Welcome to the inaugural edition of our Multistate and Transaction Tax Highlights newsletter. This publication brings together members of our US State and Local Tax (SALT) team and Alvarez & Marsal’s Canadian Indirect tax practice to highlight important state, local, and Canadian federal and provincial indirect tax developments in a practical, easy-to-follow format. Our goal is to help business leaders, finance teams, and other nontax readers understand what has changed, why it matters, and what actions may be worth considering.

I. US SALT

State and local taxes are becoming increasingly important for businesses of all sizes. Following the federal tax changes enacted in Public Law 119-21, commonly referred to as the One Big Beautiful Bill Act (OBBBA), states have been deciding whether to follow those federal changes, modify them, or reject those changes for state tax purposes. At the same time, many states are looking for new revenue sources by expanding sales and use tax rules, offering tax amnesty programs, and increasing taxes on certain high-income individuals.

Below, we summarize key Multistate and Transaction Tax developments across corporate taxes, pass-through businesses, individual income taxes, sales and use taxes, and Canadian indirect taxes. We focus on practical takeaways: what changed, why it matters, and what businesses should monitor next.

A. General Conformity Developments

The first half of 2026 saw significant state tax legislative activity. Because many state tax systems begin with federal taxable income, federal changes can directly affect how income is calculated at the state level. However, each state decides for itself whether to follow those changes, and many states were not back in legislative session until spring or summer 2026.

Put simply, states do not all use the same starting point. Some states automatically follow federal tax law as it changes, while others follow the federal tax rules as of a specific date. A third group adopts only selected federal provisions. This patchwork of rules means that a business may have one result for federal tax purposes and different results across several states.

Several areas are receiving particular attention, including depreciation and immediate expensing rules, limits on business interest deductions, international income rules, and the treatment of research and experimentation costs. For many companies, the research expense changes may be especially important because they can affect cash taxes, state filing positions, and financial statement reporting.

For individuals, several states have chosen not to follow new federal rules related to tips and overtime pay. Broader federal changes, such as those affecting tax brackets or standard deductions, may have little or no state impact depending on how each state calculates taxable income.

B. Subchapter C Corporations

As of June 30, 2026, several major jurisdictions, including Connecticut, the District of Columbia, Florida, Massachusetts, New Jersey, New York, New York City, and Texas, had adopted changes affecting how corporations calculate taxable income. Many of these changes focus on research expenses, business interest deductions, depreciation, and expensing rules.

Some states applied changes retroactively, which can create practical challenges for companies that already filed returns or made estimated payments under prior rules. Other states are phasing in changes over several years to reduce the budget impact. In addition, some states have had to update their statutory language to reflect federal terminology changes for international income.

State tax authorities also continue to challenge how companies divide income among states, whether certain income is business or nonbusiness income, and whether federal protections under Public Law 86-272 apply. Some states have also limited the use of tax attributes, such as business credits or net operating losses, potentially affecting future tax planning.

For more details on the significant changes impacting C corporations, please refer to the US SALT pieces of our firm’s ASC 740 quarterly newsletters: Q1 can be accessed here, and Q2 here.  

In the coming months, we will continue to monitor how states respond to OBBBA conformity for corporations. Areas to watch include Illinois’ updates to its 80/20 regulation, whether Washington moves forward with a margin-type tax similar to Texas, and whether California revisits proposals that could expand worldwide reporting for certain businesses.

The main takeaway is that corporate state tax compliance remains highly dynamic. Companies should continue tracking state-specific changes, document their filing positions, and prepare for increased audit activity.

C. Pass-through Entities

Pass-through businesses, such as partnerships, limited liability companies, and S corporations, remain a major focus for state tax planning. In addition to the general state conformity issues discussed above, elective pass-through entity taxes, often called PTETs, remain important because the federal SALT deduction cap was increased but not eliminated.

