State Tax Policy Trends to Watch in 2026

Jaye Calhoun of Kean Miller discusses key tax issues that states will likely address in 2026, including One Big Beautiful Bill Act provisions and the adoption of artificial intelligence tools. 

For related tax news, read the following in Tax Notes:

• Iowa DOR Issues Withholding Guidance on OBBBA Tax Deductions
• U.S. Chamber Backs Florida Bid to Challenge California Apportionment Rule
• States to Face Budget, Tax Policy Questions in 2026 Conformity Debate

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Credits
Host: David D. Stewart
Executive Producers: Jeanne Rauch-Zender, Paige Jones
Producers: Jordan Parrish, Peyton Rhodes
Audio Engineers: Jordan Parrish, Peyton Rhodes

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This episode is sponsored by Crux. For more information, visit cruxclimate.com/contact.

This episode is sponsored by Avalara. For more information, visit avalara.com.

This episode is sponsored by the University of California Irvine School of Law Graduate Tax Program. For more information, visit law.uci.edu/gradtax.

Nominate someone for the Tax Analysts Award of Distinction in U.S. Federal Taxation! For more information, visit awards.taxanalysts.org.

Transcript

This transcript has been edited for clarity.

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: state status update, 2026.

2025 was a pivotal year for tax policy and administration. This week, we're taking a look at what's expected for state tax policy here in the U.S. for the year ahead. There are a number of issues to keep an eye on, and here to help us sort through all of them is Tax Notes senior reporter Paul Jones.

Paul, welcome back to the podcast.

Paul Jones: Thanks. It's great to be here as always.

David D. Stewart: Now, I understand you spoke with someone about what's coming. Who did you talk to?

Paul Jones: Yes. I spoke with Jaye Calhoun with Kean Miller LLP, and she's also a regent with the American College of Tax Counsel and practices in Louisiana and Texas.

David D. Stewart: And Jaye is also the winner of the inaugural Tax Analysts Award of Distinction for Contributions in U.S. State and Local Taxation. So what sort of things did you talk about?

Paul Jones: Well, we spoke about a number of tax policy trends that we think are likely to get a fair amount of attention in 2026.

David D. Stewart: All right. Let's go to that interview.

Paul Jones: Hi, Jaye. Well, firstly, Happy New Year.

Jaye Calhoun: Happy New Year, Paul.

Paul Jones: And thanks for talking with us and sharing your insights with our listeners as we look at some of the state tax policy trends that are likely to see new or renewed attention in the coming year. I think one of the best places to start with would be the conformity debates that states are going to have, because that's going to be one of the major topics of discussion in 2026.

Basically, as we all know, the OBBBA, the One Big Beautiful Bill Act, made a number of changes that will impact states differently depending on when and how they update their conformity, which provisions they decide to couple to or decouple from.

And I think one of the main issues you and I had previously discussed is how this is going to impact the revenue situation for states. You've got a few states that may bring in the higher standard deduction. We've got the new deductions for tips, for overtime, and for seniors. We've got the expensing provisions like the full bonus depreciation, that's been restored, the immediate R&D [research and development] expensing, et cetera, and then, of course, also some cuts to federal support for states' Medicaid programs and SNAP [Supplemental Nutrition Assistance Program] benefits. And I think I gleaned from our previous conversation that you think a lot of state leaders are going to have to approach this from the standpoint of how this is going to impact their budgets.

So do you have any thoughts as to what we might see with regard to whether states will lean more towards decoupling from some of, for example, the business tax provisions, which some already have, or if they might decide to maintain or even proactively couple to those, and if maybe we're going to see a different treatment by states for some of the individual deductions, like, for example, the one for tips seems to have some political pull? I've seen at least a couple states that decoupled from some of the business provisions say, "Well, but we're going to couple to the deduction for tips."

Jaye Calhoun: I think you're exactly right that this is going to be an important state tax policy conversation heading into 2026, and the question is going to be conformity.

