State and local tax news for April 2025

During the past month, as many state legislatures continued to consider major tax legislation, state courts addressed state tax topics such as sales tax exemptions, the taxation of gains from a stock sale, imposition of a city earnings tax, and economic nexus. The California Court of Appeal held that implanted heart monitors were not exempt from sales tax. In Massachusetts, an appellate court held that a nonresident’s gain from selling stock in a corporation that he formed in Massachusetts was subject to its individual income tax. The Missouri Court of Appeals determined that a St. Louis resident’s passive income was not subject to the city’s earnings tax. Also, the New York Court of Appeals held that advertising reports were subject to sales tax as a taxable information service. The Oregon Tax Court concluded that a major entertainment and media company had substantial nexus even though it did not have a physical presence in the state. Finally, the South Carolina Court of Appeals held that the $5 million investment tax credit cap applies to taxpayers on an annual rather than lifetime basis. The State and Local Thinking newsletter for April, 2025, discusses all these developments. 

California court decides heart monitors not exempt from sales tax

On April 16, 2025, the California Court of Appeal, First Appellate District, held in Medtronic USA, Inc. v. California Department of Tax and Fee Administration that insertable heart monitors did not qualify for the sales and use tax exemption for medicines. The court concluded that the monitors were not exempt because they served a purely informational function requiring subsequent human intervention, rather than directly assisting in the functioning of an organ by themselves.

The taxpayer manufactured heart monitors that are implanted in a patient’s chest to automatically record an electrocardiogram (EKG) upon detecting cardiac arrhythmias. This information is used by doctors to diagnose and make informed decisions for cardiac patients. The California Department of Tax and Fee Administration collected sales tax upon the sale of the monitors. The taxpayer argued that the monitors were exempt from sales tax under a California statute and regulation providing an exemption for medicines. After the taxpayer exhausted its administrative remedies to have the sales tax reduced or returned, the taxpayer commenced litigation for a refund totaling over $3 million. The trial court granted summary judgment for the Department and the taxpayer subsequently appealed.

The California Court of Appeal affirmed that the heart monitors were not exempt from sales tax as medicines. In reaching its decision, the court focused on the language in Cal. Rev. & Tax. Code Sec. 6369 and related regulations providing a sales tax exemption for prescription medicines. The statutory definition of “medicines” excludes “[a]rticles that are in the nature of splints, bandages, pads, compresses, supports, dressings, instruments, apparatus, contrivances, appliances, devices, or other mechanical, electronic, optical, or physical equipment or article.” However, the same statute provides that “medicines” includes, in relevant part, “pacemakers, and other articles . . . permanently implanted in the human body to assist the functioning of any natural organ.”

The Department successfully argued that the monitors are excluded from the definition of “medicines” because they are devices and do not assist in the functioning of any organ. The court rejected the taxpayer’s position that the statutory exclusion for articles “in the nature of” splints and bandages from the definition of medicines indicated that such exclusion dealt with external treatments, and that the taxpayer’s monitors should qualify as exempt because they are permanently implanted inside the body. In rejecting this argument, the court noted that the general definition of “medicines” addresses an internal versus external distinction that cannot be read into a different provision of the same statute, such as the scope of “devices.” The court explained that the statute specifically includes pacemakers in the definition of “medicines,” implying that the exemption provision could not be expanded to encompass other types of devices regardless of whether they were implanted into the body.

The court also disagreed with the taxpayer’s argument that its heart monitors were exempt under the provision exempting articles permanently implanted in the body to assist in the functioning of any natural organ. Unlike pacemakers, the heart monitors serve a purely informational function that requires subsequent human intervention to “assist in the functioning” of the heart. As a result, the Court of Appeal agreed with the trial court that the heart monitors were not exempt from sales tax as “medicines.”       

Massachusetts court affirms taxation of gain from stock sale 

On April 3, 2025, the Massachusetts Court of Appeals held in Welch v. Commissioner of Revenue that gain from the taxpayer’s stock sale was subject to Massachusetts individual income tax even though he was a New Hampshire resident at the time of the sale. In affirming the Massachusetts Appellate Tax Board (ATB), the court agreed that the gain was derived from and effectively connected with the taxpayer’s trade or business in Massachusetts and represented compensation for the taxpayer’s services.  

