States introduce AI tax changes

Some state lawmakers are introducing tax legislation targeting the growing use of artificial intelligence, according to a new report, even as the Trump administration tries to set a uniform federal policy.

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New York introduced the Robot Tax Act, targeting businesses that displace workers with AI, according to the Tax Changes 2026 Midyear Update released Thursday by tax compliance software company Avalara. Also last year, Indiana and Illinois both determined that generative AI chatbot services were not subject to sales tax. Michigan has also expressed interest in taxing AI services. Kentucky recently clarified 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.

Meanwhile, the Trump administration hopes to foreclose AI legislation at the state level by implementing a broader federal policy. Last week, President Trump signed an executive order promoting AI innovation and security. The order fell short of requiring AI developers to submit their latest “frontier” models for pre-approval as feared by some, but does include a voluntary framework for doing so.

Several other states are also introducing technology-related tax legislation. 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. But having already raised approximately $90 million annually since it was enacted in 2021 against projections of $250 million, the state may face significant taxpayer refunds if the courts strike it down. Illinois also has an upcoming digital advertising tax. On the other hand, a ballot measure in Missouri could allow lawmakers to eliminate exemptions for digital goods and a range of services. At the local level, Chicago implemented the nation’s first local tax on social media advertising, effective Jan. 1, 2026.

“Businesses today are managing tax complexity on multiple fronts at once,” said Scott Peterson, vice president of government relations at Avalara, in a statement. “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.”

The report also covers other compliance changes affecting day-to-day business operations. Illinois eliminated its economic nexus transaction threshold on Jan. 1, 2026, while Kentucky will do the same on Aug. 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.

More states are eyeing 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

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 in February invalidating the Trump administration’s use of the International Emergency Economic Powers Act to levy tariffs has led to 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, general manager of cross-border at Avalara, in a statement. “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 discusses the growing international scrutiny of de minimis import thresholds. On the heels of the U.S. suspension of the $800 de minimis exemption, nations including Thailand, France and Italy, as well as the European Union, are looking for ways to reduce or eliminate low-value import exemptions, while upping customs obligations and documentation requirements for cross-border sellers.