Supreme Court Case Among State and Local Tax Issues to Watch

In 2025, state and local tax practice proved that what’s old is new, as states and taxpayers raised new challenges to longstanding issues.

Many of those developments will continue to affect SALT in 2026 as we see renewed challenges to Public Law 86-272, a federal law that prohibits states from imposing income taxes on out-of-state businesses that only solicit sales of tangible personal property in the state.

There also will be developments involving digital advertising taxes, federal tax law changes, interstate disputes, and a US Supreme Court ruling involving the government’s right to take property to satisfy a tax lien.

Public Law 86-272

Additional states moved to adopt the Multistate Tax Commission’s revised statement of information on the federal law last year. Going into 2026, states attempting to adopt the MTC’s revised Public Law 86-272 guidance related to internet activities can expect to receive pushback from taxpayers and industry associations.

A key player leading the charge against these states is the American Catalog Mailers Association, which challenged the adoption of the MTC’s revised guidance in two states during 2025.

Taxpayers should continue to monitor states’ efforts to interpret the protections afforded under Public Law 86-272 as it relates to activities conducted over the internet in the association’s appeals in New York and New Jersey by following developments in American Catalog Mailers Associationv. Department of Taxation and Finance and American Catalog Mailers Association v. Director, Division of Taxation.

Digital Advertising Tax

Maryland was the first state to enact a digital advertising tax in 2022, and it has been entangled in litigation ever since. The US Court of Appeals for the Fourth Circuit found in Chamber of Commerce v. Lierman that the pass-through restriction in Maryland’s digital ad tax provision violated the First Amendment free speech rights of affected companies in an attempt to shield Maryland lawmakers from “criticism and political accountability.”

Following Maryland’s lead, Washington in October enacted SB 5814, which expanded the state’s retail sales tax to apply to digital advertising services. The new law defines taxable digital advertising services to include online referrals, search engine marketing, website traffic analysis, and web campaign planning.

However, the law expressly excludes from the tax advertising services in printing or publishing, radio, TV, and outdoor advertising such as billboards and transit displays.

Like Maryland, suits were filed in Washington challenging the tax as a violation of the Internet Tax Freedom Act. Taxpayers should continue to monitor the litigation in these states to track how states are seeking to raise revenue by targeting digital advertising services.

Tax-and-Spending Law

States will have to consider conformity to changes in the Internal Revenue Code as a result of the federal reconciliation bill that was signed into law on July 4, 2025. Generally, states conform to the IRC in one of three ways:

• Fixed/static conformity, where the state’s tax laws conforms to the IRC as of a fixed date and would require legislative amendments to change the state’s conformity date
• Rolling conformity, where the state automatically conforms to the current version of the IRC
• Selective conformity, where the state’s tax laws conform to only certain IRC provisions

Several tax code changes can affect conforming states, including the increase to the federal SALT deduction cap, expanded exclusion for qualified small business stock, permanent extension of qualified opportunity zones incentives, and increase to business interest deduction.

Since the federal changes flow through to conforming states, a handful of states have already moved to decouple from some of the new law’s provisions. As states begin to debate their budgets and consider the impact of the law, we can expect more states to continue addressing whether their states’ coffers can afford to adopt the federal provisions in 2026.

Florida vs. California

Florida filed a complaint in October against California in the US Supreme Court, arguing that California’s occasional sales rule in conjunction with California’s single-sales-factor apportionment method harm Florida’s residents and businesses.

Florida claims California’s use of single-sales-factor apportionment is a tariff, which is “supercharged” by California’s occasional sales rule. California’s occasional sales rule excludes large income earned from a transaction outside of a taxpayer’s normal business activity.

Based on this, Florida argues that the denominator of the sales factor is significantly reduced because the rule excludes “large sales attributable to the jurisdiction where a corporation’s payroll and property are located.”

If the justices agree to hear arguments in this case, their decision can set a precedent concerning the relationships between states with conflicting apportionment methods and whether the imposition of tax under these methods unconstitutionally interferes with interstate commerce.

Takings Clause Case

The Supreme Court in 2023 held that a county’s retention of the excess value from a property at tax sale above and beyond an individual’s tax debt constituted a taking in violation of the Takings Clause of the US Constitution. The court is now poised to rule on a related and follow-up issue during its 2026 term.

In Pung v. Isabella County, an assessor revoked a property tax exemption for a parcel, which led to an unpaid tax bill of $2,241.93. The property was subsequently sold at public auction for $76,008, but had a fair market value of $194,400. The court in 2026 will consider two issues:

• Whether taking and selling a home to satisfy a debt to the government, and keeping the surplus value as a windfall, violates the Takings Clause of the Fifth Amendment when the compensation is based on the artificially depressed auction sale price rather than the property’s fair market value
• Whether the forfeiture of real property worth far more than needed to satisfy a tax debt but sold for a fraction of its real value constitutes an excessive fine under the Eighth Amendment, particularly when the debt was never actually owed

The court’s decision in Pung will provide added clarity on how “just compensation” should be measured when there is a taking of private property.

As we enter 2026, these SALT issues will play a significant role shaping laws throughout the country. Practitioners and taxpayers must stay alert to these issues as the year unfolds.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Jennifer Karpchuk is a partner in Holland & Knight’s Philadelphia office and co-chair of the firm’s state and local tax team.

Thu Lam, a tax attorney, and senior counsel at Holland & Knight in Philadelphia

Olivia Klein, also a tax attorney, is an associate at Holland & Knight in Philadelphia.

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