The taxpayer formed a Massachusetts corporation in 2003 that develops and markets derivative and collateral management solutions for institutional investors. The corporation was headquartered in Massachusetts and filed Massachusetts corporate excise tax returns that apportioned 100% of its income to the commonwealth. In 2005, the corporation was voluntarily dissolved and another Massachusetts corporation by the same name was organized. The taxpayer, who held a 50% interest in the corporation’s common stock, was the corporation’s chief executive officer and treasurer. Between 2003 and 2015, the taxpayer worked exclusively for the corporation. He reported no wage income from 2003-2005 and only minimal income in 2006 and 2007, but expected to be compensated when the stock was sold. After various reorganizations and refinancing arrangements, the taxpayer owned shares of approximately 12% of the corporation in 2015.

For the 2003 through 2014 tax years, the taxpayer and his wife filed Massachusetts resident income tax returns. They moved to New Hampshire on April 30, 2015. In late June 2015, the corporation purchased the taxpayer’s shares for approximately $4.7 million. For 2015, the taxpayer and his wife filed a Massachusetts nonresident/part-year resident tax return, on which they reported that amount as having been included as capital gain on their federal tax return. On their Massachusetts return, the taxpayer and his wife did not include the $4.7 million gain as income from a Massachusetts source. After an audit, the Massachusetts Department of Revenue issued an assessment totaling nearly $336,000 in tax, interest, and penalties based on the gain realized from the sale of the stock. The ATB ruled that the gain from the taxpayer’s sale of the stock was Massachusetts source income because it was effectively connected with his trade, business, or employment in Massachusetts. The taxpayer appealed the ATB’s determination.

The Massachusetts Court of Appeals affirmed the ATB’s decision that the gain on the taxpayer’s stock sale should be sourced to the commonwealth. Under Massachusetts law, nonresidents may be taxed on their Massachusetts source income, which is defined to include “items of gross income derived from or effectively connected with . . . any trade or business, including any employment carried on by the taxpayer in the commonwealth, whether or not the nonresident is actively engaged in a trade or business or employment in the commonwealth in the year in which the income is received.” Massachusetts law broadly defines “derived from or effectively connected with any trade or business” to include gain from the sale of an interest in a business. A regulation discussing the taxation of income from a trade or business provides that it generally does not apply to sales of stock that result in capital gains for federal tax purposes, but the gain may be taxed if the “stock is related to the taxpayer’s compensation for services.”

Based on the statutory and regulatory framework discussed above, the court explained the case turned on whether the taxpayer’s gain from his shares was “derived from or effectively connected with” his trade, business, or employment, or “related to [his] compensation for services.” The ATB concluded the taxpayer’s gain from the sale of the stock was “compensatory” and “a remuneration that derived from and was effectively connected with his . . . employment.” The Court of Appeals determined that the ATB had substantial evidence on which it based its determination that the taxpayer’s gain from the sale of his shares was derived from his own trade or business of software development. Therefore, the court affirmed the ATB’s conclusion that the gain was taxable as Massachusetts source income. The decision serves as a cautionary tale for individual taxpayers that move from one jurisdiction to another in a year in which a large gain is recognized with the expectation that such gain cannot be sourced back to the jurisdiction in which the individual was formerly located.

Missouri court determines income not subject to city earnings tax         

In Daly v. Helmsing, the Missouri Court of Appeals held on April 22, 2025, that the City of St. Louis earnings tax did not apply to a resident’s income from several nonresident limited liability companies conducting business outside the city because it was not “earned” income. The resident did not actively participate in any of the businesses and considered the income to be investment income.    

The St. Louis resident was a limited partner in several nonresident businesses operating outside the city. For the 2013-2015 tax years, the resident filed returns reporting her earned income from these businesses. After auditing the resident’s returns, the city tax collector sent a tax delinquency letter concluding that the resident had underpaid her earnings taxes. In November 2019, the tax collector filed a petition for declaratory judgment and collection of the delinquent amount. The tax collector sought declarations that: (i) the resident was foreclosed from challenging the contested taxes due to her failure to file a protest under Mo. Rev. Stat. Sec. 139.031.1 (a statute which requires payment of the disputed tax before the delinquency date); (ii) the profits paid to the resident were subject to the city’s earnings tax; and (iii) the resident was liable for the contested taxes plus interest and penalties. In granting the resident’s summary judgment motion, the trial court held the resident was not required to comply with the statute requiring payment of the disputed tax, and the income from the businesses was not earned income subject to tax. The tax collector filed an appeal.  

