SALT Outlook: Our predictions for 2022


The news headlines in 2021 continued to be dominated by the pandemic, and the same can be said of state and local tax (SALT) policy and litigation. After nearly two years, the pandemic still casts a shadow over many aspects of our lives, so it’s not surprising that many of the major SALT developments in 2021 saw state and local governments reacting to the continued effects of the pandemic and preparing for a return to some sense of normalcy. Our annual SALT outlook offers 10 predictions from our SALT team in the Washington National Tax Office for a (hopefully) post-pandemic world, focusing on the SALT issues that we believe will be of primary interest to policymakers, courts, and taxpayers in 2022. For a review of the 10 major SALT developments from last year, see “Top 10 SALT stories of 2021.”




Our 2022 predictions



1. The remote workplace in 2022


As discussed above, employers continued to deal with the state and local tax challenges brought on by a new stage of the pandemic as many started to accommodate hybrid and full-time remote work arrangements for their employees. Continued and widespread remote work also likely gave many companies the opportunity to rethink their policies in order to facilitate long-term remote work arrangements as “return-to-office” plans were continually delayed by the spread of the Delta and Omicron variants. At the same time, employers with growing remote workforces continued to navigate often conflicting state and local tax approaches to remote work in 2021.


Many states addressed this situation by issuing temporary emergency guidance addressing the income tax treatment of employees working from a different state due to the pandemic to allow employers time to adjust their policies to accommodate an increasingly remote workforce. However, most of those states announced the end of temporary guidance in conjunction with the lifting of state and local public health restrictions, with many doing so during the summer and fall months of 2021.1 A handful of states extended their income tax withholding and nexus relief through the end of the year, with South Carolina recently deciding to extend such relief through March 2022.2 Beyond temporary state telework guidance, several states made more permanent legislative changes to their income tax withholding policies in response to widespread remote work. Most notably, Arkansas reversed previous administrative policy by enacting legislation clarifying that a non-resident employee must be physically located in the state in order to be subject to the state’s income tax.3 We expect other states to make similar legislative changes to specifically address the tax impact of teleworking employees, both from the perspective of the employee and the employer. In recognition of permanent workforce shifts, we predict that: (i) at least three states will enact legislation or promulgate regulations to address existing income tax withholding policies with respect to remote workers; and (ii) by the end of 2022, no states will continue to have temporary pandemic policies addressing corporate income tax nexus.



2. PTE taxes


As discussed, states moved rapidly in 2021 to adopt pass-through entity (PTE) tax regimes as a workaround to the controversial federal $10,000 SALT deduction limitation adopted under the TCJA. Under these regimes, the PTE is permitted to deduct its state and local income taxes as a tax on the business at the federal level, followed by a deduction for the PTE tax on the distributive share of the owners’ income. Depending on the structure of the PTE tax, the owner generally claims a corresponding tax credit against their personal income tax liability or an exclusion on the portion of the owner’s pass-through income subject to the entity tax. After the IRS confirmed in November 2020 that state PTE tax regimes would be respected for federal income tax purposes, 15 states enacted legislation in 2021 adopting their own elective state PTE tax regimes,4 bringing the total number of PTE tax states to 22.5 Given the popularity of such tax regimes and the widespread interest in providing a federal tax benefit to PTE owners with little or no fiscal impact to the states, we expect this trend to continue into 2022 -- that is, unless Congress decides to drastically change the SALT deduction limitation as part of future spending bills that may yet be considered in 2022, or future IRS guidance differs markedly from the notice it released in late 2020. Barring such developments, we predict that at least five additional states will enact PTE tax regimes to the extent that the SALT deduction limitation remains in place.



3. ARPA tax mandate litigation


In 2021, the American Rescue Plan Act (ARPA)6 created funds for distribution to state and local governments to combat the effect of the COVID-19 pandemic. Under ARPA, states are required to use the funds for either a wide variety of pandemic-related purposes or to improve the infrastructure.7 The states are prohibited from using the funds to offset a reduction in state net tax revenue resulting from a change in law, regulation or administrative interpretation that reduces any tax, or from depositing the funds into a pension fund.8 In response to numerous requests by states for information on the scope of this provision, the U.S. Treasury Department released an extensive interim rule in May 2021 that recently was adopted as a final rule designed to provide further guidance to states regarding when the ARPA tax mandate is triggered.9 Despite the state challenges, the Treasury Department’s promulgation of this rule indicates that it intends to enforce the mandate.


