Rounding up trouble: How the disappearing penny affects sales tax compliance

• U.S. retailers are running out of pennies. State and local tax rates often include fractional percentages, so businesses will need to round for cash transactions when pennies are no longer available. 

• Businesses need governments to provide clear guidance on how to handle sales tax when exact change isn’t available for cash transactions. 

• The longer businesses go without guidance on when and how to round, and how to report rounding, the more sales tax compliance, enforcement, and fairness issues may arise.

In February 2025, President Donald J. Trump directed the Secretary of the Treasury to stop producing new pennies. Ten months later, on November 12, 2025, the United States Mint produced the nation’s last penny. 

The U.S. isn’t the first country to phase out a legal tender. Canada stopped producing its penny on May 4, 2012, and stopped circulating the penny on February 4, 2013. At the time, the Government of Canada launched a campaign to withdraw the penny from circulation and encouraged businesses to round cash transactions “in a fair and transparent manner.” 

Its guidance on rounding: “Only the final amount in a cash transaction (or equivalently, the change owed) should be subject to rounding. Individual items, as well as any duties, fees, or taxes, should be tabulated in their exact amount prior to rounding. This includes the Goods and Services Tax/Harmonized Sales Tax (GST/HST).” Cash totals must be rounded to the nearest five-cent increment, while non-cash payments must be settled to the exact cent.

Canada’s penny elimination went smoothly primarily because the government produced and distributed clear guidance and educational material early. 

The U.S. government hasn’t issued any regulatory guidance, leaving that to the states (or, failing state action, local jurisdictions). And perhaps because so many pennies end up in jars and under sofa cushions, retailers nationwide are already running out of pennies. Without guidance, businesses that lack exact change for cash transactions may adopt different practices, causing tax compliance, enforcement, and fairness issues as well as audit risk.

Most states currently require rounding tax calculations to the nearest penny, but states may use different rounding methods, such as:

• Rounding up to the nearest cent for all fractions of a cent
• Rounding down for anything below 0.5 cents and rounding up for anything 0.5 cents or more
• Using a bracket system

States may also have different rules for carrying out the decimal when determining the tax due: to one decimal place, two decimal places, three decimal places, four decimal places, or five or six decimal places. And states may allow or mandate different approaches to rounding, either requiring sellers to charge tax on the aggregate taxable amount of an invoice (rounding the total) or requiring the seller to charge tax on each individual taxable item (rounding each line item).

Since sales and use tax requirements are typically established by law, states may need their legislature to adopt new rounding provisions. Many tax policy analysts and retailers favor rounding the final transaction total after the applicable taxes and fees have been added, according to the National Conference of State Legislatures (NCSL). This ensures tax is accurately applied, and that retailers remit the correct tax for both cash and electronic payments.

The sooner states publish guidance the better. For cash transactions, rounding to the penny will be difficult if not impossible for businesses experiencing a penny shortage. 

Here’s what states are saying as of March 4, 2026.

The Connecticut Department of Consumer Protection advises businesses to round down if they cannot make exact change. Under Connecticut law, customers cannot be charged more for paying with cash. The notice doesn’t mention sales tax.

If the total amount due cannot be collected or the proper amount of change provided on a cash transaction due to the penny shortage, the dealer may choose how to round the total amount due from the customer: to the next lowest, highest, or nearest nickel. 

Dealers must “clearly and conspicuously” disclose their rounding method through prominent signage.

Whether a business chooses to round up or down, it must remit sales tax as required by law. “Sales tax remains due on the actual sales price prior to the dealer applying rounding due to the lack of pennies,” according to the Florida Department of Revenue. 

A bill making its way through the Florida Legislature prohibits rounding for non-cash transactions and specifies that rounding to the nickel doesn’t alter the sales price, the amount of sales tax collected, or any assessments, fees, or surcharges imposed on the sale.

Indiana: Round the total price, including tax

Indiana has passed a law that specifies rounding provisions for cash transactions. The new law could place burdensome requirements on retailers and decrease state and local sales tax collections.