OBBBA, it doesn't really land evenly across the states. So whether a state conforms on a rolling or static basis and whether it selectively decouples is really going to be driven by the very different revenue outcomes that are going to impact the state as a result of this legislation. And many of the provisions you mentioned, the full bonus depreciation, the immediate R&D expensing, some of the expanded individual deductions, they're real revenue reducers at the state level. So I do think we're likely to see more selective decoupling, particularly from the changes that reduce taxes on business, and especially in states that are already feeling budget pressure, and that's quite a few of them.

When you layer in reduced federal support for these programs, Medicaid, SNAP, the fiscal stress becomes even more acute. So for some states, decoupling could be the most politically feasible way to preserve revenue without raising rates. So it doesn't actually sound like they're raising taxes. Right? They're just decoupling from federal provisions.

But that being said, I don't think it's one-size-fits-all. Some states, particularly those that have a strong push for economic development, they're concerned about competitiveness. They may decide to maintain conformity, or they could even proactively couple to certain provisions, like bonus depreciation or R&D expensing, even if it's going to force them to take a short-term revenue hit, because they could see these provisions as a way to attract investment or signal that they're aligned with federal policy. So I would suspect that that's going to be real tension in some red states.

But as always with states, budget conditions are just going to be such a huge driver. The states that have strong reserves or have surplus positions, they may have more flexibility to couple, or at least temporarily, and then other states that are facing structural deficits are going to be much more cautious. Those states may lean heavily into decoupling, or they may delay conformity.

So I think we're going to see more targeted approaches, so more partial decoupling, timing adjustments. I don't think we're going to see wholesale conformity or rejections. They're going to be very state specific, but I definitely expect conformity debates to be front and center in 2026. And I think what's really interesting here is that they're going to reflect not just tax policy choices, but those broader fiscal and political priorities within each state.

So states that have conformed essentially policywise to the federal government's austerity push, they're not going to have as much revenue coming in as a result of some of these provisions, and they may decide that's just fine. Maybe taxpayers like paying less in tax, but they're also going to have to struggle with the fact that some of the programs they've been funding aren't really going to be funded as they were before. They've got the loss of the federal revenues. So they're really going to have to make some tough decisions. And, of course, those states that have more money in the bank, they're going to have more flexibility here.

Paul Jones: Right. And I think that part of this we should also mention is that there is at least one provision that potentially actually gives states the ability to increase revenue, at least from this source, and that's the change of GILTI [global intangible low-taxed income] to, I think it's now being pronounced NCTI, net CFC [controlled foreign corporation] tested income.

And obviously, there was criticism by some of states' taxation of GILTI after the Tax Cuts and Jobs Act, because states don't offer a foreign tax credit or necessarily have a very clean means of apportioning that income. And NCTI actually leans even further into the foreign tax credit issue because it relies on it more heavily at the federal level, and, of course, states do not provide that. But the benefit, potentially, of a state conforming to NCTI is that it would bolster their revenue from that source.

And do you think that that's going to encourage maybe states that currently don't tax GILTI to look at taxing NCTI or at least serve as an incentive for states that currently do tax GILTI to say, "Well, we're going to keep taxing that income under the new rules"?

Jaye Calhoun: Right. Yeah. So NCTI really sharpens that tension that really has been there all along with GILTI, and the criticisms that people had of GILTI are really exacerbated to some extent with the NCTI provisions, because, as you said, states don't generally offer foreign tax credits, and they still kind of struggle with how to apportion income that's really tied to foreign activity. You also have the trend we're going to talk about in a little bit with states being more comfortable with exporting the tax burden. And certainly, the idea is taxing foreign income. What connection does that income have with the state?

But with NCTI leaning even more heavily on the foreign tax credit at the federal level, that disconnect really becomes harder to ignore from a state tax policy perspective. But at the same time, I think there's no question that taxing NCTI can be attractive from a revenue standpoint. That's what you were mentioning.

So I do think we're likely to see more states that already tax GILTI just continue to tax NCTI, certainly in the near term. And for those states, maintaining conformity avoids reopening those complex policy discussions and help shore up revenues, certainly at a time of budget uncertainty in light of all these changes.

But I guess where I'm more skeptical is whether this leads to a significant expansion of states newly taxing NCTI that didn't before, because states that previously chose not to tax it, sometimes they did it for good reasons: fairness, constitutional concerns, certainly administrative concerns. The increased reliance on foreign tax credits really makes those concerns more significant.

