A new report from Avalara, Inc., a provider of agentic AI for global tax and compliance, shows a rapidly evolving tax landscape driven by state revenue pressures, global trade volatility, and a growing wave of compliance changes.
The Avalara Tax Changes 2026 Midyear Update found that, as state rainy day funds decline for the first time in more than a decade, lawmakers are increasingly expanding the sales tax base to encompass new categories of goods and services. At the same time, businesses are navigating shifting tariff policies, changing nexus standards, and new operational compliance requirements.
“Businesses today are managing tax complexity on multiple fronts at once,” said Scott Peterson, VP of Government Relations at Avalara. “States are broadening sales taxes to new categories of goods and services, 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.”
Cities and States Are Expanding the Sales Tax Base at an Accelerating Pace
Facing budget pressures and shrinking reserves, cities and states are increasingly looking beyond traditional tax policy tools to generate revenue. New and proposed tax measures target digital goods, social media advertising, data centers, AI-related services, and a broad range of personal and professional services.
Notable developments include:
- Chicago implemented the nation’s first local tax on social media advertising, effective January 1, 2026.
- Utah expanded its 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, the state may face significant taxpayer refunds.
AI taxability also remains unsettled. Most new AI-related legislation focuses on governance, but that is beginning to change:
- In 2025, Indiana and Illinois both determined that generative AI chatbot services were not subject to sales tax.
- New York recently introduced the Robot Tax Act targeting businesses that displace workers with AI.
- Michigan has expressed interest in taxing AI services.
- Kentucky recentlyclarified that AI does not change how software is taxed.
- Other states are expected to tax generative AI under existing frameworks such as data processing, information services, or SaaS.
New Compliance Rules Are Creating Operational Challenges
The report also highlights a wave of compliance changes affecting day-to-day business operations. Illinois eliminated its economic nexus transaction threshold on January 1, 2026, while Kentucky will do the same on August 1, simplifying nexus determinations to a single revenue threshold.
The retirement of the U.S. penny has introduced new sales tax calculation considerations, prompting at least seven states to adopt transaction-rounding requirements while others evaluate similar measures.
Meanwhile, states are increasingly scrutinizing payment processing costs. Illinois and Alabama have enacted laws prohibiting credit card interchange fees on the sales tax portion of transactions, and more than 20 additional states are considering comparable legislation.
Tariff and Trade Policy Shifts Are Rewriting Cross-Border Compliance
Beyond state and local tax developments, global trade compliance remains in flux as governments revisit long-standing tariff and import policies. A recent Supreme Court ruling invalidating the Trump administration’s use of the International Emergency Economic Powers Act (IEEPA) to impose tariffs has introduced new uncertainty for importers and exporters, with businesses now evaluating the impact of potential refunds, appeals, and future trade actions.
“Trade compliance has become significantly more complex as governments revisit tariff policies and low-value import exemptions,” said Craig Reed, GM of Cross-Border at Avalara. “Organizations need accurate trade data, product classification information, and the ability to respond quickly as regulations change. The companies that can adapt fastest will be best positioned to manage risk and maintain growth.”
The report also highlights growing international scrutiny of de minimis import thresholds. Following the U.S. suspension of the $800 de minimis exemption, countries including Thailand, France, and Italy, along with the European Union, are pursuing measures to reduce or eliminate low-value import exemptions, increasing customs obligations and documentation requirements for cross-border sellers.
As businesses contend with the most volatile tax environment in years, from state budget-driven expansions and landmark court rulings on tariffs to a cascade of global trade policy changes, the Avalara Tax Changes 2026 Midyear Update provides the authoritative resource compliance teams need to navigate the second half of the year. Download the full report here.
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