Effective March 5, 2026, the day the governor signed Senate Bill 243:

• Rounding is only permitted for cash transactions.

• Retailers must round the total price, including tax.

• Retailers may choose to round up or down to the next nickel. 

• Gains must be added to the retailer’s income.

• Losses must be taken away from the retailer’s income.

• Retailers must remit the full tax due to the state whether they round up or down.

The Indiana Department of Revenue offered this example: If the total price plus tax is $6.42, the retailer has the option to round up to $6.45 or down to $6.40 in a cash transaction. The three-cent gain or two-cent loss would be added to or taken away from the retailer’s income, respectively. However, the tax of 42 cents is remitted to the State regardless of rounding.

SB 243 also requires state and local government units to round down when collecting cash payments of taxes or fees. According to the bill’s fiscal note, this could reduce revenue from state taxes, fees, and fines by as much as $1.4–$2 million starting the second half of fiscal year 2027.  

In a letter to the Indiana Legislature, the Council on State Taxation (COST) listed the following “problems with current provisions in S.B. 243”:

• Purchasers would need to declare their method of payment in advance for every transaction.

• Retailers could need to use three separate rounding operations. 

• Retailers may be forced to change their sales tax calculations and point-of-sale technology to comply with the bill’s rounding requirements. 

• The rounding processes described in S.B. 243 would not be in substantial compliance with the Streamlined Sales and Use Tax Agreement, and Indiana is a full member state.

There are more straightforward solutions that would align with other states’ policies. For example, COST recommends Indiana require any necessary rounding to “take place at the very end of the transaction” to avoid rounding the sales tax to an amount divisible by a nickel at the sales tax calculation stage. 

The Legislature approved the bill without making any of COST’s suggested changes, and the governor signed it.

For cash transactions, retailers that round the amount collected to the nickel must calculate Iowa sales tax on the actual taxable sales price, according to Iowa Department of Revenue guidance. When filing sales and use tax returns, retailers must report the amount of gross sales and sales tax before any rounding.

This is only for sales tax. The department notes that rounding may create other issues for business practices that are unrelated to sales tax.

Michigan allows businesses to round cash transactions up or down to the nearest nickel and to apply the rounding convention they choose to credit transactions as well, according to the Michigan Department of Treasury. 

Under Michigan’s General Sales Tax Act (GSTA) and Use Tax Act (UTA), sellers must “compute the tax to the third decimal place and round up to a whole cent when the third decimal place is greater than 4 or round down to a whole cent when the third decimal place is 4 or less.” Sellers must base sales and use tax to the nearest cent of the listed sales price before rounding to account for a lack of pennies. 

Taxpayers should “maintain sufficient records for Treasury to determine the proper amount of tax due.” They should also “carefully evaluate whether their recordkeeping, point-of-sale, and other tax systems, procedures, documentation, etc. are adequate for continued compliance with the GSTA and UTA.” 

The New York State Department of Taxation and Finance hasn’t issued guidance related to sales tax and the penny. However, state lawmakers have introduced legislation that would require merchants to round cash purchases to the nearest five-cent denomination to encourage the reduction of the circulation of pennies in New York state.

Under Senate Bill 8580 and its companion Assembly Bill 9274, merchants must round down to the nearest nickel for cash transactions if the total price of goods or services ends in one, two, six, or seven cents, and up to the next highest nickel if the total price ends in three, four, eight, or nine cents. This is the same rounding system Canada implemented when it abolished the Canadian penny.

State or municipal tax would not apply to gains or losses from rounding. Non-cash transactions may not be rounded.

Other states awaiting legislative action

Other states that have introduced legislation to address rounding and the penny shortage include Oklahoma (HB 3075 and SB 1397), Oregon (HB 4178), Tennessee (HB 1744/SB 1810), Washington (HB 2334 and SB 6230), and West Virginia (HB 4476). We’ll keep an eye out for others and report on them as we find them.

