State and local tax (SALT) developments remained active throughout the third quarter of 2026. States continued to respond to federal tax changes while expanding taxation of digital products and services, revisiting data center incentives and addressing income tax, sales tax, apportionment, and compliance considerations.
This update highlights notable SALT developments from the third quarter, with a focus on items most relevant for compliance considerations and planning efforts.
Northeast
Massachusetts
- Smithfield P.L. 86-272 Apportionment Rules Limited: In Smithfield, the Massachusetts Appellate Tax Board held that the state could not use a Finnigan-style rule to include Massachusetts sales of a P.L. 86-272-protected affiliate in the sales-factor numerator of taxable group members.
New Jersey
- Net Operating Loss Deductions Temporarily Limited: New Jersey imposed a temporary $1 million annual cap on net operating loss deductions for corporation business tax years beginning on or after July 31, 2026, with disallowed deductions carried forward for up to six additional years beyond their original expiration period.
New York
- Sales Tax Vendor Reregistration Program Announced: New York issued guidance on its new sales tax vendor reregistration program, which provides potential penalty and interest relief for eligible vendors with outstanding sales tax liabilities.
- Cloud-Based Software Held Taxable: New York’s Tax Appeals Tribunal held that a cloud-based document management platform constituted taxable prewritten computer software rather than a nontaxable document storage service.
- New York City Unincorporated Business Tax Credit Reduced: New York City reduced the unincorporated business tax credit for high-income individual residents from 23% to 15% for income of $1.25 million or more, with a phase-down for income between $1 million and $1.25 million. The change applies retroactively to January 1, 2026.
Pennsylvania
- Section 163(j) Treatment Revised: Pennsylvania issued new guidance addressing its treatment of the federal business interest expense limitation under IRC Section 163(j), including different rules for tax years beginning before and after January 1, 2025.
- Local Sales Tax Sourcing Changed: Pennsylvania shifted local sales tax sourcing in Philadelphia and Allegheny counties from origin-based to destination-based sourcing, retroactive to January 1, 2026, with enforcement beginning October 1, 2026.
Rhode Island
- AI-Generated Reports Subject to Sales Tax: Rhode Island treated access to AI-generated reports as taxable hosted software.
- High-Income Personal Income Tax Surtax Enacted: Rhode Island enacted a phased personal income tax surtax on income exceeding $1 million beginning in 2027.
Southeast
Alabama
- Remote Worker Withholding Guidance Issued: Alabama clarified that employers generally are not required to withhold Alabama income tax on wages paid to nonresident employees for services performed entirely outside Alabama.
- Interest Paid to Foreign Affiliate Requires Addback: An Alabama appellate court required a taxpayer to add back interest paid to an Irish affiliate, finding that the subject-to-tax exception did not apply.
District of Columbia
- Federal Tax Conformity and Sales Tax Changes Enacted: The District decoupled from certain federal provisions affecting research expenditures, business interest and qualified production property, delayed a sales tax rate increase to 7% until October 1, 2027, and increased the vehicle rental tax to 11% beginning October 1, 2026.
Maryland
- Digital Advertising Tax Invalidated: The Maryland Tax Court held that the state’s digital advertising gross revenues tax violated federal law and constitutional protections and ordered refunds with interest for Apple, Google, and Peacock. Other taxpayers should consider filing protective refund claims.
- Electricity Transmission Equipment Exemption Upheld: The Maryland Supreme Court held that certain equipment used to transmit and distribute electricity qualifies for the state’s sales and use tax exemption for property used directly and predominantly in a production activity.
North Carolina
- Federal Conformity and Research Expense Rules Updated: North Carolina updated its Internal Revenue Code (IRC) conformity date while decoupling from the federal Section 174A deduction for domestic research and experimentation expenditures.
- Data Center Electricity Exemption Repealed: North Carolina repealed the sales and use tax exemption for electricity used by qualifying data centers, with the change applying to billing periods beginning on or after August 6, 2026.
- Sports Wagering and Prediction Market Taxes Enacted: North Carolina increased its sports wagering tax rate and established a new tax on prediction market operator net trading fee revenue beginning January 1, 2027.