The Missouri Court of Appeals affirmed the trial court’s holding. First, the appellate court rejected the collector’s argument that the trial court should have barred the resident from challenging the legality of the earnings tax because she did not pay the disputed tax under protest pursuant to Mo. Rev. Stat. Sec. 139.031.1. The collector contended that this statute is the exclusive remedy for a taxpayer seeking to challenge the legality of a tax and precluded the resident from challenging the city’s earnings tax assessment. The court explained that the statute did not apply in this case because the collector did not inform the resident of the amount of earnings tax it believed she owed until well after the delinquency date. The statute does not preclude a taxpayer from defending a collection action. Because the collection did not impose a tax amount that the resident could dispute before the date of delinquency, the resident could not have filed a protest before the delinquency as required by the statute.

The court of appeals also agreed the resident’s income from the businesses was not subject to the city’s earnings tax. The enabling statute that defines what income is subject to the earnings tax provides that tax generally is imposed on salaries, wages, and other compensation earned, but the tax does not apply to unearned income. Distinguishing between “earned” and “unearned” income requires consideration of all available facts and information pertinent to the individual taxpayer. In this case, the resident was a limited partner that did not actively participate in any of the businesses. She had no control over how the businesses performed or operated and considered the income to be investment income. Because this income was not the category of funds that are designated as “earned” income and the resident did not participate in the businesses, it was not subject to an earnings tax. This is a positive case for residents subject to the St. Louis earnings tax and may support a basis for refund requests if a resident has paid earnings tax on passive income, although showing that there has been no active participation in the business often requires consideration of a fact-sensitive analysis. 

New York high court affirms advertising reports subject to sales tax       

On April 17, 2025, the New York Court of Appeals held in Dynamic Logic, Inc. v. Tax Appeals Tribunal that the reports sold by the taxpayer to measure the effectiveness of clients’ advertising campaigns were considered an information service subject to sales tax. In affirming the Appellate Division of the New York Tax Appeals Tribunal, the Court of Appeals agreed that the reports constituted the furnishing of information that was substantially incorporated in reports provided to other persons.  

The taxpayer markets products to help clients measure the effectiveness of their advertising campaigns. At issue was a product, AdIndex, which identifies individuals who have been exposed to a client’s advertisements and then surveys them along with a control group. The results are compared to broader market data contained in MarketNorms, a database maintained by the taxpayer that is also available to clients as a subscription service. The taxpayer then generates a report for the client which includes the survey data collected and an analysis of the information. The data gathered in each AdIndex report is later incorporated into the MarketNorms database for use in reports for future clients.  

In 2014, the New York Commissioner of Taxation and Finance audited the taxpayer and concluded that AdIndex was a taxable information service. After the Commissioner assessed additional sales tax, the taxpayer challenged the assessment through both administrative levels of the Tax Appeals Tribunal. Ultimately, the Tribunal upheld the Commissioner’s determination and concluded that AdIndex’s primary function was the collection and analysis of information. The taxpayer filed a petition with the Appellate Division seeking to annul the Tribunal’s determination. The Appellate Division unanimously affirmed the determination and dismissed the petition, holding that the Tribunal had rationally determined that AdIndex was an information service and there was substantial evidence to support its conclusion. Also, the Appellate Division held that the Tribunal rationally concluded that the information provided through AdIndex was substantially incorporated into reports furnished to other persons. Following this decision, the New York Court of Appeals granted the taxpayer’s leave to appeal.

The New York Court of Appeals affirmed the decision after considering the relevant statutory language. Under N.Y. Tax Law Sec. 1105(c)(1), sales tax is imposed on the “furnishing of information by printed, mimeographed or multigraphed matter or by duplicating written or printed matter in any other manner, including the services of collecting, compiling or analyzing information of any kind or nature and furnishing reports thereof to other persons, but excluding the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons.” The court explained that because the parties conceded the information was personal and individual in nature, the determination of whether sales tax was properly imposed on AdIndex turned on: (i) whether the service represents the “furnishing of information” and (ii) whether the information is “substantially incorporated in reports furnished to other persons.”

The court summarily agreed that AdIndex reports constituted the furnishing of information because the primary function of the reports generated by AdIndex is the collection and analysis of information. To the extent that recommendations or advice are included in the reports, those features were ancillary to the core data analysis purpose of the product. Thus, there was ample support for the Tribunal’s determination that AdIndex is a taxable “information service.”