Tennessee law requires retailers to calculate sales tax to the exact cent and remit the exact amount of sales tax shown on the receipt or invoice.

For cash transactions that require rounding due to a lack of pennies, retailers may choose their own rounding procedures. They may round up to the nearest nickel for all such transactions, round down to the nearest nickel for all such transactions, or apply different rounding methods to different transactions. Regardless of the procedure chosen, sales tax is due on the actual sales price (prior to rounding). 

The Tennessee Department of Revenue explains that “the amount of sales tax due will remain the same for cash transactions as it is for other methods of payment, such as credit card transactions.”

Retailers must calculate, collect, and remit Texas sales tax on the taxable sales price. However, if a cash transaction has a total value (sales price plus sales tax) that cannot be collected without pennies, the Texas Comptroller of Public Accounts will allow retailers to round the transaction to the next lowest or highest nickel, as they see fit. The Comptroller won’t adjust the sales price or recalculate the tax due unless the retailer rounds past the next lowest or next highest nickel.

The Comptroller itself will continue to accept pennies for cash transactions so long as pennies are legal tender and it has sufficient pennies to make change. Should the Comptroller run out of pennies, it will round the total down to the next lowest nickel and accept that amount as payment in full.

Sales tax for non-cash payments in Texas will be collected to the penny.

For cash purposes requiring change, the Utah State Tax Commission allows retailers to round up or down to the nearest nickel after the total amount (price plus tax) has been calculated. Yet taxes come first, so cash rounding must occur after all applicable taxes have been calculated and applied to the sales price.

The Tax Commission recommends but does not require businesses to round down if the total amount is two cents more than the next lowest nickel, and up if the total amount is two cents less than the next highest nickel. Whatever method they choose to follow, retailers must clearly and conspicuously disclose their rounding method for cash transactions. 

Non-cash payments may not be rounded.

The Wisconsin Department of Revenue (DOR) states that property tax bill amounts cannot be rounded up or down. “Under state law, all taxes on real property and on improvements on leased land must be paid in full.” Furthermore, “municipalities and counties that require exact change for cash transactions should consult with their legal counsels on the process of developing and implementing such policies.”

As for sales tax, in its Fall 2025 Wisconsin Tax Updates Webinar the DOR reminded that Wisconsin sales and use tax is rounded to the nearest one cent and must be calculated before rounding the final amount due on a cash transaction. Businesses may round up or down to the nearest nickel.

The DOR advised businesses to consult with legal advisors on how to handle cash transactions when pennies are no longer available. Businesses could also decide to accept only digital payments or checks.

Fun fact: During a 1975 penny shortage, the Wisconsin DOR explained that rounding the sales tax reimbursement to the next highest nickel “constitutes the collection of excess sales tax reimbursement and is not in accordance with the Sales and Use Tax Law.”

Uniform rounding rules were added to the Streamlined Sales and Use Tax Agreement (SSUTA) in 2002. SSUTA Section 324 requires member states to adopt a rounding algorithm that: 

• Calculates tax to the third decimal place
• Rounds tax to a whole cent using a method that rounds up to the next cent whenever the third decimal place is greater than four
• Allows sellers to elect to compute the tax due on a transaction on an item or an invoice basis
• Allows the rounding rule to be applied to the aggregated state and local taxes 

No member state shall require a seller to collect tax based on a bracket system.

Congress introduced legislation, the Common Cents Act, that would require cash transactions to be rounded up or down to the nearest five cents. For debts, dues, public charges, and taxes, one-cent coins remain legal tender. 

A coalition of major trade associations is calling for Congress to authorize businesses nationwide to round cash transactions to the nearest nickel. In a letter to senators, they pointed out that at least 10 states and localities have laws that prohibit rounding to the nearest nickel. “If these remedies are not addressed in short order,” the letter explains, “it will be challenging to legally engage in cash transactions with customers in growing swaths of the country.”