• California extended its PTET regime through 2030 and made the election easier to manage. Beginning in 2026, taxpayers are no longer required to make the June 15 prepayment to qualify for the election.  However, if the prepayment is not made, the owners’ PTET credit is reduced by 12.5%. See Senate Bill 132.
• Illinois made its PTET election permanent by eliminating the scheduled 2025 sunset. This gives pass-through businesses and their owners more certainty for future planning. See Senate Bill 1911.
• Indiana revised its composite return rules to better align with its PTET regime. The change eliminates a penalty that previously applied when a pass-through entity excluded certain nonresident owners with no Indiana-source income in a composite return. See Senate Bill 259.
• Maryland refined its pass-through entity tax rules effective for tax year 2026. If an entity elects to pay tax on behalf of all owners, resident owners are generally taxed on total income, while nonresident owners are taxed only on Maryland-apportioned income. Additional technical guidance may be needed for S corporations and ownership structures that present allocation issues. See Senate Bill 284.
• Massachusetts created a new elective pass-through entity tax beginning in tax year 2026 to address the state’s four percent surtax on high-income earners. The election gives pass-through entity owners another mechanism for managing the surtax at the entity level. See H.B. 5470, enacting a new Mass. Gen. Law Chapter 63E.
• Minnesota retroactively extended its PTET election through tax year 2027 and expanded composite filing eligibility for certain nonresident partners. See H.F. 2348.
• Virginia enacted H.B. 29, making its PTET permanent by eliminating the prior sunset provision.

D. Individual/Personal Taxes

Individual income tax policies are moving in different directions across the country. Some states are reducing rates or simplifying tax brackets, while others are increasing taxes on high-income or high-net-worth individuals. For executives, business owners, and mobile individuals, this makes residency, domicile, and state filing positions increasingly important.

Rate Reductions

In 2026, several states continued reducing individual income tax burdens through rate cuts, bracket simplification, expanded credits, or movement toward flat-tax systems. Some of these reductions were enacted in prior years and are now taking effect through scheduled phase-ins or revenue-based triggers.

Key examples include:

• Kentucky – Reduced its flat individual income tax rate from  to 3.5%, effective January 1, 2026. See H.B. 1 (2025).
• Mississippi – Continued its scheduled flat-rate phase-down, reducing the individual income tax rate to 3.75% for 2026, 3.5% for 2028, 3.25% for 2029, and 3% for 2030 and all subsequent years. See H.B. 1 (2025).
• North Carolina – Reduced its flat individual income tax rate from 4.25% to 3.99% for tax year 2026. See Session Law 2023-134.
• Ohio – Consolidated its individual income tax structure into a single 2.75% rate for income above the exemption threshold as of January 1, 2026. See H.B. 96 (2025).  

Wealth Taxes

At the same time, other states are moving in the opposite direction by targeting higher-income or higher-net-worth individuals. These proposals and enacted changes often focus on millionaire surtaxes, capital gains taxes, luxury real estate surcharges, or wealth-based taxes. They are generally narrower than broad income tax increases and are often intended to fund public priorities such as healthcare, education, housing, or childcare.

• California - One of the most closely watched proposals is the California Billionaire Tax Act, also known as Proposition 40, which qualified for the November 2026 ballot. If approved, it would impose a one-time five percent tax on the net worth of California residents and certain trusts with wealth of $1 billion or more. The proposal has attracted national attention and is expected to raise significant legal and policy questions, including issues involving residency, asset valuation, retroactivity, and constitutional limits on state taxation.
• Colorado - Voters are expected to consider whether to replace the state’s current flat 4.4% individual income tax rate with a graduated-rate structure featuring multiple brackets and a top rate of 8.4% beginning in 2027.  If approved, it would represent a significant policy shift for a state that has historically relied on a flat individual income tax rate.
• Rhode Island - Enacted a new millionaire tax as part of its FY 2027 budget legislation (H. 7127). The measure phases in an additional tax on taxable income exceeding $1 million, increasing the rate on income above that threshold from 5.99% to 6.99% beginning January 1, 2027, with additional one-percentage-point increases in the next two years until the top rate reaches 8.99% in tax year 2029.