So what I do expect to see is more refinement rather than reversal. So states may keep taxing NCTI, but they might look at, for example, mitigation tools, like higher deductions or exclusion percentages, or maybe they could make their sourcing and apportionment rules clearer. And some of those adjustments could help address some of the policy concerns but still preserve the revenue. So I would think it's going to be a more subtle trend.

So in the short term, I guess revenue pressure is likely going to keep NCTI in the tax base for many states, but I guess we hope that longer term, NCTI forces a more serious reexamination of whether state-level tax of foreign earnings really can be squared with sound tax policy and constitutional limits, because there are some real concerns there a lot of the practitioner community have, a lot of the taxpayers have, and certainly that are going to come up in litigation.

Paul Jones: Well, let's shift topics here, because I think another thing that we're going to see is that, again, in keeping with this theme that states are going to be working to ensure that they've shored up enough revenue, there has been an increase in interest by states over the last few years in taxing digital goods and digital products.

I think everybody is familiar with the litigation over Maryland's digital advertising tax. But obviously, last year, Washington also expanded its existing gross receipts tax, its business and occupation tax onto digital advertising as well. And there has more generally been an interest by states in trying to figure out how they can apply taxes, including sales taxes and excise taxes, onto the digital economy, sale of digital goods and even services in some states. Of course, the MTC [Multistate Tax Commission] also has a project that it's continuing to work on, I think they have a meeting coming up, and this is to develop guidance for how states might go about taxing digital products.

What kind of developments do you think we're going to see both legally with some of the legal challenges that we already have? Washington's digital advertising tax has been challenged as well, I think, by Comcast, and then, also potentially legislatively, policies that states may look to adopt. And, of course, if you have any insight, the MTC project as well.

Jaye Calhoun: Yeah. Those are some great questions. The taxpayers and tax departments have been struggling with taxation of the digital economy for many, many years, and the technology just keeps changing. Right?

So they've all kind of struggled to keep up. Taxpayers need to know what to collect tax on, what to pay tax on. Auditors ought to know what they are supposed to review, what information they're supposed to have to do it. So states have really come at this very piecemeal, but the pressure, this revenue pressure that's on right now, it's really the common thread tying all of these developments we've been talking about together.

So I guess on the legislative side, I expect that there will be continued experimentation by states in taxing digital goods and services, particularly where they perceive the traditional tax bases to be eroding. So when the landscape was just taxing tangible personal property and some services, and most goods that were purchased were tangible personal property, it's really a different world. And now, so much of that happens online, and states are perceiving their tax bases to be eroding as a result.

In Louisiana, where I practice — in addition to Texas, Texas has done this as well — but Louisiana just passed legislation to tax digital products, and everybody is kind of trying to determine whether they've essentially, by law, created a new class of items to be taxed. We have TPP. We have services, and we have these digital products now. What is that? So our clients want to know. They need to know.

But we've already seen sales tax expansion to digital products in many states, and I think more states are going to be looking at extending their existing frameworks rather than creating entirely new taxes, trying to tax or clarify that digital equivalents of taxable tangible goods or services are within the base, or maybe they're going to adjust their sourcing rules for digital transactions. So that's probably going to continue to happen.

But you mentioned Maryland. Digital advertising taxes are really different because Maryland and Washington, they have very distinct approaches. Right? One's a gross receipts tax, the other is an excise-style levy. I don't expect the states to jump on board immediately. Not a lot of copycat statutes right away, but largely because they're all watching the litigation that is resulting from these kind of front-runner states testing the water. So states that are facing acute budget pressures, those remodels are certainly very tempting, especially because they're perceived as targeting large, out-of-state businesses. Right? So the operative words being large and out of state.

But on the legal front, I think we're going to see increasing focus on constitutional constraints. It has to be, particularly the commerce clause, the First Amendment. And interestingly, the Internet Tax Freedom Act has gotten a lot of traction lately because of federal preemption issues. The outcome of the Maryland litigation is going to be pivotal, not just for digital advertising taxes, but for how far states can go in carving out these industry- or activity-specific digital taxes.