- Intercompany Debt Deduction Eliminated: North Carolina eliminated the creditor-side franchise tax deduction for affiliated debt retroactive to 2021 and enacted phased reductions to the individual income tax rate from 3.99% to 2.99%.
Tennessee
- Money Transmission Tax Enforcement Paused: Tennessee paused enforcement of its new tax on money transmission services while constitutional litigation proceeds.
Virginia
- Data Center Electricity Tax Enacted: Virginia preserved existing sales and use tax incentives for qualifying data centers but enacted a temporary tax on electricity consumed by data center operators at $0.011 per kilowatt-hour beginning July 1, 2026.
Central
Colorado
- Software and SaaS Become Taxable: Effective January 1, 2027, Colorado will generally impose sales and use tax on downloaded and remotely accessed computer software, including certain SaaS offerings and mobile applications.
Illinois
- Digital and Technology Taxes Enacted: Illinois enacted new taxes on targeted advertising services and social media platforms effective January 1, 2027, and on digital asset transactions effective July 1, 2027.
- Qualified Small Business Stock Treatment Modified: Illinois decoupled from the federal Section 1202 exclusion for qualified small business stock, requiring taxpayers to add back certain gains excluded from federal income.
Indiana
- Wagering Taxes Paid to Other States Not Subject to Addback: The Indiana Supreme Court held that wagering taxes paid to other states are excise taxes rather than taxes based on or measured by income, so Indiana’s addback requirement does not apply.
Nebraska
- Alternative Apportionment Required for Certain IRC Section 965 Income: A Nebraska court held that an alternative apportionment formula was required for certain deemed-repatriation income.
New Hampshire
- Capital Losses Cannot Be Shared Across New Hampshire Combined Group: New Hampshire held that members of a combined group cannot share capital losses.
Ohio
- Financial Institutions Tax Upheld: The Ohio Supreme Court upheld the state’s Financial Institutions Tax against a Dormant Commerce Clause challenge involving its rate structure based on apportioned equity capital.
- Financial Technology Services Taxability Clarified: In CheckFree, the Ohio Supreme Court addressed the sales tax treatment of automated data processing and electronically delivered financial services under the state’s taxable services framework, vacated the Board of Tax Appeals’ decision in part and remanded the case on September 16.
- Pharmaceutical Chargebacks Excluded from CAT Gross Receipts: The Ohio Supreme Court held that pharmaceutical chargebacks reduce gross receipts subject to the Commercial Activity Tax.
Texas
- Marketplace Fees Excluded From Data Processing Tax: The Texas Comptroller directed marketplace fees to be removed from taxable data processing services, while state officials signaled that data center tax exemptions may face further review in 2027.
West
Arizona
- Unclaimed Property Treatment Clarified: The Arizona Department of Revenue clarified that gift cards, stored-value cards, loyalty points, and other property previously excluded from the state’s unclaimed property law would not become subject solely because of SB 1336.
California
- Digital Software and SaaS Become Taxable: California expanded its sales and use tax base to include certain electronically delivered and remotely accessed prewritten software, including specified SaaS offerings, beginning January 1, 2027.
- Business Tax Credit Limitation Extended: California extended its $5 million limitation on certain business tax credits through 2029, established a modified permanent limitation beginning in 2030 and reduced the minimum franchise tax for qualifying new pass-through entities from $800 to $400 for 2027 through 2029.
- Personal Income Tax Decouples From Federal Business Interest Rules: California enacted SB 1435, decoupling its personal income tax from the federal Section 163(j) business interest expense limitation.
Your Guide Forward
The third quarter of 2026 brought continued changes to state and local tax rules as states responded to federal tax legislation, expanded taxation of digital products and services, and revisited tax incentives, apportionment, and sourcing rules. These developments may create new compliance requirements while also presenting planning opportunities for businesses operating across multiple jurisdictions.
For tailored guidance and support in navigating these developments, consult your tax advisor or a qualified Cherry Bekaert SALT professional today.
Explore past Quarterly SALT Updates for additional developments and insights.