Washington, Hawaii, and Maine

Other states are also increasing taxes for top earners. Washington added a higher rate tier for long-term capital gains (see Chapter 82:87) and enacted a separate tax on household income above $1 million (S.B. 6346), scheduled to take effect in 2028. Hawaii increased its top individual income tax rate effective in 2027 via Act 24, and Maine adopted a surcharge on income above $1 million (see L.D. 2212). These developments highlight the split in state policy: some states are lowering broad-based rates, while others are raising targeted revenue from high-income taxpayers.

New York Matters

2027 Fiscal Year Budget

On May 28, 2026, Governor Kathy Hochul signed New York’s 2027 state budget act into law. The budget included a mix of family-focused relief and taxpayer-friendly changes, including an expanded refundable Child and Dependent Care Credit and a one-time refundable energy rebate for eligible residents.

The legislation also aligned New York with certain recent federal tax changes. Beginning in 2026, eligible taxpayers may exclude up to $25,000 of qualifying tip income. New York also addressed a technical issue for certain international investors by excluding specified foreign corporate distributions from New York income to help avoid potential double taxation.

New York also enacted a surcharge on certain luxury second homes in New York City, effective July 1, 2026. The surcharge generally applies to high-value condominiums, cooperative apartments, and one- to three-family homes that are not used as the owner’s primary residence. This measure reflects a broader trend of states and localities seeking additional revenue from high-value residential real estate.

E. Sales and Use

Most US states impose a state-level sales or use tax, and many local jurisdictions impose additional sales taxes. As lawmakers seek new revenue, sales and use taxes are often a focus because states can raise revenue by expanding what is taxable or changing when out-of-state sellers must register and collect tax.

Although the US Supreme Court’s Wayfair decision is now several years old, sales and use tax compliance remains complex. Businesses of many sizes and across many industries continue to face exposure, especially when selling digital products, software, services, or goods into multiple states.

What Is New

States continue to expand sales tax to digital products, software, cloud-based services, and technology-related services.

• Kentucky – H.B. 757 expanded sales tax to data brokering services effective August 1, 2026.
• Nebraska – L.B. 901 repealed the state’s data center exemption effective July 1, 2026.
• Utah – S.B. 162 expanded the taxation of digital video and audio content, including subscription-based streaming services. It clarifies that taxable access does not require file transfer, and confirms that seller-hosted prewritten software, including SaaS, and other electronically accessed software, is taxable. Effective July 1, 2026.

Economic Nexus Threshold Changes

States are also moving away from transaction-count thresholds and toward revenue-only standards for economic nexus. This shift can simplify compliance, but may also change when a remote seller is required to register and collect tax.

• Illinois – Effective January 1, 2026, Illinois repealed its 200-transaction threshold. Economic nexus is now based solely on $100,000 of gross receipts from Illinois sales. See H.B. 2755 (2025).
• Kentucky – Effective August 1, 2026, Kentucky repealed its 200-transaction threshold. Economic nexus will be based solely on $100,000 of gross sales into Kentucky. See H.B. 757.

What Is on the Horizon

• California – S.B. 122 expanded the sales tax base by redefining tangible personal property to include prewritten (canned) computer software regardless of the method of delivery.  As a result, electronically delivered and remotely accessed software, including SaaS, will become taxable. Effective January 1, 2027.
• Colorado – H.B. 26-1223 expanded the sales tax base to include remotely accessed prewritten software, including SaaS, and other hosted software by repealing the exemption for most downloaded and hosted software. Certain custom software and software governed by certain negotiable license agreements remain exempt. Effective January 1, 2027.

II. Canadian Indirect Taxes

Canada’s indirect tax landscape is also changing. Provincial sales tax bases are expanding to cover services and digital offerings that were previously outside the tax base. At the same time, the Canada Revenue Agency has received enhanced audit and enforcement powers, which may lead to more enforcement activity. Businesses should monitor these developments, review contracts and invoicing systems, and ensure that filing positions are well supported and up to date.

