Sales Tax Update - January 2026

2026 - THE YEAR OF THE SALES TAX AUDIT

As we predicted at the beginning of last year, 2025 brought heightened enforcement and increased sales tax audit activity for remote sellers and all sellers, particularly in e-commerce, SAAS and digital service industries.  In 2025, Dillon Tax Consulting represented taxpayers in more sales tax audits that in any of our previous years (30+) in multistate sales tax.  Furthermore, the states were far more aggressive in their pursuit of additional revenues than in previous experiences.  So what are some of the reasons for this, and why do we predict that it will continue in 2026?

AI Aids Revenue Authorities to Identify and Conduct Audits

State revenue authorities in the U.S. are increasingly using AI and advanced analytics to help target sales tax audits and detect sales tax non-compliance, particularly as departments face staffing shortages and growing tax complexity. These AI tools and predictive analytics enable states to analyze large volumes of filings, third-party transaction data, and other records to flag patterns of potential non-compliance. These tools can enable states to identify unreported sales tax and compliance issues that auditor may overlook or would take states years to review manually.  State tax agencies, like the New York State Department of Taxation and Finance, have reportedly used AI to expand the number of audit and compliance notices they issue.  While states do not disclose how these tools are employed to impact audit methodologies, this is a sign of things to come in both how AI is used in identifying and conducting audits.

Evolving Nexus

We are now 5 years out from all states’ adoption of economic nexus standards, since the U.S. Supreme Court’s landmark decision in in South Dakota v. Wayfair.  States continue to seek ways in which to alter these standards, including removal of the transaction count aspect of the threshold, and modifying the sales that count toward the threshold, with more states considering ALL sales, including exempt, wholesale and marketplace sales.

Evolving Taxability

Software and platform-based services continue to expand and become more ubiquitous for commercial and residential consumers.  Sales tax laws have always lagged well behind technology.  The nature of this technology makes it difficult to define or put into a specific sales tax classification.  As states continue to expand their sales tax base – particularly through informal policy changes and interpretations of existing laws – it is critical for sellers to routinely monitor their sales to ensure that they are properly coded as taxable.  This is particularly true for sellers of digital goods and services and Software As a Service (SAAS), such as online subscription-based gaming, information and website platform-driven consumer tools. 

Expanding Marketplace

States also continue to interpret what it means to be a marketplace facilitator.  As noted above, if a marketplace is deemed to be a marketplace facilitator, it is responsible for the collection and remittance of sales tax on all sales transacted on its marketplace platform.  Third party marketplace sales are projected to account for 65% of all global ecommerce.  States adopted these marketplace definitions in an effort to “cast a wide net” and ensure that companies such as Amazon and eBay would be required to collect and remit sales tax on all sales transacted on their platforms.  However, the unintended consequence is that neither states nor marketplaces are confident as to what constitutes a marketplace facilitator, especially in sectors such as lodging and food sales.  Marketplace sellers are also confused, falsely believing that they have no obligations if they make sales on a marketplace, which is not always the case.  All too often, sellers only discover this on audit. 

MARYLAND AND WASHINGTON STATE MADE SWEEPING CHANGES TO TAX IT AND OTHER SERVICES

Maryland’s new 3% sales tax applies to business and consumer purchases of various cloud-based services, website design and hosting services, and all forms of software publishing, data processing and information services.  As such, this new sales tax would apply to most business sales and purchases of software, data processing and storage services, information services, IT support, consulting, design, programming and installation services.  The new tax provides that if a sale may also be subject to sales tax at the higher 6% rate, the higher rate applies. These changes took effect July 1, 2025.  Our previous analysis of this law change may be found here.

Washington State expanded the sales tax base to additional services, including custom software, customization of prewritten computer software, information technology (IT) consulting, training and support, custom website development, data processing and data entry, digital and nondigital advertising services, live, in-person and electronic presentations, security and investigation services, and temporary staffing services, except for qualifying hospitals.  The changes took effect October 1, 2025.  Our previous analysis of this law change may be found here.

CHICAGO’S PERSONAL PROPERTY LEASE TRANSACTION TAX RATE INCREASES TO 15%

Effective January 1, 2026, Chicago increased its Personal Property Lease Transaction (PPLT) tax rate from 11% to 15%.  The PPLT tax applies to sales and leases of personal property to customers located within Chicacgo.  It also applies to non-possessory computer leases, which include cloud computing and Software as a Service (SaaS) transactions.  This often-overlooked transaction tax is one of the highest in the nation.

NEW YORK’s DYNAMIC LOGIC DECISION FORECASTS A NARROWING OF THE INFORMATION SERVICE EXCLUSION

The New York Dynamic Logic sales tax decision signals the direction that the New York State Department of Taxation and Finance (the Commissioner) is headed with respect to software-related and digital product sales — especially around data, analytics, digital services, and software-like offerings  [Matter of Dynamic Logic Inc. v. Tax Appeals Tribunal of the State of New York, 2025 NY Slip Op 02262 (NY Ct App, April 17, 2025)]. Dynamic Logic sold an advertising analytics service, designed to measure the effectiveness of the client’s advertising campaigns against a benchmarking database and provide custom reports.  This information was subsequently included in the benchmarking database, which was used to provide reporting to other clients.  While both sides agreed that the service was an information service, Dynamic Logic argued that the service qualified for a statutory exclusion from sales tax for “information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons.” [NY Code Sec. 1105(c)(1)]. 

The sides disagreed as to whether the data was “substantially incorporated”.  Whereas Dynamic Logic asserted that “substantially” was quantitative, meaning “to a great extent or degree.” The Commissioner and the Tax Tribunal in the appealed decision concluded that the definition was qualitative, meaning information was “substantially incorporated” if the information represented a “valuable addition” to subsequent reports.  The Court of Appeals agreed, noting that the reuse of a “meaningful amount” of data, even though anonymous, rendered the information service taxable.  The Court also noted that even under a quantitative approach, it would reach the same conclusion, as Dynamic Logic also separately sold a product that gave buyers access to much of the same data as in the customer’s reports.

This decision is noteworthy for several reasons:

1.     It highlights that New York and other states will continue to interpret exemptions and exclusions narrowly against taxpayers.  If one fact works against the taxpayer, it can render a narrowing decision that has ripple effects for other taxpayers;

2.     It highlights the need for companies and their advisors to scrutinize not only software sales but also the sale of services, particularly digital and data services, as states are increasingly turning their attention to taxation of these services.

3.     Cloud-based and digital goods and services will be the focal point for revenue authorities and changing sales tax policies over the next decade.  For example, see Texas change to data processing regulation; Maryland and Washington State changes regarding IT services. 

Our previous anlaysis of this decision may be found here. 

PARTING THOUGHTS

It is imperative that companies proactively seek the regular guidance and input of experienced sales tax professionals, not only to ensure that they are registered in each state in which they have nexus, but also to ensure that they are compliant with the ever-changing sales tax laws.  Companies should routinely review their sales tax nexus, sales tax decision matrices, sales tax automation mapping, certificate management, and proactively address historical compliance gaps to minimize sales tax audit exposure risk.