The Multistate Tax Commission is, they're reviewing the concerns. They're this working group. And ideally, the theory is they're working towards greater uniformity, administrability, and to provide clear definitions and guidance, sourcing guidance for digital products, certainly certain services. And as they proceed, it may give states more confidence to act and make them feel like it's less likely to be a compliance burden or there's less risk of litigation.

The concerns that a lot of the practitioner community has had really relate to the interplay of the Internet Tax Freedom Act. Basically, it's federal legislation. The Multistate Tax Commission's project has not necessarily seemed to take that into account. It's almost like, "Well, we're not going to worry about that right now. We're just going to come up with these rules and concepts," which I don't know. It's interesting. We'll see how that plays out.

But overall, I think the next phase isn't just about whether states can tax digital activity, but how they do it, whether they can design these taxes in a way that's defensible, that they can administer, that they can sustain over the long run, even as the technology changes, especially in the environment we have today where many states have significant revenue needs. Everybody is watching, and the technology landscape continues to evolve. So very interesting to see how that's going to play out.

Paul Jones: Yeah. It's definitely a moving target. So shifting from taxation of digital products and services, let's take a quick look at online sales and remote sales tax, our old friends.

It's been about eight years since the Wayfair decision. And after that, states quickly adopted some version of South Dakota's threshold, some combination of the value of sales into the state and the number of transactions. But recently, there's been a shift where a lot of states are getting rid of the transaction threshold, and we've seen a shift where states are basically just focusing exclusively on an economic threshold and using that to establish sales tax nexus.

Do you think that trend is going to continue basically until all states have adopted that approach, just saying, "We don't care how many distinct or discrete sales you have. We're just looking really at a pure economic nexus threshold where it's the amount of money that you've made from sales in state"?

Jaye Calhoun: Yeah. I think that's exactly right. I think we probably will continue to see more states move toward dollar-only thresholds, and I think that's driven by a combination of administrative convenience and enforcement, but the pressures to do it aren't really evenly felt on both sides.

From the state perspective, dollar thresholds are just easier to administer. They're easier to defend. They're more straightforward to monitor. They're easier to audit. They reduce these complicated disputes that we've had for a long time over transaction counts, and using only a sales-based threshold seems to align more closely with how states think about market participation, revenue impact.

From the seller's perspective, there's definitely an argument that dollar-only thresholds are simpler to track, especially for businesses with high-volume and low-dollar transactions, a high volume of those. Tracking transaction counts across multiple states, which have slightly different rules, can be costly. They can make mistakes.

So in that sense, dollar thresholds can improve compliance clarity, but I don't think the shift is purely about easing compliance. I think it also tends to pull more sellers into the tax base, particularly those with fewer transactions, but higher-dollar values, which makes them attractive to states from a nexus establishment standpoint. Right?

Paul Jones: Right. And that fits, again, with this issue of states looking to bring in more revenue, but also, as is their preference, tax out-of-state actors, again, here on the grounds that they are engaged in economic activity in state. But right, you get rid of that transaction threshold, you make it a lot easier to expand the pool of sellers that you can potentially tax, as well as making it easier to determine who you can tax.

Jaye Calhoun: Right. And this is, I guess, a thread throughout what we've been discussing today. But I'm from Louisiana, where [Sen. Russell B. Long], I guess, famously said, "Don't tax you. Don't tax me. Tax the guy behind the tree."

And that's the theme, which is to the extent that you have businesses that don't have property. They don't create jobs in the state. They don't have capital invested in the state. They don't necessarily have as big a say in the political process because they're remote. And collecting more taxes from those businesses than those businesses that do have the in-state presence, it's attractive. It's attractive to legislatures.

Paul Jones: On the same sort of track as the remote sales issue, you had mentioned obviously that for some sellers, they've discovered this comes with more obligations than maybe they had previously realized. And, of course, out-of-state sellers have, for a long time, been able to claim a fair amount of protection under Public Law 86-272.

But there is new thinking by states on that question, particularly that internet-related activities can basically pierce the protection that's provided by 86-272, that if you are, for example, using your website, you have a portal that allows customers that have purchased your product, maybe a digital sprinkler system for your lawn, and you have product support that's sort of interactive where they can ask questions and get answers, that that would represent something that exceeds the activities protected under Public Law 86-272.