This tax mandate has led to several constitutional challenges, resulting in three significant federal district court decisions during 2021 granting injunctions against enforcement.10 First, an Ohio federal district court held that the ambiguously written ARPA tax mandate exceeded Congress’s power under the Spending Clause and granted a permanent injunction against applying the tax mandate in Ohio.11 Also, a Kentucky federal district court granted Kentucky and Tennessee a permanent injunction from application of the ARPA spending restriction because it was a coercive grant of federal money.12 Most recently, a federal district court in Alabama decided a similar challenge by 13 states that was led by West Virginia.13 The court held that the tax mandate violates constitutional limits by exceeding Congress’s power and granted an injunction from enforcement in the relevant states. The U.S. Treasury Department has appealed these controversial rulings to the federal appellate courts. As several federal circuit courts begin to consider lawsuits challenging the constitutionality of the ARPA tax mandate, we predict that at least two circuit courts will come to different conclusions, resulting in a split.



4. Income tax relief


In 2021, many states decided to dissociate from their income tax regimes by reducing rates or phasing out taxes. For example, North Carolina enacted legislation in November 2021 that phases out the corporate income tax, which is currently imposed at a 2.5% rate, beginning with the 2025 tax year.14 The phaseout will be complete in the 2029 tax year and is not contingent upon other events. Louisiana enacted legislation to reduce corporate income,15 individual income,16 and pass-through entity tax rates17 for tax years beginning on or after Jan. 1, 2022, that was contingent on voters approving a constitutional amendment.18 In November 2021, the Louisiana voters approved the constitutional amendment which allows the tax rate reductions to take effect.19 In December 2021, Arkansas enacted legislation reducing corporate income, personal income and pass-through entity tax rates with further future rate reductions possible depending on economic conditions.20 As states continue to move from reliance on income taxes, we predict that at least three states will enact income tax relief in the form of corporate and/or personal income tax cuts and/or phaseouts, due to better-than-expected revenue collections in 2021.



5. State adoption of MTC revised statement on P.L. 86-272


In Aug. 2021, the Multistate Tax Commission (MTC) adopted revised guidance interpreting longstanding federal protections from the imposition of state income tax to reflect the modern economy and internet business activities.21 The MTC approved an updated statement of information interpreting Public Law 86-272 (P.L. 86-272), the 1959 federal law that limits the state taxation of income from sales of tangible personal property if the taxpayer’s only business activities in the state are the solicitation of orders that are approved and shipped from outside the state.22 Most significantly, the revised statement includes a new subsection to determine what constitutes protected or unprotected activities under federal law, specifically addressing activities conducted using the internet. The statement provides a listing of 11 different activities conducted by internet businesses and explains whether they are protected or unprotected for P.L. 86-272 purposes. The revised statement is significant, albeit somewhat controversial, because it provides principles for applying the federal statute to modern business transactions in a manner that tends to narrow the protection of the law in many cases. With the adoption of the guidance, it stands to reason that some of the states that encouraged this project to move through the MTC will want to confirm that they support these policies. We predict that at least three states will formally adopt the MTC’s revised statement of information providing that various activities conducted via the internet exceed P.L. 86-272 protection through regulation or administrative action.



6. U.S. Supreme Court review of SALT cases


The U.S. Supreme Court recently has been asked to consider four cases that involve the constitutionality of certain federal, state, or local tax laws. In two of the cases, state high courts determined whether local taxes imposed on billboard advertising violate the free speech and free press protection of the First Amendment. In Clear Channel Outdoor, Inc. v. Director, Department of Finance,23 the Maryland Court of Appeals upheld the City of Baltimore’s tax on the privilege of selling advertising space on billboards and determined the tax was constitutional. In contrast, the Ohio Supreme Court held in Lamar Advantage GP Co., L.L.C. v. Cincinnati24 that an excise tax imposed on a small number of billboard operators by the City of Cincinnati violated the rights to freedom of speech and free press protected by the First Amendment. Because two state high courts have reached conflicting conclusions on the same constitutional issue, there is an increased probability that the U.S. Supreme Court will consider these cases.


