As Midwest states continue to adjust to shifting revenue needs, expanding digital commerce, and a mobile workforce, tax laws across the region are entering another period of significant change. With income tax rate reductions, evolving nexus standards, updated apportionment rules, and significant legislative developments, such as Nebraska’s LB644, 2026 is shaping up to be a pivotal year for multistate businesses. This overview highlights the most important trends influencing state and local tax planning for the year ahead. 

Nebraska’s LB644 and Its Impact 

One of the most consequential state tax developments in the Midwest is Nebraska’s LB644. Enacted in 2025, the law continues to create disruption heading into 2026 due to its retroactive effect on incentive programs and agreements that businesses already relied upon. Key concerns include: 

• LB644 applies retroactively to incentive contracts that were previously negotiated and approved. 
• It affects participants in the ImagiNE Nebraska Act and legacy incentive programs by changing qualification requirements and benefit calculations. 
• It raises constitutional and contract law concerns because it alters agreements between businesses and the Nebraska Department of Revenue after the fact. 
• Many Nebraska taxpayers are actively exploring administrative challenges or legal strategies in response.
  

Given the significance of this change, any company with Nebraska incentives should prioritize a review of its agreements before moving forward with 2026 investment or hiring plans. LB644 may also influence how regional businesses view Nebraska’s long-term incentive environment. 

What are the key multistate tax trends for Midwest businesses in 2026? 

Tougher Nexus Enforcement and Broader Filing Obligations 

States are continuing to broaden what constitutes nexus, especially as they seek to replace revenue lost from recent and ongoing income tax cuts. Heading into 2026, state departments of revenue across the Midwest are: 

• Intensifying economic nexus enforcement, including service providers, SaaS companies, subscription-based models, and digital platforms. 
• Increasing scrutiny of remote and hybrid employees, who remain a leading nexus creator even for businesses with no physical locations in the state. 
• Expanding audit programs targeting unregistered taxpayers with online or out-of-state activity. 

Businesses operating across multiple states should expect more notices, questionnaires, and targeted audits in 2026. 

Continued Movement Toward Market-Based Sourcing 

The shift to market-based sourcing across the Midwest is accelerating heading into 2026. Key developments include: 

• Nebraska, Iowa, Illinois, and Minnesota continue refining guidance around where services are “received” by the customer. 
• Missouri continues phasing in sourcing changes tied to prior legislation. 
• States are increasingly focused on sourcing rules for digital services, cloud computing, licensing arrangements, and mixed-service contracts. 

For businesses selling services or digital products across state lines, accurate revenue sourcing is now a top priority. 

Income Tax Rates Continue Decreasing Across the Region 

Several Midwest states have rate reductions built into 2026 through previously enacted legislation. These reductions are aimed at enhancing competitiveness, but they also put pressure on other parts of the tax base. Here’s what’s relevant for 2026: 

• Nebraska continues to phase in corporate and individual income tax cuts, with lower rates taking effect January 1, 2026. 
• Iowa’s flat tax is nearing or reaching its final implemented rate, depending on state revenue triggers. 
• Missouri may see additional automatic rate cuts if revenue thresholds are met. 
• Kansas is expected to continue evaluating reductions following multi-year reform discussions. 

Lower income tax rates create planning opportunities, but businesses should expect states to offset these reductions with increased compliance actions, audit activity, and changes to other revenue streams. 

Cross-Border Compliance in the Remote & Hybrid Workforce 

Remote work remains one of the most disruptive trends in state taxation. As 2026 begins: 

• Nebraska, Kansas, and Iowa continue applying work-performed rules for wage withholding. 
• States are issuing more guidance on traveling/temporary employees, hybrid schedules, and multi-jurisdictional compensation. 
• Reciprocity agreements remain limited in the region, meaning employers must continue to track employee location with precision. 

Companies with remote employees should regularly update HR and payroll systems and revisit written policies to prevent withholding and unemployment insurance errors. 

Sales & Use Tax

Sales tax remains one of the most rapidly evolving tax types heading into 2026. Midwest states continue to refine: 

• Economic nexus thresholds and what counts toward them. 
• Treatment of marketplace facilitator sales, including platforms that provide fulfillment but not payment processing. 
• Taxability rules for digital goods, SaaS, subscriptions, and professional services. 
• Enhanced audit focus on under-collected use tax for manufacturers and construction contractors. 

Businesses selling goods or services online, through distributors, or via marketplaces should ensure their systems capture accurate sales and exemption information across states. 

Incentives & Credit Programs 

Beyond Nebraska, most Midwest states continue refining incentive programs that support investment, innovation, and job creation. This includes R&D credits, manufacturing exemptions, capital investment incentives, and workforce development programs. While these programs remain competitive, businesses should monitor legislative changes closely, especially as states balance revenue needs with ongoing income tax reductions. 

Audit Activity Is Rising in 2026 

As states seek stable revenue sources and respond to changes in economic activity, audit activity is expanding heading into 2026. Midwest audit focus areas include: 

• Remote workforce withholding. 
• Economic nexus and sales tax registration gaps. 
• Revenue sourcing and apportionment for service providers. 
• Taxability of digital products and SaaS. 
• Use tax on out-of-state equipment and capital purchases. 

Meanwhile, voluntary disclosure programs remain one of the most effective tools for reducing past exposure, offering penalty relief, defined lookback periods, and structured compliance paths. 

How can Midwest businesses strengthen multistate compliance in 2026? 

To build a proactive strategy for the year ahead, companies should: 

• Conduct a 2026 nexus review to identify new filing obligations. 
• Reevaluate apportionment and sourcing policies based on updated state rules. 
• Model the effects of 2026 income tax rate reductions. 
• Monitor legislative and regulatory developments in states where they operate. 
• Review participation in credit and incentive programs, especially in Nebraska. 
• Consider voluntary disclosure if new nexus exposure is identified. 
• Strengthen remote-work policies and payroll location tracking. 

Partner with Lutz to Stay Ahead 

With rapid legislative changes, ongoing income tax reductions, and heightened audit activity, 2026 will require businesses to be more proactive than ever. Whether you’re evaluating how LB644 may affect your incentive commitments, addressing remote workforce compliance, or planning around 2026 tax rate changes, informed decisions will help protect your bottom line. Lutz’s State and Local Tax (SALT) services help businesses navigate multistate regulations so you can feel confident that nothing is slipping through the cracks. Contact us to learn more.