Eliminating vendor discounts: the impact on businesses
by February 27, 2026
For decades, state governments and businesses have operated under a standard administrative arrangement regarding sales tax. Because businesses act as the state’s primary agents for calculating, collecting, and remitting tax revenue, many states provided a vendor discount—also known as a collection allowance or service fee. This allowed businesses to retain a small percentage of the tax collected, typically between 0.5% and 3%, to help offset the significant administrative costs of compliance.
However, as of 2026, this long-standing policy is shifting.
Facing widening budget gaps and increased infrastructure demands, a growing number of states are eliminating or reducing these discounts. The fiscal impact of these policy changes is substantial. For example, in 2024, Colorado businesses retained $56.5 million through these service fees. As of January 1, 2026, the state has eliminated the discount entirely, bringing that retention to zero. This blog covers what businesses need to know, including how compliance workflows can be reconsidered to recoup some of this lost revenue.
Which states are eliminating their vendor discounts?
The trend toward eliminating or reducing these discounts is accelerating. Here’s how states are changing their vendor discounts in 2026:
| State | 2025 policy | 2026 policy | Estimated annual impact (per $1M taxable sales) |
| Colorado | 3.33% discount (Capped at $1,000/mo) | 0% (Eliminated) | $2,000 Loss (Previously ~0.2% effective) |
| Ohio | 0.75% discount (No cap) | 0.75% (Capped at $750/mo) | $3,600 Loss (Previously $4,500 benefit) |
| Nebraska | 2.5% discount (Capped at $150/mo) | 2.5% (Capped at $75/mo) | $600 Loss (Benefit cut by 50%) |
| South Dakota | Variable Allowance (Based on timely filing) | 0% (Suspended until 2028) | $1,000+ Loss (Varies by volume) |
The financial impact: Quantifying the operational cost
For financial leadership, these legislative shifts represent a direct increase in the cost of compliance. If your organization has not yet audited the impact of these disappearing allowances, we recommend starting with these three critical areas:
The retention audit
Review your 2025 tax filings and identify line items labeled “Service fee credit,” “Collection allowance,” or “Vendor discount.” Historically, these credits acted as a subsidy, often offsetting the cost of your tax department’s headcount or your compliance software. In 2026, these funds are being reclassified as state revenue, effectively removing that operational subsidy from your budget.
Margin erosion
For high-volume businesses, the cumulative loss is substantial. Consider a business with $10M in annual taxable sales and a 7% average tax rate. This organization remits $700,000 in sales tax annually. A 2% collection allowance previously contributed $14,000 toward overhead costs. With that discount eliminated or capped, that $14,000 becomes a direct hit to your bottom-line margin.
The compliance and audit risk
The risk extends beyond the balance sheet into compliance regulation. If your accounting processes are configured to automatically retain a percentage of tax due (for example, remitting only 97% of the total liability to account for the 3% discount), maintaining this practice in states like Colorado will now result in an automatic underpayment notice. The state’s expectation for 100% remittance remains absolute, even as the incentive for collecting it disappears.
Strategic pivot: Turning compliance from a cost to an efficiency
If the state is no longer willing to pay your team to file taxes in a timely manner, every hour your team spends on manual forms is a pure loss. Here’s how to pivot to keep the efficiency in your compliance process:
- Stop the manual work: Manual filing was sometimes cheaper when vendor discounts covered the labor. Now, it is an expensive drain on resources.
- The tech offset: Moving to automated filing through a software like TaxJar, is no longer just a convenience—it’s a financial necessity. If you can’t keep the discount, you must lower the cost of the task. Automation scales your compliance without scaling your payroll.
- Rooftop-level accuracy: In states that still allow local-level discounts, accuracy is more important than ever. Using rooftop-level calculations ensures you aren’t over-remitting in jurisdictions where you are still entitled to a credit.
The trend is clear: many states are watching the revenue gains in Colorado and Nebraska very closely. We expect to see more sunset clauses on vendor discounts in the future as states realize the untapped revenue. The era of the state-subsidized tax department is ending. Compliance should not cost more than the tax itself—it’s time to automate your workflow before the margins tighten any further.
By integrating your finance teams with TaxJar, you can automate compliance and maintain efficiency. Our cloud-based platform automates the entire sales tax life cycle across all of your sales channels — from calculations and nexus tracking to reporting and filing. With innovative technology and award-winning support, we simplify sales tax compliance so you can grow with ease.
Get started for free with a 30-day TaxJar trial today, or reach out to our sales team if you have any questions.
