US State Tax Update – Feb 2026: Texas IRC Changes and AI Sales Tax Rulings
Have you ever felt like state tax laws move faster than a tech update? To be honest, keeping track of 50 different jurisdictions feels like a full-time job in itself. Just when you think you’ve got your nexus and apportionment figured out, a state like Texas changes its entire approach to the Internal Revenue Code, or Kentucky decides your AI-powered software is now taxable. It can be super frustrating, right? But don’t worry—I’ve spent some time digging through the latest updates from January and February 2026, and I’m here to walk you through the big shifts so you don’t have to navigate them alone! 😊
The Big Shake-up: Income and Franchise Tax Updates 🏢
One of the most significant updates comes from the Texas Comptroller. They recently announced a new policy regarding federal conformity that might make your head spin a little. Starting with the 2026 report year, taxpayers are instructed to use current federal tax rules for most income and deductions. However—and this is a big “however”—if a specific Texas statute or regulation cites the IRC, you have to use the version that was in effect back in 2007. This is particularly huge for companies dealing with bonus depreciation, as there’s a one-time adjustment available for the 2026 filing.
Meanwhile, Minnesota is drawing a line in the sand regarding foreign corporations. The Department of Revenue clarified that they don’t necessarily follow the federal “Effectively Connected Income” (ECI) rules. Even if a foreign company doesn’t have a U.S. physical office, if they have constitutional nexus through sales in Minnesota, they might still owe state tax. It’s all about the difference between federal treaties and state-level jurisdiction.
In Iowa, new rules effective February 25, 2026, allow banks to elect to file combined franchise tax returns with their investment subsidiaries. This applies to tax years starting on or after January 1, 2025, and means you don’t have to add back expenses to carry those subsidiaries on the Iowa return.
In New York City, an Administrative Law Judge (ALJ) recently sided with the Department of Finance regarding the Unincorporated Business Tax (UBT). The judge rejected the “aggregate method” in favor of the “entity method.” This means a broker-dealer partnership couldn’t just mash its allocation factors together with its subsidiaries; instead, the income from each subsidiary must be allocated separately first. The judge also interestingly noted that the recent U.S. Supreme Court Loper Bright decision didn’t limit the City’s authority to issue these specific regulations.
Sales, Use, and the Digital Frontier 💻
If you’re using Artificial Intelligence, pay attention to Kentucky. The Department of Revenue has stated that AI-powered applications generally count as taxable “prewritten computer software.” Even if the AI learns and adapts based on your data, they don’t consider that “custom software.” Whether it’s a download or SaaS, if it’s prewritten, Kentucky is likely going to want a piece of the sales tax. Rhode Island is on a similar path, recently ruling that online database subscriptions for research materials are taxable as vendor-hosted prewritten software because the search and retrieval functions are essentially “software tasks.”
Over in Illinois, new rules are now in effect (as of January 8, 2026) that change how leases and rentals of tangible personal property (TPP) are taxed. If you lease TPP in the ordinary course of business, you’re now considered a “retailer” and must register to pay tax on those receipts.
Wisconsin has been busy in court. They recently won a case arguing that an online marketplace for secondary ticket sales (like concerts and sports) owed sales tax for periods between 2008 and 2013. The court ruled that the “marketplace provider law” passed in 2019 was just a clarification of existing law, not a new tax.
On a brighter note for taxpayers, North Carolina courts recently protected intercompany transfers. They ruled that moving products between affiliates isn’t a taxable “sale” if there’s no actual payment or reciprocal obligation, even if there are internal accounting entries or hypothetical markups. Also, Texas ruled that services assisting dealers with manufacturer warranty claims aren’t taxable “data processing” because the service provider isn’t actually storing or manipulating the data in their own database—they’re just proofreading and editing.
Local Taxes and the “Penny” Problem 📊
Did you hear that the federal government is ending the production of the penny? It sounds like a small change, but it has actual tax implications! Both North Carolina and South Carolina issued guidance saying that if a retailer rounds a cash transaction after tax, the tax itself should not be recalculated. You calculate the tax on the original sales price, and the rounding is just a “cash-at-the-register” convenience.
Property Tax and Local Business Fees
| State | Change / Ruling | Impact |
|---|---|---|
| Alabama | TPP Exemption Increase | Business TPP exemption raised from $40k to $100k market value. |
| Virginia | Manufacturing Status | Ice cream makers now qualify as “manufacturers,” getting better tax rates on machinery. |
| Georgia | County Tier Designations | 2026 Job Tax Credit designations delayed until April 1, 2026. |
| Washington | Interchange Fees | Excluded from B&O tax gross receipts for processors. |
In Georgia, the state supreme court declined to review a case involving the Atlanta Business Occupation Tax. This confirms that a company with multiple offices nationwide only owes the Atlanta tax based on a specific allocated percentage of its Georgia gross receipts—basically, you divide the Georgia receipts by the total number of offices contributing to them. And in Virginia, a refueling service provider won a big battle: they can situs their receipts to foreign business locations if the work was performed or controlled from there, rather than being taxed 100% at their Virginia headquarters.
Interactive: The Penny Rounding Logic 🧮
Confused about how North and South Carolina want you to handle cash rounding with the new “no penny” policy? Use this simple logic check to see how much tax you should report!
Sales Tax Rounding Checker 🔢
Key Takeaways of the Post 📝
It’s been a packed couple of months for tax professionals. Here are the most critical points to keep in mind for your 2026 filings:
- Texas Conformity: Check your depreciation schedules! The split between 2007 IRC and current IRC for Texas franchise tax is a game-changer.
- AI is Taxable: If you’re selling or using AI in Kentucky or Rhode Island, assume it’s taxable software until proven otherwise.
- Property Tax Breaks: Small businesses in Alabama should cheer for the $100k TPP exemption, and Virginia food manufacturers (like ice cream makers) should look into machinery tax rates.
- Cash Transactions: In NC/SC, “After-Tax Rounding” due to the end of the penny does not reduce your sales tax liability.
2026 State Tax Flash Report
Frequently Asked Questions ❓
Tax season always brings surprises, but staying informed is half the battle! I hope this deep dive into the January and February 2026 updates helps you feel a bit more prepared. If you have any questions about these specific state rulings or want to share how your business is handling the Texas IRC changes, feel free to drop a comment below! Let’s help each other out~ 😊
