Key Takeaways
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AI is reshaping state and local tax rules, affecting nexus, incentives, and audit enforcement.
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States are expanding taxes on digital and emerging technologies to capture new revenue.
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Traditional local taxes remain critical funding sources, backed by voter support.
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Income tax cuts continue as states quietly broaden tax bases elsewhere.
Welcome to this edition of our roundup of state tax developments. The State Tax News and Views is published weekly. Consider the Eide Bailly State & Local Tax team for your state tax planning, compliance and incentive needs.
Artificial intelligence is no longer just a business tool—it’s quickly becoming a tax policy issue. As companies integrate AI into everyday operations, states are being forced to decide how existing tax frameworks apply to fast‑moving technology. At the same time, lawmakers and revenue agencies are turning to AI as both a target for new taxes and a tool for enforcement, testing long‑standing SALT concepts like nexus, taxability, and fairness.
Together, the developments below show how states are adapting—sometimes creatively, sometimes aggressively—as they try to modernize tax systems without destabilizing reliable revenue sources.
Artificial Intelligence and SALT: Incentives, Nexus, and Audit Risk
AI isn’t just changing how businesses operate; it’s reshaping how states compete for investment, assert nexus, and conduct audits. On the incentives side, states are actively courting AI and technology companies with targeted credits and development deals, treating AI as the next wave of high‑growth economic activity. New York’s decision to offer up to $10 million in tax incentives to an AI‑driven business expansion is a clear example of how innovation strategies are translating into concrete tax policy.
NEW YORK
AI Company Set to Receive $10M in New York Tax Incentives - Emily Hollingsworth, Tax Notes ($):
See related: SALT Credits & Incentives: The Playbook - Part I
At the same time, questions are emerging around whether AI‑driven activity itself can create taxable presence. As autonomous systems and algorithm‑based decision‑making become more common, practitioners are increasingly asking whether traditional nexus concepts—built around people, property, and physical activity—are sufficient when value is created through code.
Algorithmic Entities and the Code: When AI Creates Taxable Presence - Mohsen Ghazi, Tax Notes ($):
States are also deploying AI internally. Revenue agencies are using machine‑learning tools to select audit targets and identify compliance risks, raising concerns about transparency, consistency, and bias. While these tools promise efficiency, they also add another layer of uncertainty for taxpayers trying to understand how and why they’re being flagged.
CALIFORNIA
Unwatched: How State Audit Selection Systems Bypass Oversight - Paul Jones and Emily Hollingsworth, Tax Notes ($):
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But experts say AI employed in automated systems used by state tax agencies to help with audit selection can present risks, including bias, if not carefully monitored and reviewed.
Digital Economy Revenue Grab: New Taxes on Emerging Tech and Markets
As traditional tax bases struggle to keep pace with economic change, states are increasingly turning to the digital economy for new revenue. Legislatures are experimenting with excise taxes and expanded definitions that pull emerging activities into the tax base.
Kentucky’s newly enacted excise tax on prediction markets illustrates this trend. By treating online prediction platforms more like gambling operations, lawmakers were able to impose a transaction‑based tax without waiting for broader federal guidance. Similar approaches are appearing nationwide, as states look for ways to capture revenue from platforms that don’t fit neatly into existing categories.
KENTUCKY
Kentucky Lawmakers Enact Excise Tax on Prediction Markets - Matthew Pertz, Tax Notes ($):
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The bill institutes an excise tax on prediction markets like Kalshi and Polymarket. These platforms, which lawmakers say operate like sports gambling platforms, will face a 14.25 percent excise tax on their transaction fees.
These efforts often move faster than the underlying legal framework, increasing the likelihood of litigation and patchwork compliance obligations. Taxpayers operating across state lines may find that the same digital activity is treated very differently depending on how a state chooses to label it.
Local Revenue Still Has Its Defenders
While much of the SALT conversation focuses on new taxes and digital innovation, some jurisdictions are reaffirming their commitment to long‑standing, traditional revenue sources.