And even, in fact, in California, I think, it has been determined that just using a fulfillment center, which, of course, Amazon provides a lot of sellers, where they're storing your inventory in state, can create that sort of presence where you now have a potential obligation to pay, in California, minimum franchise tax, but in other states also, income tax where you're no longer protected.

Do you think that's going to continue to be an issue that we're going to see more states looking at? I think it's the MTC that took a position that those online activities could make a seller have an obligation for not just the sales tax post-Wayfair that I think a lot of them anticipate they now have to pay, but also income tax exposure as well.

Jaye Calhoun: Yes. I always like to think of this story, this thing that happened to me years ago. I was teaching in an online program based in another state, and I would sit in my office, and I would get on the computer, and I would teach these students, and the students were everywhere, including in the state, and it was through a university which has teachers as employees. So, of course, I got a W-2. And the first year I got the W-2, they had withheld the withholding taxes of that state.

And so, I called them up, and I said, "I haven't set—" And I'm teaching a state and local tax class. Right? I said, "I have not set foot in that state this year, and here's what the law says in the state. Your income tax is based on services performed in the state. I'm sitting here at home in this state. So I don't think you can withhold taxes." So she's like, "Let me get back to you." And then the next thing you know, I got a check in the mail, a refund of those withheld taxes. Now, I had to pay them over to the state in which I sat. But anyway, it was kind of funny.

But when I talked to my students about it in this class, and I told them the story, one of them said to me, "But weren't you virtually present in that state?" which at the time I thought was funny.

But with the developments that we've had, and when you're talking about the MTC's guidance on Public Law 86-272, that's kind of what they're talking about. I definitely think the states are going to, some of them are going to continue to be more aggressive. We're going to see more cases like that because they are emboldened by this activity, this guidance from the MTC. But I do think there are some important caveats. I think that from the state's perspective, the MTC's updated guidance reflects how commerce actually functions today. That's what they see and they think.

But many of the activities that used to be performed by in-state personnel are now delivered digitally: Me teaching, customer support, troubleshooting, software updates, account management, and states that view those activities as functionally equivalent to in-state business operations, even if they're delivered through an online portal, are going to continue to kind of press that.

But the guidance is still controversial because Public Law 86-272 is a federal statute, and there's real question about how far states or even the MTC can go in reinterpreting it without congressional action, and we've seen courts split on how much weight to give the MTC's interpretation. And so, I expect that uncertainty to continue.

So practically speaking, I don't think every state's going to rush in to assert income tax nexus in every case, but I do think states are under fiscal pressure to test these boundaries, particularly in audits, and maybe the auditor is going to trot out that MTC guidance as support for a more expansive position. So the near-term reality is probably more controversy, more litigation rather than uniformity.

So over time, I think this is going to have to force clearer answers from the courts, potentially from Congress — right? They could. They could help — about how Public Law 86-272 applies in a digital economy. And until then, states and taxpayers are operating in, we could call it, a fairly unsettled space.

Paul Jones: This seems like a good time to bring up factor representation, because there's a lawsuit that I've been covering in California. I guess now it's just between California and the National Taxpayers Union Foundation. And really, it's over whether California can exclude certain transactions and activities that are linked to deducted income, income that's not treated as part of business income. And there was a 2024 law that the state Legislature in California passed.

The National Taxpayers Union Foundation is arguing it's a retroactive change, but the central issue really fundamentally is factor representation, and you and I have discussed this case that Florida filed in October against California with the U.S. Supreme Court, arguing that a rule that California uses to basically throw out its single-sales-factor apportionment formula, one-time sales or receipts from one-time sales of things like factories and other assets that are used in the regular course of a business's operations. So the state will tax that income. It'll include that income in the tax base that gets apportioned, but it won't use that sale for purposes of apportionment to determine what proportion of the taxpayer's income it gets to tax. That seems like an issue. There are other cases, of course, that raise the same issue.

