opportunities. There is real value in approaching these developments with a planning mindset rather than viewing them only as potential exposure.
Related Resources from Checkpoint News, CoCounsel Tax, and Checkpoint
- Checkpoint News subscribers:
- Multistate Tax Trends: SALT Litigator Jennifer Karpchuk on Market-Based Sourcing Frictions, Digital Ad Taxes, and Multi-Jurisdictional Audit Risks, by Catalyst’s Rebecca Newton-Clarke
- CoCounsel Tax Templates:
- Analyze Sales Tax Economic Nexus Threshold and Composition
- Evaluate Sales Tax Nexus Risk of Remote Employee
- Analyze State Economic Nexus Test for Corporate Income Tax
- Assess State Position on P.L. 86-272 and Internet Activities
- To access all CoCounsel Tax templates, log in to CoCounsel and click the CoCounsel Templates navigation link in the left panel.
- Checkpoint subscribers can dive deeper into nexus, manufacturing and data centers, electronically delivered goods and services, and gross receipts taxes with:
- Nexus Assistant Charts: covering nuances of economic nexus, threshold computation, physical presence nexus, P.L. 86-272, and more.
- Catalyst Topic # 1050: Sales and Use Tax: Nexus, examining each state’s approach to sales and use tax nexus, with an emphasis on the intricacies of economic nexus, including threshold computation for remote sellers and marketplace facilitators, and timing of registration after economic nexus is established. The topic offers state-by-state insights into remote seller and marketplace facilitator policies, potential sourcing issues, and the persistence of physical-presence nexus for a variety of in-state activities, including remote work.
- Catalyst Topic # 1051: Sales and Use Tax: Electronically Delivered Goods and Services, providing in-depth state-by-state analysis of electronically delivered goods and services, including SaaS and AI offerings, as well as bundled transactions, sourcing, threshold computation, and marketplace intermediary platforms such as online travel companies, meal-delivery platforms, and more
- Catalyst Topic # 1010: Corporate Tax: Electronically Delivered Goods and Services, providing in-depth state-by-state analysis of nexus and sourcing issues related to electronically delivered goods and services, including cryptoassets.
- Catalyst Topic # 1070: Gross Receipts Taxes, examining state gross receipts taxes.
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