State Tax Updates 2026 MAR: Navigating Penny Shortages and OBBBA

Hey there, tax professionals and business owners! Let’s be real for a second—keeping up with state and local taxes (SALT) feels like trying to drink from a firehose lately, doesn’t it? 😅 March 2026 has been an absolute whirlwind of legislative action, administrative guidance, and court rulings across the United States. If you’ve been feeling overwhelmed, you are definitely not alone. I’ve spent the last week digging through every single update so you don’t have to!

Whether you’re dealing with the headache of cash rounding now that the penny is out of production, trying to figure out how the federal One Big Beautiful Bill Act (OBBBA) affects your state returns, or navigating the ever-shifting sands of economic nexus, this guide is your lifeline. Grab a cup of coffee ☕, and let’s dive into the massive wave of state tax developments from March 2026!

1. The End of the Penny: Cash Rounding Rules Are Here 🪙

By now, you’ve heard the news: the federal government has officially ended the production of the penny, leading to a nationwide shortage. Honestly, I won’t miss having my wallet weighed down by copper, but for retailers, this has created a bit of a mathematical nightmare at the cash register. Several states have rapidly issued guidance on how to handle cash transaction rounding.

• Arizona: A newly enacted law requires sellers to use the “Swedish method” to round the total transaction amount to the nearest five-cent increment. Note that this rounding must take place on the total price including tax.
• Indiana: Indiana is letting retailers choose whether to round up or down to the next nickel. The Department of Revenue clarified that any 3-cent gain or 2-cent loss goes to the retailer’s income, but the underlying tax must still be fully remitted to the state.
• Wisconsin: The state emphasizes that the penny shortage does not change how sales tax is calculated. Retailers must multiply the taxable items by the tax rate first, round to the nearest cent, and then round the final cash transaction to the nearest nickel.
• Washington: The Department of Revenue noted that rounding gains are technically taxable gross income under the B&O “Service & Other Activities” classification. However, they won’t enforce B&O tax liability on these gains prospectively until final guidance is issued. Rounding losses? Just a cost of doing business, unfortunately.

2. Federal Conformity & The “OBBBA” Ripple Effect 🏛️

If you thought dealing with the federal One Big Beautiful Bill Act (OBBBA, P.L. 119-21) was tough at the federal level, just wait until you see how states are reacting. We are seeing a massive wave of rolling conformity and selective decoupling.

Also, speaking of New Mexico, the Taxation and Revenue Department issued an urgent bulletin regarding the 2025 Corporate Income Tax Return (Form CIT-1). The form didn’t properly implement 2024 law changes limiting the IRC 250 deduction. Taxpayers might need to manually adjust Line 5 or even file amended returns to properly subtract the IRC 250 deduction claimed for FDII and GILTI.

3. Corporate Income, Apportionment, & Sourcing Battles 🏢

Apportionment is always a battlefield, and this month is no exception. Let’s look at some fascinating court decisions regarding how income is sliced up and taxed across state lines.

• California Agribusiness Victory: In a huge proposed decision, a California court found that Smithfield Packaged Meats Corp. qualified as an “agricultural business” eligible for the special three-factor (property, payroll, sales) apportionment formula. The court slammed the state’s narrow “product-based approach” for defining agribusiness as invalid.
• California’s $800 Minimum Tax Reach: Using a third-party fulfillment center? Watch out. The Office of Tax Appeals ruled an out-of-state seller using a fulfillment program owed the $800 minimum tax because storing inventory in-state constituted “doing business”.
• Florida Cost of Performance (COP): A Florida circuit court allowed an electronic bill payment service provider to source its receipts 100% out-of-state based on its costs of performance. The court emphasized looking at the taxpayer’s direct activities, not the activities of the clients’ customers.
• Texas Rejects “Ultimate Destination”: The Texas Supreme Court affirmed that receipts from sales of tangible personal property must be sourced to Texas if possession is yielded in the state, rejecting the taxpayer’s “ultimate destination” argument for fuel delivered to foreign vessels.
• Idaho Settlement Proceeds: The State Tax Commission ruled that a manufacturer’s lawsuit settlement proceeds were allocable nonbusiness income, not apportionable business income, because the company didn’t initiate the suit or control the litigation.
• South Carolina Alternative Apportionment: An administrative law judge remanded a case involving forced combination back to the Department of Revenue to consider 2024 legislative standards for equitable allocation.

4. Sales, Use, and Indirect Tax Shenanigans 🛍️

Now, let’s pivot to the world of indirect taxes. We are seeing a lot of movement regarding digital services and physical presence.

There are also some bright spots! Washington announced a temporary penalty relief program for uncollected sales tax on newly taxable services (like IT training and advertising services) under ESSB 5814. Also, Indiana passed a cool new law prohibiting public agencies from imposing taxes or fees for using or accepting digital assets (like cryptocurrency or NFTs) as a payment method.

5. Audits, Amnesty, and Deadlines 📅

Let’s wrap up with some administrative housekeeping. If you have compliance issues, Indiana is expanding its upcoming 2026 tax amnesty program to cover unpaid liabilities for tax periods ending before January 1, 2024 (previously 2023). This is a golden opportunity to wipe out penalties and interest!

In Colorado, updated guidance was released on how partnerships must report federal tax adjustments following an IRS audit, detailing rules for state partnership representatives and tiered partners. In New Jersey, the U.S. Supreme Court declined to review a case challenging the constitutionality of the state’s CBT royalty expense “addback” exception, meaning the state’s retroactive regulatory fix stands.

Also, don’t miss the deadline in Michigan: April 1, 2026, is the tentative claims filing deadline for the new refundable R&D credit for expenses incurred during the 2025 calendar year. And keep an eye on Illinois, where a trade association is currently suing Chicago over its new social media amusement tax, claiming it violates the Internet Tax Freedom Act and the Commerce Clause.

Key Takeaways of the Post 📝

That was a ton of information, so let’s distill it down to the absolute essentials you need to remember:

1. Penny Rounding: Retailers must adopt specific cash rounding rules (often the “nearest nickel”) varying by state, but tax amounts owed to the state generally remain unchanged.
2. OBBBA Decoupling: States like Michigan and New Mexico are actively decoupling from federal OBBBA provisions like bonus depreciation and increased interest deductions.
3. Sourcing Wins & Losses: Florida affirmed Cost of Performance sourcing for certain service providers, while Texas insisted on “place of transfer” over “ultimate destination” for tangible property.
4. Digital Service Scrutiny: Washington is aggressively taxing digital automated services, including the reimbursement of implementation expenses.

Frequently Asked Questions ❓

Phew! That was quite the journey through the latest tax landscapes. From the quirks of navigating a penny-less economy to massive corporate apportionment battles, state taxation is never boring. If you have any more questions about how these updates might affect your business, feel free to ask in the comments~ 😊 Stay compliant out there!