How do you think that is going to continue to evolve? Because, obviously, if you're a state like California and you can say, "Well, factors that are going to reduce a taxpayer's apportionment to California and obviously reduce our taxation of their income, we have reasons why we want to remove those from our apportionment. We don't think they're representative. We think it's distortive to include them."

But from a taxpayer's standpoint, their argument is, "Hey, this ultimately is turning into a game of not actually looking at where we do business, how we do business. It's become a means by which a state can try and tax more of our income than is actually linked to activity in that state."

Jaye Calhoun: Yeah. So I agree with you. I think factor representation is becoming one of the most important and most contentious state tax issues right now, because these disputes highlight this fundamental tension between legislative control over apportionment formulas, which they have, Supreme Court has approved, and the constitutional requirement that those formulas fairly reflect a taxpayer's in-state activity.

And California, as you mentioned, is a good example, because that Microsoft decision put a spotlight on how the sales factor denominator can materially affect apportionment, and the legislator's response reflects concern about revenue leakage. But when states start excluding categories of income or transactions from the denominator without a corresponding adjustment to the numerator, that's where those representation issues arise. Right?

So that litigation you mentioned, the NTUF case and Florida's action against California — although the latter might have some real political origins — it signals that taxpayers and even maybe other states are increasingly willing to challenge what they view as distortive apportionment outcomes. And in California, that situation with single sales factor and that special rule does allow California, when you do the math, to tax arguably more than its fair share of whatever taxpayer's connection with — and I say that taxpayer, because in this case, Florida is saying, "Taxpayers in general, our taxpayers, are damaged by this."

But taxpayers themselves have had these concerns with this state and other states. But arguably, what the state is doing is taxing more than its fair share of the taxpayer's income, more income than is truly connected with the taxpayer's activity in the state as a result of the impact on the apportionment formula. So states have broad discretion in designing their formulas, but it's not unlimited. Right? The Constitution provides protections. The due process, the commerce clause still require that the results of applying a state's apportionment formula is both internally and externally consistent, that it can't be arbitrary.

So I think we're going to see more of these disputes, because single-sales-factor regimes, market-based sourcing, these trends amplify the stakes. So we see these situations. Changes to apportionment rules can really produce very large revenue consequences for the states and even create situations in which they're focusing more on out-of-state taxpayers, which makes legislative intervention more tempting, which is going to result in more litigation, because there really are important constitutional issues at play here. So I do expect factor representation challenges will continue, and particularly where states act retroactively or where adjustments appear driven primarily by revenue concerns rather than by a principled matching of income and activity. Right? That's what they're supposed to be doing under the Constitution.

So over time, this could force courts to more clearly define the boundaries of how far states can go in fine-tuning apportionment without crossing constitutional lines. We don't know if the Supreme Court will take this case with Florida suing California, but you and I have talked about. I'm involved in an organization that filed an amicus brief, hoping that the Supreme Court understands the importance of the issue, whether they take it in this case or not. We do hope they take it and provide clarity and uphold those constitutional provisions that taxpayers should be able to rely on.

Paul Jones: Right. Yeah. And the Florida case, obviously, they're taking it all the way back to Moorman Manufacturing and raising it as a challenge that also implicates California's use of single-sales-factor apportionment, because they're arguing that, particularly, since the state focuses — for the vast majority of businesses, there are a couple exceptions — but for the vast majority of businesses, it is single-sales-factor apportionment that this one rule throwing these occasional sales out of the sales factor has a disproportionate impact.

Jaye Calhoun: Right. So it's important to note that Moorman didn't say single-sales-factor apportionment is fine under any circumstance. Moorman looked at that case and basically didn't say it was unconstitutional in that situation.

I think people tend to look at Moorman and say, "Oh, Supreme Court has said single sales factor is fine under any circumstance." That is not what they said. So really, really important to keep that in mind. And hopefully, like I said, the Supreme Court will take a look and provide some guidance to taxpayers.

Paul Jones: We are going to make a radical shift of topic and talk now about tax administration because I think this is a topic you're interested in, and it's one I'm increasingly interested in. So leaving aside states, their revenue problems, conformity, their tax bases, just looking at the art, the science of applying and administering taxes, one of the ways that states are looking to improve how they do that is by increasingly adopting automation, particularly more and more sophisticated forms of artificial intelligence.