On December 2, Senator Elizabeth Warren and Congresswoman Maxine Waters sent a letter to Department of the Treasury Secretary Scott Bessent, Federal Reserve Chair Jerome Powell, and U.S. Mint Acting Director Kristie McNally. “We write to urge your agencies to provide immediate guidance amidst concerns from consumers, retailers, and banks regarding the impact of penny shortages. … [I]t is critical that your agencies take immediate clarifying action, especially ahead of the holiday shopping season.”

Warren and Waters asked the agencies to provide answers to their questions and publicly release a plan to manage penny circulation no later than December 12, 2025. Such guidance has yet to materialize.

In addition to deciding when and how businesses should round, it would be helpful for states to answer the following questions: 

• Who will get the extra tax, the merchant or the jurisdiction, if a merchant rounds up? 
• Who will absorb the loss, the merchant or jurisdiction, if a merchant rounds down? 
  • At least one retailer will reportedly lose millions this year by rounding down.
• Should businesses be allowed to round non-cash transactions as well as cash transactions? 

Regarding that last point, NCSL notes that some network payments, such as Mastercard and Visa, “require equivalent treatment of cash and card transactions.” Additionally, if a retailer rounds the tax instead of rounding the total, cash buyers could end up paying a rounded-down tax while non-cash buyers would pay the full rate. Discriminating against electronic payments could put a retailer at odds with the Internet Tax Freedom Act (ITFA). Conversely, states may end up collecting less tax or more tax than they’re due if a retailer rounds the total and not simply the tax.

“We’re seeing states require rounding for cash sales and prohibit rounding for electronic payments,” says Scott Peterson, VP of Government Relations at Avalara. “By design, this creates a total sales price differential that must be addressed.”

NCSL recommends adding taxes to the pre-rounded total then rounding the final amount symmetrically. “This approach ensures that the exact tax owed is always paid and that, over time, consumers and retailers each ‘win’ roughly half the time. Such balance is critical to maintaining trust and avoiding perceptions of bias or manipulation.”

Once all states update their rounding rules to account for elimination of the penny, retailers will need to update their processes and systems. According to NCSL, it will take retailers an estimated six to nine months to update cash acceptance and reporting systems to accommodate rounding functionality. Updates will include:

• Defining and designing new systems
• Clarifying distinctions between cash and digital costs
• Identifying operational risks
• Ensuring integration with related systems (e.g., payroll and tax)

In the meantime, retailers are managing penny shortages in clever ways. A mid-Atlantic convenience store chain offered a free soda to each customer who brought in 100 pennies. Grocery stores in Pennsylvania and Schenectady, New York, held special events when customers could exchange pennies for gift cards worth twice the value of the coins. Good stuff.

There’s another potential impact in gross receipts states like Arizona (with its transaction privilege tax), Delaware, New Mexico, and South Dakota, where retailers are required to remit tax based on their total gross receipts. “If the sales tax is rounded before the invoice total is rounded,” Peterson explains, “there are two points at which the retailer may have more gross receipts than it would have without the rounding. Without legislative action, the law in those states would negatively impact businesses that round up. Whatever legislative action states finally take, they must address this issue.” 

Something for lawmakers to keep in mind moving forward.

Phasing out the penny will require businesses to update pricing, point-of-sale (POS) systems, and reconciliation procedures for sales tax compliance. Unfortunately, few tax authorities have provided clear rounding guidelines. 

Without coordinated guidance, the penny’s disappearance could unintentionally create compliance friction and equity debates in sales tax administration. Lacking clear rounding rules, retailers will need to decide whether to round up or down in cash transactions, and whether to round per item or per invoice. This could lead to inconsistent practices or audit risks across businesses and jurisdictions.

Rounding prices to the nickel will not solve tax issues because state and local tax rates often include fractional percentages. In certain jurisdictions, rounding will be unavoidable for cash transactions and sales tax compliance. 

Whatever happens with rounding, Avalara Agentic Tax and Compliance™ can help businesses streamline and improve tax compliance.