Three Sales Tax Changes That Happened While You Were Focused on Back-to-School Season

August has been the busiest month of the year for sales tax holidays — Tennessee, Iowa, Texas, Ohio, Missouri, Oklahoma, South Carolina, Virginia, Illinois, Massachusetts, Connecticut, and Mississippi all ran back-to-school or Second Amendment weekends in the past few weeks.

While the holiday coverage dominated the conversation, three significant compliance changes happened quietly in the background that affect far more businesses than any holiday ever will.

Here's what you missed — and what you need to do about each one.

Change 1: Kentucky Just Eliminated Its 200-Transaction Nexus Threshold — Effective August 1

Kentucky House Bill 757 took effect on August 1, 2026, removing the state's 200-transaction economic nexus threshold for remote sellers and marketplace providers.

Before August 1, Kentucky required out-of-state sellers to register and collect sales tax once they crossed either $100,000 in gross receipts from Kentucky sales or 200 separate transactions with Kentucky customers in a calendar year. Either threshold was enough to trigger the obligation.

After August 1, only the revenue test applies. If you have under $100,000 in Kentucky sales, the state no longer cares how many individual orders you shipped there.

Kentucky joins a rapidly growing list of states that have dropped the transaction count: Illinois dropped it January 1, 2026. Utah dropped it July 1, 2025. North Dakota, California, Wisconsin, Wyoming, and more than a dozen others did it in prior years. As of today, roughly 28 of the 45 states that enforce economic nexus use revenue-only thresholds. Only 15 states plus Washington D.C. still pair the dollar test with a transaction count.

The direction of travel is clear: the 200-transaction threshold is a dying mechanism. But its death creates two separate compliance questions depending on your situation.

If your Kentucky sales exceed $100,000 annually — you have a nexus obligation whether you knew about the transaction threshold change or not. Your obligation under the old rules was the same as under the new rules. Nothing changes for you except simplicity.

If your Kentucky sales are below $100,000 but you previously triggered nexus solely because of transaction count — you no longer have a Kentucky nexus obligation under the revenue-only test. That means you may be able to deregister from Kentucky if revenue-only is your only remaining connection to the state. Before doing so, verify that you don't have physical nexus — an employee, inventory, a fulfillment partner, or regular in-state activity — that independently creates an obligation regardless of the economic nexus threshold.

One more detail: Kentucky also expanded its sales tax base as part of the same legislation. Data brokering services — companies that collect, buy, sell, or share consumer data — became subject to Kentucky's 6% sales tax on August 1. If your business sells data, licensing, or information-based services to Kentucky customers, review your taxability under the new expanded definition immediately.

Change 2: California and Colorado Are Taxing SaaS Starting January 1, 2027 — You Have 4 Months to Prepare

This is the most significant digital economy sales tax development since Washington's ESSB 5814 expanded to IT services and digital advertising in October 2025.

Two of the largest state economies in the country are moving in the same direction simultaneously.

Colorado enacted House Bill 26-1223, signed into law on June 4, 2026. California enacted Senate Bill 122, signed into law this summer. Both take effect January 1, 2027. Both fundamentally change how software is taxed.

Here's what's changing in each state:

In Colorado, the prior rule tied software taxability to delivery method — software transferred on physical media was taxable, while software accessed remotely or delivered electronically was generally not. House Bill 26-1223 eliminates that delivery-based distinction entirely. Starting January 1, 2027, Colorado's definition of taxable computer software expands to include software delivered by any means — including remote internet access, downloads, and cloud-based access. SaaS subscriptions, mobile apps, and cloud-based software tools that were previously exempt in Colorado become taxable at the state's 2.9% sales tax rate plus applicable local rates.

Two narrow exemptions survive in Colorado: custom software developed specifically for a single customer, and software governed by a negotiated license agreement — meaning a written contract individually bargained between parties and signed before the software is accessed. Standard click-through terms and nonnegotiable license agreements don't qualify for the negotiated agreement exemption. If your SaaS uses standard terms of service rather than individually negotiated contracts, assume your product is taxable in Colorado from January 1.

California has historically been one of a small minority of states that did not impose sales tax on electronically delivered prewritten software or SaaS. That changes on January 1, 2027. Under Senate Bill 122, California expands its definition of tangible personal property to include digital products — specifically prewritten computer software transferred on tangible media, transferred electronically, or accessed remotely. The practical effect: SaaS, cloud software subscriptions, and electronically delivered prewritten software all become subject to California's 7.25% base sales tax rate plus applicable local rates.