The two remaining cases concern more traditional constitutional issues for tax matters. In Ferrellgas Partners, L.P. v. Director, Division of Taxation,25 a New Jersey court held that a statute imposing an unapportioned partnership filing fee that does not reflect the amount of business conducted in the state does not violate the Commerce Clause of the U.S. Constitution. In New York v. Yellen,26 the U.S. Court of Appeals, Second Circuit held that the $10,000 cap on the federal tax code’s SALT deduction does not violate the U.S. Constitution. The complaint was dismissed because the cap is not coercive in violation of the 10th Amendment or the principle of equal sovereignty. We predict that the U.S. Supreme Court will grant review of at least one of these pending SALT cases.



7. Post-Wayfair litigation


In light of the Wayfair decision and subsequent state efforts to impose sales tax collection obligations on remote sellers and marketplaces, it was only a matter of time until taxpayers would challenge complex state sales tax regimes on the basis that they are unconstitutional under Wayfair. A novel challenge has come in the form of Halstead Bead v. Lewis,27 in which an Arizona-based online business filed a lawsuit in federal court alleging that Louisiana’s decentralized sales tax system presents undue compliance burdens for remote sellers under Wayfair, due to varying rules and tax bases between the state sales tax and the local sales taxes administered by the state’s 64 parishes. Under the state’s current system, in-state businesses remit state sales taxes to the Louisiana Department of Revenue and local taxes to each parish in which they operate. In contrast, out-of-state companies meeting Louisiana’s economic nexus thresholds must report to a separate agency, the Sales and Use Tax Commission for Remote Sellers, and are subject to different rules.


In Wayfair, the U.S. Supreme Court upheld South Dakota’s sales tax economic nexus law in part because the state was a member of the Streamlined Sales Tax Agreement (SSTA), an organization of states that seeks to provide uniformity in sales tax administration through state-level administration, the adoption of uniform tax bases and sourcing rules, and simplified tax rates. Among other things, the Halstead Bead litigation raises the question of whether states with decentralized sales tax systems like Louisiana will pass muster under Wayfair if they are not SSTA members and there is lack of uniformity in administration between the state sales tax and self-administered local taxes. Given the current environment, we predict that at least three further challenges by online sellers will be introduced in court against states that do not have centralized or SSTA-compliant sales tax systems.



8. Sales tax and the digital economy


As discussed above, Maryland made headlines last year by becoming the first state to enact a gross receipts tax on proceeds derived from digital advertising services in the state.28 The noteworthy and somewhat controversial tax is being challenged in both federal and state court, as lawsuits by both business associations and media companies are alleging violations of electronic commerce under the Internet Tax Freedom Act (ITFA) and the Commerce and Due Process Clauses of the U.S. Constitution.29 Additionally, the tax presents various practical obstacles for taxpayers, including how to properly source advertising revenues to the state.30 Further, subsequent emergency legislation delayed the effective date of the tax to the 2022 tax year due to various difficulties faced by the Maryland Comptroller in implementing the tax.31 Against this backdrop, other states may be reticent to adopt similar digital advertising taxes until they have a better idea of whether Maryland’s tax survives the pending legal challenges, and if so, whether the state is ultimately successful in implementing the tax.


Given the current legal and practical issues associated with implementing digital advertising taxes, states may have a greater appetite to tax the digital economy by expanding their sales tax bases to include digital goods and services, as many have done so already. Sales tax base expansions potentially offer a more legally sound route to tax digital services and might be even more appealing in the current environment in which businesses use such services to pivot and operate more efficiently during the pandemic. We predict that: (i) at least three states will enact legislation to expand their sales tax bases to include digital goods and/or services; and (ii) no state will adopt legislation that is substantially similar to the Maryland digital advertising tax currently being disputed in the courts.



9. Tweaks to state marketplace laws


As noted above, states moved to adopt remote seller economic nexus provisions at a rapid pace after the Wayfair decision. Another outgrowth of Wayfair was the widespread enactment of legislation requiring marketplace facilitators or providers to collect and remit sales tax on seller transactions that are facilitated through their platforms.32 In fact, all states that adopted a remote seller provision also enacted a corresponding marketplace provision with similar sales and transaction thresholds. However, the rapid adoption of such provisions resulted in a wide range of definitions and collection responsibilities that vary widely from state to state, causing sales tax compliance difficulties for marketplace facilitators as they continue to navigate their relationships with marketplace sellers. Some common questions include whether the platform falls under a state’s definition of a “marketplace facilitator” or “marketplace provider”; who is responsible to collect and remit sales tax; who is subject to audit and liability for failure to properly collect tax; and whether marketplace sellers have their own independent sales tax filing obligations. Watching these issues play out from an audit and enforcement perspective, states may be more willing to revisit their marketplace rules to provide greater simplicity and uniformity to taxpayers. Recognizing the difficulties in navigating inconsistent marketplace rules, we predict that at least two states will provide further clarity to their existing marketplace facilitator/provider provisions through legislation, regulation, or administrative action.



