Penny Phase-Out Creates Multistate Sales Tax Compliance Challenges

In February 2025, the Treasury ceased penny production due to production costs exceeding face value (3.69 cents per penny). While approximately 114 billion pennies remain in circulation, shortages are already impacting retailers nationwide. (Note, the US elimination of the penny would be the functional equivalent of the EU eliminating the EUR1 cent coin or a British elimination of the 1p.)

The core compliance issue is that most states require sales tax to be calculated and rounded to the nearest penny, but pennies are increasingly unavailable for cash transactions. Unlike Canada, which issued comprehensive guidance before eliminating its penny in 2012, the U.S. government has delegated rounding rules to individual states.

State responses have been fragmented. Florida allows dealers to choose their rounding method. Texas permits rounding cash transactions to the nearest nickel but prohibits rounding non-cash transactions. Several states – including Oklahoma and West Virginia – have pending legislation.

Key unresolved questions include: Who absorbs rounding gains and losses? How should electronic payments be treated? Could differing rules for cash versus card transactions implicate the Internet Tax Freedom Act? And in home-rule states, could local jurisdictions adopt conflicting approaches?

Key takeaway

Multistate retailers should immediately assess their exposure across jurisdictions and begin updating POS systems to accommodate rounding functionality. Businesses should establish consistent internal rounding policies, ensure receipts clearly display any rounding adjustments, and monitor legislative developments in each state where they operate. Consulting with tax advisors now can help manage audit risk during this transition period and position businesses to respond quickly as additional guidance emerges.