SALT outlook: Our predictions for 2023


SALT Outlook: Our predictions for 2023


Each year, the SALT team in Grant Thornton’s Washington National Tax Office looks ahead to discuss which state and local tax issues we think will occupy legislatures,  courts and revenue departments. Our annual SALT outlook offers 10 predictions, focusing on the SALT issues that we believe will be of primary interest to policymakers, courts, and taxpayers in 2023.


Last January, our outlook for 2022 predicted activity in such wide-ranging concerns as remote work income withholding policies, pass-through entity taxation, American Rescue Plan Act (ARPA) mandate litigation, income tax relief and cryptocurrency guidance. Grant Thornton’s recent webcast, “Significant SALT Developments for 2022 and Predictions for 2023,” includes a review of the past year’s most significant issues and also looks to what this year could hold.


A review of the 10 major SALT developments from last year can also be found in our story “Top 10 SALT stories of 2022.”




Our 2023 predictions


1. PTE Taxes


Throughout 2022, states continued to move swiftly to adopt PTE tax regimes as a workaround to the federal $10,000 SALT deduction limitation adopted under the Tax Cuts and Jobs Act (TCJA), with eight jurisdictions doing so in 2022. Electing into these tax regimes continues to be an attractive option for PTEs because of the federal tax benefit available to PTE owners. Given the popularity of these tax regimes, and the widespread interest in providing a federal tax benefit to PTE owners as long as the $10,000 SALT deduction limitation remains in effect, with little or no fiscal impact to the states, we expect this trend to continue in 2023 in jurisdictions that have at least thought about the issue but have not yet acted. Because 30 state and local jurisdictions have already enacted elective PTE tax legislation to date, the pace of adoption will necessarily slow from prior years. We predict that two to four additional states will enact PTE tax regimes in 2023.



2. Tax collections seesaw


While most states were in a relatively comfortable spot with respect to their budgets in 2022, state budget surpluses may not continue for much longer, as economic headwinds begin to blow and the specter of an economic recession during 2023 looms.1 The changing economy may produce large fluctuations in state tax collections during the year, making it difficult for policymakers to determine whether to keep cutting taxes, or bolstering revenue streams through other means. In recent years during which state revenue was not as strong, states enacted “sin” taxes on items such as recreational marijuana2 and sports betting3 to raise revenue. Expect a lot of variation in the states’ approach to revenue generation in 2023. We predict that while income tax relief will continue, with at least four additional states deciding to lower corporate and/or personal income taxes in the form of rate reductions and/or phaseouts, at least three additional states will act to raise additional revenue through “sin tax” legislation such as the taxation of sports betting and/or recreational marijuana.



3. ARPA tax mandate litigation


The ARPA tax mandate litigation discussed above is reaching a critical juncture, with courts reaching inconsistent conclusions in several jurisdictions. Notably, the uncertainty resulting from when the tax mandate provision serves to prevent a tax cut has not stopped states from going forward with plans to reduce taxes over time. At the same time, it is clear that the Treasury Department plans to continue litigating in support of the guidance that it has provided on this subject to date. The challenge between the states and the federal government is precisely the situation for which the ultimate judicial arbiter should weigh in. We predict that the U.S. Supreme Court will grant review of at least one of the ARPA tax mandate cases to resolve the split between federal appeals courts over whether states have standing to challenge the tax mandate and/or determine the constitutionality of the tax mandate itself.



4. Continuing Maryland digital advertising tax litigation


After the spate of litigation on Maryland’s digital advertising services tax in 2022, all signs lead to the Maryland Supreme Court being the court of last resort with respect to whether this tax will be revived. The Maryland attorney general most recently filed a direct appeal with the Maryland Supreme Court, arguing that the state trial court judge wrongly accepted the case and ruled on a constitutional issue because the plaintiffs had not first objected through the state’s administrative appeals process. While the state's high court considers the matter, potentially impacted companies are still somewhat uncertain as to how to comply with a tax that is on the books, with adopted regulations, forms and the like, but has been stricken by a court. We predict that the invalidation of Maryland’s digital advertising services tax will be upheld by the Maryland Supreme Court, stalling any other state attempts to enact similar taxes.



5. Sales tax inventory nexus litigation


A growing number of states have asserted sales tax “inventory nexus” for remote sellers participating in the Fulfillment by Amazon (FBA) program prior to the South Dakota v. Wayfair Inc.4 decision in 2018 and the subsequent enactment of marketplace facilitator laws. Under the FBA program, as a means to efficiently transport an online retailer’s inventory to the ultimate customer, the inventory may be temporarily relocated to an intermediate state without the retailer’s knowledge. States such as California, Pennsylvania and Washington have begun asserting nexus and sales tax collection and remittance obligations based on such tangential physical presence in their states.