10. Cryptocurrency guidance


Virtual currency such as bitcoin has become increasingly popular during the past few years and raises unique tax issues because it may be used as currency as well as an investment. In 2014, the IRS determined that convertible virtual currency is treated as property rather than currency.33 As a result, “[g]eneral tax principles applicable to property transactions apply to transactions using virtual currency.”34 New Jersey35 and New York36 soon announced that they were following the federal treatment of convertible virtual currency, but states had remained relatively silent on this issue until 2021. In a general information letter, the Illinois Department of Revenue recently clarified the apportionment treatment of virtual currency and adopted an approach consistent with the position on convertible currency expressed by the IRS.37 Earlier in the year, Wisconsin issued guidance explaining that virtual currency is intangible property treated for tax purposes similar to other types of intangible property.38 Due to the increased importance of this topic and the relative lack of state guidance, we predict that at least two states will provide guidance on the tax treatment of virtual currency.



1 For example, Pennsylvania ended its “status-quo” income tax sourcing policies and nexus relief on June 30, 2021, after which traditional withholding rules and nexus policies would apply. Telework Guidance, Pennsylvania Department of Revenue, updated June 17, 2021. New Jersey’s temporary employer withholding rules and nexus relief ended effective Oct. 1, 2021. Teleworking – End of COVID-19 Temporary Suspension Period for Nexus and Withholding Purposes, New Jersey Division of Taxation, Aug. 3, 2021.

2 SC Information Letter #21-31, Extended Tax Relief – Nexus and Income Tax Withholding Requirements for Employers with Workers Temporarily Working Remotely as a Result of COVID-19, South Carolina Department of Revenue, Dec. 21, 2021.

3 Ark. Act 1019 (S.B. 484), Laws 2021.

4 Notable states enacting PTE tax regimes in 2021 included California, Illinois and New York. For further discussion, see GT SALT Alert: “California provides elective passthrough entity tax”; GT SALT Alert: “Illinois enacts income and franchise tax changes”; and GT SALT Alert: “New York state enacts tax increases in budget.”

5 Connecticut is the only state to have adopted a mandatory PTE tax to date.

6 P.L. 117-2 (2021).

7 Social Security Act, Title VI, 42 U.S.C. § 802(c)(1). The states are required to comply with certification and reporting requirements to receive the funds, and the federal government has the right to recoup the funds if the states do not comply with the ARPA restrictions.

8 Social Security Act, Title VI, 42 U.S.C. § 802(c)(2).

9 31 C.F.R. Part 35, RIN 1505-AC77, “Coronavirus State and Local Fiscal Recovery Funds.” This final rule is effective April 1, 2022.

10 For an issue paper addressing challenges to ARPA, see Joseph Bishop-Henchman, National Taxpayers Union, “Six Lawsuits Filed to Challenge ARPA Ban on State Tax Cuts,” June 3, 2021, published at:

11 Ohio v. Yellen, United States District Court for the Southern District of Ohio, Western Division, Case No. 1:21-cv-181, 2021 U.S. Dist. LEXIS 123008, July 1, 2021. See GT SALT Alert: “Ohio granted injunction from ARPA tax cut provision.”

12 Kentucky v. Yellen, United States District Court for the Eastern District of Kentucky, Central Division, Case No. 3:21-cv-00017-GFVT-EBA, Sep. 24, 2021. For further information, see GT SALT Alert: “Kentucky and Tennessee succeed in ARPA challenge.”

13 West Virginia v. U.S. Dept. of the Treasury, United States District Court for the Northern District of Alabama, Western Division, Case No. 7:21-cv-00465, Nov. 15, 2021. Additional states in this litigation include Alabama, Arkansas, Alaska, Florida, Iowa, Kansas, Montana, New Hampshire, Oklahoma, South Carolina, South Dakota, and Utah. For a discussion of this case, see GT SALT Alert: “Federal court blocks ARPA tax mandate enforcement.”

