Blog

The third quarter of 2026 brought several state tax developments that could affect how businesses price transactions, plan investments, and prepare returns. California enacted a sales tax expansion for prewritten software and SaaS beginning in 2027, while Kentucky began taxing data brokering services in August. At the same time, Maryland appealed a Tax Court ruling against its digital advertising tax, leaving the future of that tax unresolved.
Data center incentives also drew renewed scrutiny. North Carolina ended its sales tax exemption for electricity used at certified data centers while retaining exemptions for certain other qualifying purchases. Meanwhile, New York and North Carolina adopted rules that differ from federal treatment of research expenditures, creating additional state return adjustments. Our Q3 article covers these developments, along with changes to local sales tax collection and other compliance requirements businesses should watch as the year draws to a close.

On August 14, the Tax Court ordered refunds, with applicable interest, to Apple, Google, and Peacock TV. In each case, the court found that Maryland’s digital advertising tax violated the Internet Tax Freedom Act, the dormant Commerce Clause, and the Due Process Clause.

The court’s analysis may have implications beyond Maryland. It concluded that digital and nondigital advertising are sufficiently similar for purposes of the Internet Tax Freedom Act. Because Maryland generally does not impose a statewide tax on comparable nondigital advertising, the court held that the digital advertising tax was preempted by federal law.

The decisions also found constitutional problems with the tax’s use of worldwide revenue to establish the $100 million applicability threshold and determine the tax rate. In the Peacock TV decision, the court separately held that the statutory exemptions for certain broadcast entities and news media entities violated the First Amendment.

An artificial intelligence agent does not need a desk, a company badge, or a W-2 to change a taxpayer’s state tax profile. It may answer customer questions, negotiate terms, approve transactions, monitor equipment, issue refunds, arrange delivery, or transmit a software fix. Each task can occur in seconds and at national scale. The state tax question, however, is not whether the agent is a person. It is whether the business, through the agent, is conducting an activity that a state may tax.

That distinction matters. The Supreme Court’s decision in South Dakota v. Wayfair, Inc. rejected a physical-presence requirement for sales tax nexus and recognized that an Internet seller can be present in a state in a meaningful way without traditional physical presence.[1] Although Wayfair addressed sales tax, its practical message has influenced the broader state tax conversation: a business cannot assume that activity is outside a state simply because its employees and headquarters are elsewhere.

As organizations begin developing their 2027 budgets and strategic plans, tax credits and incentives should be part of the conversation from the start. Hiring, expansion, technology, research, training, and energy projects may qualify for valuable federal, state, or local programs but timing is critical. Some incentives require applications or approvals before a project begins. Reviewing planned initiatives now can help your organization preserve eligibility, improve projected returns, and avoid missing important opportunities.What Is on Your 2027 Roadmap?