After determining that the reports were the furnishing of information, the court concluded that the exemption for information that is not substantially incorporated in reports furnished to other persons did not apply. The taxpayer unsuccessfully argued that, in order to be substantial, data must be incorporated “to a great extent or degree” into subsequent reports. The Tribunal found that as long as information collected from each AdIndex report is blended thoroughly with existing data into subsequent reports and represents a valuable addition to them, the product does not qualify for the statutory exclusion. The court concluded that the Tribunal’s application of the statutory exclusion was reasonable. Alternatively, even if the court were to accept the taxpayer’s definition of “substantially incorporate” as meaning incorporation “to a great extent or degree,” it would still be reasonable for the Tribunal to conclude that the AdIndex product did not qualify for the exclusion because much of the information generated for each report is incorporated in the MarketNorms database, which the taxpayer separately markets and sells as an independent product.

This decision is consistent with other recent holdings in New York, but is notable because of its likely narrowing of the exemption that historically was available for taxpayers that provided distinctive information services to clients. Taxpayers providing services by which information is provided in some format and could be construed as taxable information services should carefully consider the court’s analysis. A comprehensive dissenting opinion disagreed with the majority opinion’s analysis of the exemption for information, contending that the Adindex report issued to a particular client was not substantially incorporated in reports furnished to other clients, and as such, the exemption should have been available to the taxpayer. 

Oregon court decides entertainment company had economic nexus       

The Oregon Tax Court held on March 25, 2025, in NBC Universal, Inc. v. Department of Revenue, that a taxpayer that owned and operated news and entertainment television networks had substantial nexus with the state because its agreements with Oregon television affiliates, which generated advertising revenue for the taxpayer, established an economic connection to the state. Also, the taxpayer failed to prove that the apportionment formula for interstate broadcasters unfairly represented its activities in Oregon.

During the 2006-2013 tax years at issue, the taxpayer owned and operated a portfolio of news and entertainment television networks that included NBC, a motion picture company, television production operations, a television station group, and theme parks. The taxpayer created programming content which it provided to affiliate stations nationwide, including in Oregon. However, the taxpayer had no offices, employees, or physical property in Oregon and did not own or operate local broadcast television stations in the state. Under contracts with seven NBC affiliate stations in Oregon, the taxpayer provided programming and branding support. The Oregon affiliate stations did not pay the taxpayer directly for licensing, services, or sales related to broadcast television and advertisements. Instead, the taxpayer received revenue from the local stations for advertising sales.

The court explained that the central issue was whether the taxpayer’s licensing of television programming created a substantial nexus or economic presence in Oregon that justified state taxation. The Oregon Department of Revenue successfully argued that the taxpayer’s agreements with Oregon affiliates established a substantial economic connection with the state. The court rejected the taxpayer’s argument that it lacked substantial nexus because it had no physical presence in Oregon and did not directly market to Oregon residents.

An Oregon regulation, currently numbered Or. Admin. R. 150-317-0020, provides that before the state may impose corporate income or excise tax, there must be substantial nexus between Oregon and the activity or income it seeks to tax. The regulation explains that the Commerce Clause of the U.S. Constitution does not require a taxpayer to have a physical presence in the state. Under the regulation, “[s]ubstantial nexus exists where a taxpayer regularly takes advantage of Oregon’s economy to produce income for the taxpayer and may be established through the significant economic presence of a taxpayer in the state.” The regulation includes several factors to consider when determining nexus. As discussed below, the Oregon Tax Court expressly applied three of these relevant factors.  

The Oregon Tax Court determined that the taxpayer had substantial nexus with the state. The taxpayer maintained continuous and systematic contact with Oregon’s economy by partnering with affiliates under contract to deliver broadcast television programming and advertisements aimed at Oregon viewers. Also, the taxpayer generated significant gross receipts attributable to the Oregon viewers through the taxpayer’s sales of advertising slots during its programming. Finally, the taxpayer’s business activities in Oregon stemmed from its significant gross receipts attributable to the use of its intangible property. The taxpayer branded the local affiliates as NBC stations and received revenue from licensing its programming for broadcast to Oregon viewers.