This section focuses on selected Canadian indirect tax developments and is not intended to cover other Canadian tax areas, including income tax, payroll tax, property tax, or customs and trade matters.

British Columbia PST — Expansion to Professional Services

• Effective October 1, 2026, British Columbia will apply seven percent Provincial Sales Tax to certain professional services, including accounting, architectural, engineering, geoscience, security, and non-residential real estate services. This is a significant expansion of the PST base. Businesses that provide or purchase these services for use in British Columbia should review their obligations, contracts, invoicing, systems, and vendor arrangements before the effective date.[1]

Manitoba RST — Expansion to Cloud Computing and Software Services

• Effective January 1, 2026, Manitoba began applying its seven percent Retail Sales Tax to cloud computing and software-related services, including Software-as-a-Service (SaaS). Businesses that provide or purchase these services for use in Manitoba should assess whether new collection, self-assessment, or remittance obligations apply.[2]

CRA Voluntary Disclosure Program — Updated Guidelines

• The CRA updated its Voluntary Disclosure Program effective October 1, 2025. The previous “general” and “limited” categories were replaced with “unprompted” and “prompted” streams. The updated program may provide more opportunities for businesses to correct prior-period issues, reduce penalties, and manage interest exposure, depending on the facts.[3]

GST/HST Reverse Charge — Proposed Application to Certain Telecom Services

• The federal government has proposed requiring certain recipients of telecommunication services to self-assess and remit GST/HST directly instead of having the supplier collect it. The proposal appears aimed at cross-border telecom arrangements involving foreign suppliers. The effective date has not yet been finalized, so businesses should continue monitoring developments.[4]

Digital Services Tax — Rescission

• Canada’s Digital Services Tax has been rescinded retroactively to June 20, 2024. Businesses that previously remitted DST should follow CRA guidance and monitor whether refunds and related interest are properly administered.[5]

GST/HST on Mutual Fund Trailing Commissions — Change in CRA Position

• The CRA has changed its position on mutual fund trailing commissions. Beginning January 1, 2028, these fees will be treated as taxable supplies for GST/HST purposes. Fund managers, dealers, and financial services businesses should begin assessing the impact on systems, agreements, and pricing.[6]

A&M Tax Says

The first half of 2026 underscores the continued pace and unevenness of state, local, and Canadian indirect tax changes. Businesses should evaluate how these developments may affect compliance obligations, cash taxes, financial reporting, residency and filing positions, contracts, systems, and transaction planning. Proactive review of state conformity positions, PTET elections, sales and use tax obligations, digital taxability, individual tax exposure, and Canadian indirect tax processes can help reduce surprises and support more defensible positions.

A&M’s State and Local Tax and Canadian Tax professionals will continue to monitor these developments and assist businesses in evaluating the practical impact on their operations. Should you have any questions about any of the items outlined above, or any related matters, please reach out to Emilio Martinez, Leanne Scott, or a member of your A&M team, and who can direct your inquiry to the appropriate A&M professionals.

[1] “Bill 2 – 2026: Budget Measures Implementation Act, 2026,” Government of British Columbia. “Notice 2026-001: Notice to Providers of Professional Services,” Government of British Columbia.

[2] “The Budget Implementation and Tax Statutes Amendment Act, 2025”, Government of Manitoba. “Information Bulletin RST 033: Computer Software and Online Services,” Government of Manitoba.

[3] "Changes to the Voluntary Disclosures Program,” Canada Revenue Agency.

[4] “Government launches consultation on draft legislation for various tax measures,” Department of Finance Canada; “Explanatory Notes Relating to the Goods and Services Tax/Harmonized Sales Tax, Excise Levies and Other Taxes and Charges,” Department of Finance Canada.

[5] “Digital Services Tax Act,” Department of Justice Canada.

[6] “GST/HST Notice 344: Application of the GST/HST to Mutual Fund Trailing Commissions,” Canada Revenue Agency.

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