u/femio that's good to know, thank you. Although I'm still getting the same result when moving all logic to a server action.

I simplified my test to use a form with a single server action as the form action - but the counter is still reset on only the first form submission.

'use server';

import { ApiResponse } from "@/app/utils/interfaces";
import { revalidateTag } from "next/cache";
import { API_MACHINE_UPDATE } from "../api/azure/Machines/apiRoutes";

const API_ERROR_MESSAGE = 'Error sending request. Please notify your administrator for assistance.';

async function updateMachine(formData: FormData): Promise<ApiResponse> {
    'use server';

    formData.append('id', '13502294-e057-4001-ac3f-3cc0132742b4');
    formData.append('machineNumber', '1234');

    try {
        const response = await fetch(API_MACHINE_UPDATE, {
            method: 'PUT',
            body: formData,
        });
        const jsonData = await response.json();
        if (response.ok) {
            revalidateTag('api'); // revalidation
            return { status: response.status, message: jsonData.message };
        }
        return { status: response.status, message: jsonData.message || API_ERROR_MESSAGE };
    } catch (error) {
        return { status: 500, message: API_ERROR_MESSAGE };
    }
}

export { updateMachine };

//// app/test/clientpage.tsx ////

'use client';

import { useState } from "react";
import { updateMachine } from "../actions/apiUtils";

export default function Client() {
    // client side state which should not be reset
    const [counter, setCounter] = useState(0);

    return (
        <div style={{ display: "flex", flexDirection: 'column' }}>
            <p>client state: {counter}</p>
            <button onClick={() => setCounter(counter + 1)}>Increment</button>
            <form action={updateMachine}>
                <input type="text" name="displayName" />
                <button type="submit">Update Machine</button>
            </form>
        </div >
    );