Imposition of the tax also satisfied the Due Process and Commerce Clauses of the U.S. Constitution. Regarding the Due Process Clause, the court noted that the taxpayer’s programming agreements with its local affiliate stations demonstrated a purposeful availment of the Oregon market. The taxpayer earned substantial revenue from its advertisements placed in broadcasts, which ultimately targeted Oregon residents. The court found these activities collectively satisfied the Due Process Clause’s nexus requirement. Also, the taxpayer had substantial nexus under the Commerce Clause.  The taxpayer’s contracts with Oregon affiliates created a substantial virtual presence by ensuring its programming and advertising content was broadcast following a consistent weekly schedule to Oregon viewers, which generated significant advertising revenue. The contracts with Oregon affiliates amount to intentional and continuous engagement with the state’s market.

The court held that the taxpayer failed to prove that the apportionment formula for interstate broadcasters unfairly represented its activities in Oregon. The special apportionment provisions specifically use an audience-based apportionment methodology, reflecting the economic reality of the broadcast industry. The court determined that the internal and external consistency tests were satisfied. Therefore, the court granted the Department’s motion for summary judgment.

This case illustrates the analysis that should be performed when making economic nexus determinations. On March 31, 2025, the Oregon Tax Court released a similar decision involving another major entertainment and media company in Time Warner, Inc. v. Department of Revenue. In this decision, the court held that several of the taxpayer’s network affiliates were classified as broadcasters subject to the apportionment formula for interstate broadcasters given their audience and financial ties to Oregon. The court also determined that since the parties were still considering whether other network affiliates had the same ties to Oregon, it was too soon to rule on the overarching issue of whether the Oregon broadcaster formula provided for fair apportionment. 

South Carolina holds investment tax credit cap applies annually

On March 26, 2025, in Duke Energy Corp. v. South Carolina Department of Revenue, the South Carolina Court of Appeals held that the statutory $5 million investment tax credit limitation applies on an annual, rather than lifetime, basis. In reversing the South Carolina Administrative Law Court (ALC), the appellate court held that the taxpayer was entitled to receive nearly $20 million of tax credits for the 2011-2014 tax years because it did not exceed the annual $5 million limit in any of these four years.   

S.C. Code Ann. Sec. 12-14-60(A)(1) provides an investment tax credit “for any taxable year in which the taxpayer places in service qualified manufacturing and productive equipment property.” At issue was subsection (G), which places a $5 million limit on the amount of tax credit entities may claim. Following an audit, the South Carolina Department of Revenue disallowed nearly $20 million in investment tax credits claimed by the taxpayer for the 2011-2014 tax years. After the taxpayer protested the adjustment, the Department issued a determination affirming its decision. The taxpayer subsequently requested a contested case hearing. The ALC found the statute ambiguous and construed the tax credit cap to be a $5 million lifetime limit. Also, the ALC determined the Department did not violate any rulemaking procedures when revising the credit form to reflect a lifetime limit. The taxpayer appealed to the South Carolina Court of Appeals.  

The Court of Appeals reversed the ALC’s interpretation of the investment tax credit cap as a lifetime limitation. In agreeing with the taxpayer, the appellate court held that the statute is unambiguous and sets forth an annual limit. After acknowledging that subsection (G) does not contain any time-specific language to describe the $5 million limit, the court noted that subsection (A)(1) defines the credit as being available in “any taxable year.” Also, the credit applies against a yearly income tax. Absent language providing for a lifetime limitation, the court found a credit against a yearly tax can be claimed in any tax year in which the statutory requirements are met. In addition, the court noted that the legislature’s intent in enacting the credit was to encourage continued investment in the state. The court reasoned that provided the taxpayer meets the requirements, the tax credit may be claimed. Furthermore, the court explained that the credit’s 10-year carryforward provision supports its conclusion that the statutory cap is an annual limit. When subsection (G) is read within the context of the entire statute, the plain language specifies the limit applies on an annual basis.

Although the court explained that it gives deference to an agency’s interpretation of its laws and policies, the court determined the Department’s interpretation of the $5 million statutory cap as a lifetime limit contradicted the court’s reading of the statute’s plain language. The court held that the ALC erred in finding that the statute was ambiguous. This decision is positive for taxpayers because the application of the cap on an annual basis may greatly increase the lifetime credit available to some taxpayers, and potentially for credits that have similar cap language contained in statutes. Accordingly, taxpayers may want to consider refund claims based on this case.