In response, remote sellers have challenged state sales tax assessments and registration demands by filing lawsuits in federal and state court. For example, the Online Merchants Guild, a trade association for independent online retailers, filed a lawsuit on behalf of the FBA sellers in a California federal court challenging California’s authority to issue sales tax assessments against the FBA sellers. However, the lawsuit was dismissed on the basis that it was barred by the federal Tax Injunction Act (TIA), and the dismissal was upheld by the U.S. Court of Appeals for the Ninth Circuit.5


After a similar lawsuit filed by the Guild challenging Pennsylvania’s registration demands of FBA sellers was dismissed by a federal court on procedural grounds, the Guild re-filed the lawsuit in a Pennsylvania state court. As the first court to rule on the merits of these cases, a Pennsylvania appellate court ruled that Pennsylvania failed to establish that FBA sellers had sufficient minimum contacts with the state under the Due Process Clause of the U.S. Constitution to mandate collection and remittance of sales tax.6 Given that other courts are likely to reach varying conclusions on pending inventory nexus cases around the country, we predict that two to four additional federal or state court decisions will be issued addressing sales tax inventory nexus issues on the merits, with a split developing across jurisdictions as to whether the practice satisfies due process.



6. State adoption of revised P.L. 86-272 guidance


As discussed above, states have begun to adopt the MTC’s revised guidance interpreting longstanding federal protections from the imposition of state income tax originally developed under P.L. 86-272 to reflect the modern economy and internet business activities. The MTC’s revised statement has generated significant controversy because the MTC’s position on internet business activities arguably narrows the protections of the law in many cases, and some people question its interpretation of a federal law that could subject businesses to income tax filing obligations by engaging in certain internet activities in a state even though they have no physical presence there. Though states are not bound by the MTC’s revised statement and are responsible for individually adopting its principles, unless such policies are successfully challenged through litigation, other states will follow California and New York’s lead. We predict that two or three additional states will adopt the MTC’s revised statement providing that various activities conducted via the internet exceed P.L. 86-272 protection through regulation or administrative action. 



7. Reactions to previously planned changes in TCJA


The TCJA was enacted in 2017, but states are continuing to react to many of the TCJA’s provisions which as planned, continue to morph over time.7 For example, the TCJA provided 100% bonus depreciation for property placed in service after Sept. 27, 2017, and before Jan. 1, 2023.8 However, the federal bonus depreciation deduction will be phased out in 20% annual increments, with a complete elimination of bonus depreciation beginning in 2027. Recognizing this change, some states that traditionally conformed to the federal provisions may want to continue 100% bonus depreciation. In May 2022, Oklahoma became the first state to address the phaseout of the federal bonus depreciation deduction by enacting legislation allowing 100% bonus depreciation, notwithstanding any changes to federal law related to amortization of cost recovery beginning on or after Jan. 1, 2023.9


The TCJA also contained prospective provisions concerning the business interest deduction limitation and research and development (R&D) expenditures. For purposes of the business interest deduction limitation contained in IRC Sec. 163(j), the TCJA provides that the adjusted taxable income computation used for the limitation follows an earnings before interest, taxes, depreciation, and amortization (EBITDA) approach for the 2018-2021 tax years. Beginning in 2022, the adjusted taxable income computation is more equivalent to an earnings before interest and taxes (EBIT) approach. Also, effective for tax years beginning after Dec. 31, 2021, the TCJA amended IRC Sec. 174 to require R&D expenditures to be deducted over a period of five years (domestic research) or 15 years (foreign research). Prior to 2022, taxpayers could fully deduct all R&D expenditures as incurred. In March 2022, Tennessee decoupled from this federal change by enacting legislation to adopt IRC Sec. 174 as it existed immediately before enactment of the TCJA.10


Given the TCJA’s dramatic and shifting effect on state corporate income tax bases, states will need to closely consider and reevaluate how they conform to the TCJA’s most significant provisions. We predict that states will react to these TCJA changes as follows: (i) at least two more states will provide for permanent 100% bonus depreciation, in light of the planned federal reductions in this benefit; (ii) at least two states will reposition their conformity policy on the IRC Sec. 163(j) limitation to either decouple from the change in the interest limitation calculation, or completely decouple from the limit; and (iii) in the absence of federal legislation extending more beneficial provisions relating to IRC Sec. 174, at least two more states will effectively extend such provisions.      



