Avalara, Inc., a leader in global tax and compliance, has released its Tax Changes 2026 Midyear Update, highlighting a rapidly shifting tax landscape. States are getting creative as they face declining rainy day funds for the first time in over a decade, leading to an expansion of the sales tax base to new categories of goods and services. Businesses must navigate tariff uncertainty, evolving nexus standards, and new compliance requirements.
States and Cities Expand Sales Tax Base
Facing budget pressures, cities and states are looking beyond traditional tax tools. New and proposed taxes target digital goods, social media advertising, data centers, AI-related services, and personal and professional services. Notable developments include Chicago's nation-first local tax on social media advertising, effective January 1, 2026, and Utah's expansion of sales tax to digital products and prewritten software, effective July 1, 2026. Maryland's digital advertising tax continues to face legal challenges, having raised roughly $90 million annually against projections of $250 million, potentially leading to significant taxpayer refunds.
AI Taxability Remains Unsettled
While most AI-related legislation focuses on governance, taxability is emerging. In 2025, Indiana and Illinois ruled that generative AI chatbot services are not subject to sales tax. New York introduced the Robot Tax Act targeting businesses that displace workers with AI. Michigan has expressed interest in taxing AI services, and Kentucky clarified that AI does not change how software is taxed. Other states are expected to tax generative AI under existing frameworks like data processing, information services, or SaaS.
New Compliance Rules Create Operational Challenges
Businesses face dynamic compliance requirements as tax policy shifts at record speed. Avalara's Scott Peterson, VP of Government Relations, notes, 'Businesses today are managing tax complexity on multiple fronts at once. States are broadening sales taxes to new categories, international trade rules are shifting rapidly, and compliance requirements are becoming more dynamic. The pace of change is unlike anything we've seen in recent years.'