Custom software developed for a specific customer remains exempt in California. But off-the-shelf software — regardless of delivery method — is now in scope. For businesses selling standardized software products to California customers, this is a new compliance obligation that requires registration, rate configuration, and billing updates before January 1.

The combined market impact is enormous. California and Colorado together represent two of the most important technology and software markets in the country. Any business that sells SaaS, software subscriptions, or electronically delivered software and has customers in either state needs to start preparing now — not in December.

The four-month preparation checklist:

Review your product catalog for every software product sold to California or Colorado customers. Determine whether each product is prewritten — and therefore taxable in 2027 — or custom-developed for a specific buyer and therefore exempt. Verify California nexus — if you sell SaaS to California customers and your annual California revenue exceeds $500,000, you have economic nexus and a collection obligation beginning January 1. If you've been treating your SaaS as non-taxable and haven't registered in California, that registration needs to happen before year-end. Configure your billing system to add sales tax to SaaS invoices for California and Colorado customers from January 1. Update your customer contracts where applicable — particularly in Colorado, where a negotiated license agreement may preserve the exemption. Gather exemption certificates from any customers claiming a resale or manufacturing exemption. Review your Colorado home rule city exposure — many Colorado home rule jurisdictions such as Denver have their own separate sales tax rules that may or may not align with the state's new SaaS taxability rules.

The four months between now and January 1 sound like enough time. For software companies with large customer bases, complex product catalogs, and multi-entity legal structures, the compliance work is significant. Start now.

Change 3: South Dakota's Sales Tax Rate Cut Expires July 1, 2027 — 10 Months Away

This one requires no action today. But it's the kind of change that sneaks up on businesses that don't track it — and it's worth knowing about now rather than discovering it in June 2027.

In 2023, South Dakota temporarily reduced its state sales tax rate from 4.5% to 4.2% — a consumer-facing cut designed to provide relief during an inflationary period. That reduction has been in place for three years.

It expires July 1, 2027.

Unless South Dakota's legislature acts to extend or make permanent the 4.2% rate during the 2027 legislative session — which opens in January — South Dakota's state sales tax rate reverts to 4.5% on July 1, 2027.

South Dakota is notable in the sales tax world as the state whose Supreme Court case — South Dakota v. Wayfair in 2018 — fundamentally changed how economic nexus works across the country. The state's relatively straightforward sales tax structure — a flat 4.2% or 4.5% state rate, no income tax, simple nexus rules — makes it one of the cleaner compliance environments in the country. The rate change is a minor adjustment in isolation. But for businesses selling high volumes into South Dakota, a 0.3 percentage point rate increase on July 1, 2027 requires a system update and a pricing review.

Watch South Dakota's 2027 legislative session closely. If the rate cut extension becomes a political priority — as it did when it was first passed in 2023 — it may be renewed before June 30. If the legislature doesn't act, the reversion is automatic.

The Bigger Pattern All Three Changes Reflect

These three stories — Kentucky's nexus simplification, California and Colorado's SaaS expansion, South Dakota's rate sunset — aren't random. They reflect the same forces reshaping the sales tax landscape that the Tax Foundation's midyear report documented last week.

States are simplifying where complexity produces no revenue advantage. The 200-transaction threshold was a compliance burden for businesses and a minimal enforcement tool for states. Kentucky dropping it follows a consistent multi-year pattern of states concluding the transaction test isn't worth the complexity it creates.

States are expanding what they tax as the economy shifts toward digital services. California and Colorado taxing SaaS from January 2027 is the most significant expression of this in years — two of the largest consumer technology markets in the country bringing SaaS into the taxable column simultaneously. They won't be the last.

States that cut rates temporarily face pressure to make cuts permanent or let them expire. South Dakota's 2027 decision is a version of the same conversation happening in Tennessee over grocery taxes, in Alabama over grocery tax suspensions, and in every state where a temporary cut created a constituency for permanence.

All three changes require something from businesses — whether that's deregistering in Kentucky if transaction-volume was the only nexus trigger, preparing California and Colorado billing systems for January 2027, or monitoring South Dakota's legislative session next year. None of them are optional.

Not sure how Kentucky's threshold change affects your registration status — or whether your SaaS products will be taxable in California and Colorado starting January 1, 2027? Book a free consultation with our team at sales.tax. We'll review your nexus exposure, your product taxability, and your compliance setup across every state where these changes matter.