Kansas City and St. Louis are among the few U.S. cities that impose a local earnings tax, which requires periodic voter approval to remain in effect. In Kansas City, the 1% earnings tax has been in place since the 1960s and applies not only to city residents, but also to nonresidents who live elsewhere and earn wages by working within city limits, as well as to certain business net profits. Similarly, St. Louis has long relied on its own 1% earnings tax, which is imposed on individuals who live or work in the city, regardless of where their employer is located. Under Missouri law, voters in both cities must regularly decide whether to continue these taxes—and once again, voters in both jurisdictions overwhelmingly chose to renew them.
MISSOURI
Kansas City and St. Louis Voters Renew Earnings Tax - Matthew Pertz, Tax Notes ($):
Despite frequent criticism, the earnings tax remains a cornerstone of local finance. It accounts for roughly 19% of Kansas City’s total revenue and more than 35% of St. Louis’s, making it one of the largest and most dependable funding sources for both cities. Voters’ continued approval signals a clear preference for revenue stability over experimentation—particularly when the alternative is deeper service cuts or fiscal uncertainty.
Broader State Tax Policy Shifts: Rate Cuts, Phaseouts, and Structural Changes
Not all state tax changes are about expanding the base. Some states are moving in the opposite direction—cutting income‑tax rates, accelerating phaseouts, or simplifying filing obligations to remain competitive.
Recent developments in Georgia, Missouri, and West Virginia reflect this dual reality. Lawmakers are balancing pressure to reduce tax burdens with the need to replace lost revenue—often by reconsidering which services, digital products, or transactions should be taxed instead. For taxpayers, these shifts can materially affect effective tax rates, planning assumptions, and compliance strategies mid‑year.
GEORGIA
Georgia Closes Session With Income Tax Cut, Homestead Option Sales Tax - Matthew Pertz, Tax Notes ($):
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Lawmakers also rushed to pass a substitute for H.B. 463, which will retroactively lower the income tax rate to 4.99 percent as of January 1, 2026, and reduce it by 0.5 percentage points in each of the next two years. It also raises the standard deduction from $24,000 to $32,000 for married filers and from $12,000 to $16,000 for all other filers.
MISSOURI
Missouri Senate Removes Triggers From Income Tax Phaseout - Matthew Pertz, Tax Notes ($):
The resolution would also give the legislature five years to expand the list of goods and services that are subject to sales and use tax, such that any expansion roughly generates the same amount of revenue as was lost from the reduction of the income tax.
WEST VIRGINIA
New West Virginia Laws Include Tax, Filing Breaks for Businesses - Kennedy Wahrmund, Tax Notes ($):
SEASONED WITH SALT
Tax Tips, Tricks and Opportunities
Is Your State Taxing Your AI Subscription? - Jennifer Barajas, Eide Bailly:
With companies relying heavily on AI tools and automation platforms, and software subscriptions, a key sales tax question is getting renewed attention: Are those items taxable? The term "AI" can make the answer seem unclear, but in most cases the analysis looks at the existing sales tax rules and how the product is delivered and licensed. Most states have not created a separate category for AI services and instead apply existing rules for SaaS, prewritten software, digital products, or taxable services. As such, the same AI platform may be taxable in one state and exempt in another.
One recent Indiana ruling has called attention to the problem. The state found that a subscription to a generative AI chatbot was not taxable where users remotely accessed a hosted platform, received no software or code, and received no permanent ownership rights. Based on the facts, the state treated the generative AI subscription as a service rather than taxable prewritten software or taxable digital product. Other states come to a different conclusion. Texas and Washington, for instance, tax SaaS on a broad basis, with Texas allowing a partial exemption, depending on how it is characterized under state law.
Taxability depends on how an AI platform is delivered and what rights the customer receives. Accessing an AI tool via the web can be treated differently from a product that includes software downloads, application programming interface (API) access, or some other transferred function. The point is simple: organizations using AI should review the sales tax treatment of those purchases state by state, focusing on delivery method, customer rights, and whether any software or digital property is transferred. A focused taxability review may find unexpected exposure and potential overpayments.