I know that the California Franchise Tax Board is just about, I think, to complete a project or a phase of a project where they were adopting machine learning to help improve their audit selection tools, and there's also some states that are looking at using generative AI, large language models to help with customer service.

What do you think we're going to be seeing with respect to the adoption of AI by tax departments? What are some of the benefits? Obviously, I mentioned one. And also, what are some of the potential risks, and how should states and the practitioner community be prepared for that?

Jaye Calhoun: Yeah. So it is kind of a discussion of AI everywhere you turn these days, and that's because, certainly, we've had machine learning, artificial intelligence for quite some time, and states have cautiously and gradually incorporated that in different aspects of their function to administer taxes, to collect taxes, even maybe for audit selection.

But generative AI, the ChatGPTs, and I guess whatever the state tax collection version of it will be, has become of great interest. There's been this big push to get this out there. My law firm's talking about it. I'm sure that you guys are talking about it, and everybody is trying to figure out, "Oh, it's this wonderful, best thing since sliced bread. How are we going to use it?"

And I think the state tax administrators are all very excited as well about the possibilities because there are always underfunded tax departments, revenue shortfalls, concerns, and it has this kind of promise of potentially adding to their capacity to function at a lower cost. So certainly, like I said, the large language models type, the machine learning side has already been part of what they're doing, and they're increasingly including that in some of their primary functions.

But what they're thinking about now, again, is the idea of chatbots or virtual assistants or tools that can help draft responses to taxpayer inquiries, to answer phones, and give, hopefully, accurate answers, that basically could provide faster response times, better access outside of business hours, potential to reduce the strain on these understaffed agencies. For routine questions, this could be very helpful. But I think you mentioned bias and issues; the downsides are real.

So we all have been experimenting with this type of technology, and when does it help you? When does it just make stuff up and sound very authoritative when it does that? I mean, you really cannot have that in tax administration. So as tax administrators review these products and try to incorporate them, they're going to have to really address situations in which this technology gets very overconfident when it gives wrong answers, or it doesn't handle nuance well, and that matters so much in tax, and you have these transparency and due process concerns. You want the public to know what they're dealing with. You want taxpayer information to remain confidential.

A threat at my law firm in our discussions about AI has been the concern that if you're using this type of technology for a particular client whose information must be kept confidential, to what extent does that train the machine, which then uses it somewhere else for somebody outside the firm? And we can't have that, and I'm pretty sure state tax laws are going to prevent that as well.

So the agencies are really going to have to be able to have enough human oversight to ensure that these concerns are addressed, that the information is accurate. They're going to be able to explain how decisions are being made. When mistakes are made, they're going to have to correct them quickly. I think they've been very cautious, but they are moving forward with this kind of guardrails-first type approach to assist human decision-makers but not replace them.

Paul Jones: Do you think that the law firms which have been adopting this, some of them very aggressively, have also maybe provided a bit of a road map for the agencies? Obviously, they're using it for very different purposes, but this is a large private-sector industry where professionals have been adopting and working with generative AI for a couple of years now.

Does that potentially help inform the tax agencies in the public sector, give them sort of an opportunity to learn from the successes and the mistakes of private-sector tax practitioners as they attempt to administer taxes, answer taxpayer questions, etc.?

Jaye Calhoun: To the extent that these products are being developed, the tax administrators have always been a little bit very careful about making — they don't want outside interest to be able to understand really sometimes how they think. That's why I think Tax Analysts has been on that push to get audit manuals. We need to know how you think. It's important. Transparency is important.

But yeah, I think there could be communication. There could be help. I haven't seen anything that suggests they're going to the private sector to ask, but they're going to private businesses to talk to them. So I think maybe the information gets funneled back that way.

One of my partners, he got on one of these tools, and he asked the question, "Why does Texas tax dogs and not cats?" And he got a very long, literate answer on why they do, [but] they don't. So like I said, we've been kind of playing around with this a little bit, but there are so many pitfalls and concerns you have. What do they say? You can use AI. It's kind of like a bright associate, but not a very careful one, like a lazy but bright associate. Yeah.