14 N.C. S.L. 2021-180 (S.B. 105), Laws 2021. For further information on this legislation, see GT SALT Alert: “North Carolina providing broad-based tax relief.”

15 La. Act 396 (H.B. 292), Laws 2021.

16 La. Act 395 (H.B. 278), Laws 2021.

17 La. Act 396 (H.B. 292), Laws 2021.

18 Note that the legislation also provides franchise tax rate reductions contingent on voter approval of the constitutional amendment. La. Act 389 (S.B. 161), Laws 2021. Future personal income tax and franchise tax rate reductions may occur if certain state financial conditions are satisfied. For further discussion of the legislation, see GT SALT Alert: “Louisiana provides contingent tax rate reductions.”

19 On Nov. 13, 2021, Louisiana voters approved the amendment of Art. VII of the Louisiana Constitution (Constitutional Amendment 2 on the ballot).

20 Ark. Act 1 (H.B. 1001) and Act 2 (S.B. 1), Laws 2021, Second Extra. Session.

21 Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272, Multistate Tax Commission, revised Aug. 4, 2021. For background regarding MTC efforts to update the P.L. 86-272 statement of information, see GT SALT Alert: “MTC reviewing fed laws covering state income tax.”

22 Pub. L. No. 86-272, 15 U.S.C. §§ 381-384.

23 247 A.3d 740 (Md. 2021); petition for cert. filed, No. 21-219, Aug. 12, 2021.

24 Ohio Supreme Court, No. 2021-Ohio-3155, Sep. 16, 2021; petition for cert. filed, No. 21-900, Dec. 14, 2021. For a discussion of this case, see GT SALT Alert: “Ohio ruling: Billboard tax violates 1st Amendment.”

25 New Jersey Superior Court, Appellate Division, No. A-3904-18T1, Jan. 13, 2021 (unpublished); petition for certification denied, 251 A.3d 760 (N.J. 2021); petition for cert. filed, No. 21-641, Oct. 28, 2021.

26 U.S. Court of Appeals, Second Circuit, No. 19-3962-cv, Oct. 5, 2021; petition for cert. filed, No. 21-966, Jan. 3, 2022. For further discussion of this case, see GT SALT Alert: “Court upholds federal SALT deduction cap.”

27 Halstead Bead, Inc. v. Lewis, U.S. District Court for the Eastern District of Louisiana, No. 2:21-cv-02106, complaint filed Nov. 15, 2021.

28 Md. Ch. 37 (H.B. 732), Laws 2021. For further discussion, see GT SALT Alert: “Maryland enacts digital ad gross revenues tax.”

29 U.S. Chamber of Commerce et al. v. Franchot, No. 1:21-cv-00410, U.S. District Court for the District of Maryland, Northern Division, filed Feb. 18, 2021; Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia LLC et al. v. Maryland Comptroller of the Treasury, No. C-02-CV-21-000509, Circuit Court for Anne Arundel County, Md., filed Apr. 15, 2021.

30 The Maryland Comptroller issued final regulations in Dec. 2021 providing rules for the sourcing of digital advertising tax revenue. MD. CODE REGS. §, Maryland Comptroller, effective Dec. 13, 2021.

31 Md. S.B. 787, Laws 2021.

32 For an in-depth discussion of marketplace provisions, see Kevin Herzberg & Patrick K. Skeehan, Wayfair Three Years On: Navigating a Changing Sales Tax Landscape, TAX NOTES STATE, Oct. 18, 2021.

33 Notice 2014-21, 2014-16 I.R.B. 938.

34 Id.

35 Technical Advisory Memorandum TAM-2015-1(R), New Jersey Division of Taxation, July 28, 2015.

36 TSB-M-14(5)C, TSB-M-14(7)I, TSB-M-14(17)S, New York Department of Taxation and Finance, Dec. 5, 2014.

37 General Information Letter IT-21-0004, Illinois Department of Revenue, Aug. 31, 2021 (released Oct. 2021). For a discussion of this guidance, see GT SALT Alert: “Illinois clarifies cryptocurrency apportionment.”

38 Tax Bulletin No. 213, Wisconsin Department of Revenue, April 2021.






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