8. Effects of inflationary / uncertain economic environment


Beginning in 2021, as part of the economic impact of the COVID pandemic, the U.S. economy has been experiencing its highest rate of inflation in 40 years. The Federal Reserve Bank has been substantially raising interest rates to combat inflation, but it is unknown how long the high inflation rate will continue. Retailers are experiencing rapidly rising costs and are seeking ways to pass some of these higher costs to consumers. Recent guidance issued by the South Carolina Department of Revenue highlighted this issue, in which the Department addressed the sales tax treatment of inflation fees, convenience fees and non-cash adjustment fees added to customers’ invoices or receipts to recover some of their increased operating and processing costs.11


While inflation shows some signs of abating, the imposition of cost recovery fees by businesses may not follow as quickly. In fact, these fees may become more prevalent and merit clarification from other states regarding whether they are subject to sales and use tax. In response to inflation and additional fees imposed in the post-COVID environment, we predict that at least more four states will issue guidance on the sales tax treatment of these types of fees.



9. Remote work tax policy


Widespread remote work continues to present complexity for employers when it comes to income tax withholding, nexus and apportionment considerations. The staying power of the remote workplace also stands to negatively impact certain states from a long-term revenue perspective. In particular, New York’s longstanding aggressive enforcement of the convenience of the employer rule has added effect in an environment in which out-of-state employees may no longer be required to regularly commute into a New York office but are still designated to that office. As a result, bordering states like New Jersey are evaluating potential legislative responses. Considering the increasingly detrimental revenue effect on states that border convenience states, we predict that at least two states will enact legislation or promulgate regulations to address income tax withholding rules in response to a bordering state’s enforcement of a convenience rule.



10. Novel sales tax collection approaches, and sales tax on novel products


In 2021, Colorado became the first state to enact legislation imposing a state-level retail delivery fee on certain motor vehicle deliveries to a Colorado location with at least one item of tangible property subject to state sales tax.12 While the fee did not become effective until July 2022, the compliance difficulties associated with the collection of this novel and complex fee have caused confusion for both in-state and remote sellers in determining the extent to which they are required to collect the fee and how to do so. Despite the complexities associated with the implementation of the retail delivery fee, other states are likely to consider similar fees or taxes on deliveries, in response to the trend of companies moving to a home delivery model using electronic vehicles. States are also looking for new ways to charge for the use of roads if they continue to see decreases in gasoline tax revenue. Watching Colorado’s approach closely, we predict that at least two states will propose retail delivery fees, but no states will enact this type of fee in 2023.

While states continue to search for new sales tax (or fee) collection approaches, the focus on taxing new types of products continues. As discussed above, the marketplace for NFTs has exploded in recent years, which in turn has triggered interest by states seeking to subject NFTs to sales and use tax as a means to generate additional revenue. In an effort to tax these novel products, we predict that at least three additional states will provide regulatory or administrative guidance on the treatment of NFTs for sales and use tax purposes.


1 Two major states already are predicting an end to their budget surpluses. California is projected to have a budget deficit beginning with the 2023-24 fiscal year based on lower revenue estimates. California’s Fiscal Outlook, Legislative Analyst’s Office, The California Legislature’s Nonpartisan Fiscal and Policy Advisor, Nov. 16, 2022. Similarly, New York has announced reductions in its tax receipts forecast that could result in budget deficits beginning with the 2024 fiscal year. Press Release, Governor Hochul Announces Update to State Budget Financial Plan Reflecting Changes to the National Economic Outlook, Office of New York Governor, Aug. 1, 2022.
2 In 2021, the states that decided to tax recreational marijuana included Connecticut, Montana, New Jersey, New Mexico, New York, and Virginia.
3 The states that decided to tax sports betting in 2021 included Arizona, Connecticut, Florida, Louisiana, Maryland, Nebraska, South Dakota, and Wyoming.
4 138 S. Ct. 2080 (2018).
Online Merchants Guild v. Maduros, U.S. District Court for the Eastern District of California, No. 2:20-cv-01952, Oct. 13, 2021; affirmed, U.S. Court of Court of Appeals for the Ninth Circuit, No. 21-16911, Nov. 9, 2022. For further information, see GT SALT Alert: “Federal court dismisses California sales tax suit.”
Online Merchants Guild v. Hassell, Pennsylvania Commonwealth Court, No. 179 M.D. 2021, Sept. 9, 2022. For further discussion, see GT SALT Alert: “Pennsylvania denies nexus based on inventory.”
7 P.L. 115-97 (2017).
8 IRC § 168(k).
9 Okla. H.B. 3418, Laws 2022, enacting Okla. Stat. tit. 68, § 2358.6A.
10 Tenn. S.B. 2397, Laws, 2022, amending Tenn. Code Ann. § 67-4-2006(a), effective for tax years beginning or after Jan. 1, 2022. 
11 Revenue Ruling No. 22-10, South Carolina Department of Revenue, Oct. 20, 2022. For further discussion, see GT SALT Alert: "South Carolina's inflation fees to be subject to sales and use tax.
12 Colo. S.B. 21-260, Laws 2021, adding Colo. Rev. Stat. § 43-4-218.





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