So I don't know, but I do know that there is a tremendous amount of interest in it, and that the revenue secretaries, the comptrollers, they're all looking into how they can incorporate it as the rest of us are. But yeah, hopefully, there's going to be — we'll all kind of learn together how this works and maybe some overlap, some benefit for segments that have gone before and sharing their information.

But I suspect that's going to come through the vendors. The vendors have been selling to the private sector, and now they're going to be selling to the government, and they may have some way to share that information you're talking about. But I think we're going to have to watch. We're just going to be able to watch what's going to happen here and how they are going to strike the balance they have to strike between efficiency and all the promises of AI, and fairness, and accountability, and taxpayer trust. So we're all just going to watch and see how it plays out and hope for the best.

Paul Jones: Let's shift to a different topic completely, and this is one that's of interest to me. I've covered it, but it's been a few years since, I think it's Tyler v. Hennepin County. Hopefully I'm pronouncing that correctly.

And it seems to me that many, if not most, states have adopted at least some new rules to try and limit the situations where a homeowner would lose their equity in the event of a foreclosure, a tax sale, or tax auction. I know that I just covered last year, I think it was Oregon and California had approved some new laws to try and ensure that that didn't happen, and a lot of other states have as well.

But I've heard from some people that there are still outstanding issues, circumstances in which a state or rather, I would say, a local government would potentially foreclose on a property in a way that would cost the owner equity they had in excess of the tax debt that they owed. Can you talk quickly about that? What are some of the ways states have been complying with that decision, and what are some of the ways where there needs to be more work done? And is that potentially going to require courts to come in and sort of revisit the actions the states have taken?

Jaye Calhoun: Yeah. And those are, quite often, very sad situations in which you have the widow or the widower, and they've lived in the house for years, and then the neighborhood is gentrifying, and then they lose the house at a tax sale. The value in the property really has been going to the tax sale purchaser in many states and very sad situations.

So I think Tyler has had a real and lasting impact, and you're right that most states have responded in some form. Sometimes they've created refund mechanisms or surplus return procedures or maybe cleared up the notice requirements so that homeowners aren't losing their equity when the property taxes have been paid. But in many states, the focus has been on procedural fixes, ensuring that this excess value is returned after the tax sale, or extending the redemption periods, or maybe giving taxpayers a clearer path to claim surplus proceeds.

In Oregon and California that you mentioned, they're good examples of legislatures that moved quickly to bring their systems into closer alignment with Tyler. But where the compliance questions start to arise is less about, I don't know what you call it, outright defiance of the decision, but more about implementation details. So in some states, the process for recovering surplus value can be very cumbersome or time-limited or poorly communicated. And when that happens, it raises concerns about whether homeowners are realistically able to reclaim their equity. You're also seeing situations where you have fees, interest costs deducted before the surplus is returned, and whether excessive deductions effectively undermine the constitutional protection that the Tyler court recognized.

Another unresolved issue is how Tyler applies to variations in state tax collection systems. So for example, you have homeowners with installment contracts or lien sales versus deed transfers or abandoned property, which those are kind of gray areas that are generating litigation. They're likely to continue to do so.

So I think the broad takeaway is that states have taken the Tyler case very seriously. But we're now in a second phase where courts and legislatures are working through what meaningful compliance looks like in practice, and that's where I expect we'll continue to see challenges, not about whether states have to return equity. They do, but about whether the way they're doing it truly satisfies the constitutional standard. But it's been a good thing.

Like I said, a lot of times, these are very sad cases, and you don't want the little old lady, who now is going to have to go live in a nursing home, to not have the equity in her property that is really hers. So I think it's a good thing overall. We just hope the states work out their systems in a way that really does provide meaningful ability for these taxpayers to get their excess value back.

Paul Jones: Well, I think that should just about wrap things up. I think we've given 2026 more than enough things to work on. And Jaye, I just wanted to say thanks again for spending so much time with us and sharing all of your thoughts and insights on the diverse range of issues here. And there's so many more we could talk about, but we don't have all year. We've got to get to it. But thanks again.

Jaye Calhoun: So yeah, thank you so much. It was a pleasure being here. And like you said, Happy New Year.