The beginning of the summer season brought the adoption of SALT legislation in several states to resolve budgetary issues, along with important administrative decisions and agency regulations that merit consideration. In California, the Office of Tax Appeals determined that two taxpayers continued to be California residents despite their efforts to change their domicile to Nevada. Connecticut enacted budget legislation that extends the 10% corporation business tax surcharge for three years and eliminates the cap on a combined group’s tax liability. In separate legislation, Connecticut is providing an incentive for residents who work outside the state to successfully challenge the convenience of the employer rule used in other states. Minnesota enacted an omnibus tax bill designed to raise revenue that repeals the electricity sales tax exemption for qualified data centers and increases the cannabis gross receipts tax. Also, New Jersey adopted changes to its corporation business tax rules that include a new rule addressing the extent of P.L. 86-272 protection to internet activities, and significant additional interpretation to its market-based sourcing rules. In Philadelphia, the city enacted budget legislation that gradually reduces the city’s varied personal and business tax rates. Finally, Virginia enacted legislation that temporarily suspends its rolling conformity to the Internal Revenue Code. The State and Local Thinking newsletter for July discusses all these developments.
California OTA holds individuals were residents of state
In an unpublished opinion released on June 2, 2025, the California Office of Tax Appeals (OTA) ruled in Tran and Medina that the taxpayers were California residents because they maintained a familial abode in the state and were physically present in the state for most of the time during the tax years at issue. Even though the taxpayers purchased a condominium in Nevada, were issued Nevada driver’s licenses, registered their vehicles in Nevada, and registered to vote in Nevada, they failed to convince the OTA that they were no longer California residents.
The case concerned whether a husband and wife were California residents during the 2007-2009 tax years. They resided in California through the end of the 2006 tax year. Prior to the tax years at issue, they acquired an investment property in California. The husband was licensed as a California physician and surgeon and his wife was licensed as a California nurse, but their licenses expired in 2005. In October 2006, the husband purchased a condominium in Nevada that was smaller than the California home. In February 2007, they were issued Nevada driver’s licenses and surrendered their California licenses. The wife registered the California vehicle in Nevada in March 2007, and registered a recently purchased vehicle in Nevada in June 2008. During 2007 and 2008, the wife received specialized medical treatment in a California clinic on numerous occasions. The husband accompanied his wife to her treatments. They registered to vote in Nevada in October 2008. Their family members lived in California and the taxpayers repeatedly spent time in California.
The taxpayers filed joint California nonresident or part-year resident income tax returns for the tax years at issue. The California Franchise Tax Board (FTB) audited the taxpayers and determined that they remained California residents. The FTB proposed to increase the taxpayers’ California income based on California residency and to assess additional tax. They timely appealed the assessments.
Before the OTA, the taxpayers argued that beginning in January 2007, they were not residents of California because they were no longer domiciled in the state. The OTA explained that California residents are taxed on their entire taxable income, while nonresidents are only taxed on income from California sources. Under California law, a “resident” is defined as including: (i) every individual who is in California for other than a temporary or transitory purpose; and (ii) every individual domiciled in California who is outside the state for a temporary or transitory purpose. A domicile is defined as the one location where individuals have the most permanent connection, the place where they intend to remain, and the place where they intend to return when absent. To change domicile, a taxpayer must: (i) take up actual, physical residence in a particular place; and (ii) intend to remain there permanently. A domicile is presumed to continue until it is shown to have been changed.
In determining that the taxpayers remained domiciled in California for the 2007-2009 tax years, the OTA first noted that it was undisputed that the taxpayers were California domiciliaries and residents prior to 2007. As a result, the taxpayers’ domicile is presumed to be California unless they demonstrate that their domicile changed. The OTA examined the taxpayers’ acts and determined that they did not intend to abandon their California domicile and establish a new domicile in Nevada. According to the OTA, the taxpayers were physically present in California for a substantial amount of time as compared to their time spent outside California, demonstrating a significant connection to the state. Also, the purchase of the Nevada residence did not show that they abandoned their California domicile. Furthermore, the taxpayers did not prove an intent to leave their California domicile and establish a new one in Nevada.
After concluding that the taxpayers were California domiciliaries, the court determined that they were California residents because they were only outside the state for a temporary or transitory purpose. The OTA explained that where individuals have contacts with more than one state, the state with the closest connections is the state of residence. To evaluate an individual’s contacts with a state, the following factors are considered: (i) registrations and filings with a state or agency; (ii) personal and professional associations; and (iii) physical presence and property. The OTA considered these factors and concluded that the taxpayers’ time in Nevada was for a temporary or transitory purpose. However, the wife was granted innocent spouse relief and was not responsible for any liabilities for tax, penalties, or interest.
Connecticut extends corporate surcharge, eliminates combined group cap
On June 23, 2025, Connecticut Governor Ned Lamont signed budget legislation, H.B. 7287, which extends the corporation business tax surcharge, eliminates the cap on a combined group’s tax liability, repeals an alternative net operating loss (NOL) provision for certain combined groups, and increases the refund value of certain research credits. On the same day, Governor Lamont signed separate legislation, S.B. 1558, providing an individual income tax credit for residents employed in another state who successfully challenge the other state’s convenience of the employer rule.
H.B. 7287 extends the existing 10% corporation business tax surcharge for three years to the 2026 through 2028 income years. Prior to amendment, the surcharge was scheduled to expire after the 2025 income year. The surcharge continues to apply to corporations that have more than $250 in corporation tax liability and either: (i) have at least $100 million in annual gross income in those years; or (ii) are taxable members of a combined group that files a combined unitary return, regardless of the amount of annual gross income.
Beginning with the 2025 income year, H.B. 7287 eliminates the $2.5 million cap on the amount a combined group’s tax, calculated on a combined basis, can exceed the tax it would have paid on a separate basis. This provision could substantially increase tax due for large businesses with significant Connecticut physical or economic presence. The legislation also eliminates an alternative NOL provision that applied to a very limited number of combined groups that had over $6 billion in NOLs prior to the 2013 tax year. These combined groups could make a special election during the 2015 income year to relinquish 50% of their losses before 2015 in exchange for using the remaining loss carryover to reduce their tax by up to $2.5 million in any income year beginning in 2015. Prior to amendment, combined groups that made this election were only subject to the standard NOL limitation. The legislation eliminates this alternative NOL rule and requires these groups to recalculate their remaining loss carryover on their 2025 income year return as if they had not been required to relinquish 50% of their losses before 2015 to make the election. The recalculated remaining NOLs may be used beginning with the 2025 tax year subject to the standard NOL limitations.
H.B. 7287 also increases the cash refund a qualifying small biotechnology company may receive for research tax credits from 65% to 90% of the credit amount beginning with the 2025 income year. This refund is available to qualified small businesses that earn research tax credits that cannot be used because they have no corporation business tax liability. A “biotechnology company” is a company that applies certain technologies to produce or modify products, improve plants or animals, identify targets for small molecule pharmaceutical development, transform biological systems into useful processes and products, or develop microorganisms for specific uses. The refund amount remains at 65% of the value of the credit for other qualifying small businesses.
Beginning with the 2020 tax year, S.B. 1558 provides Connecticut residents with an income tax credit if they successfully challenge another state’s convenience of the employer rule. Under New York’s convenience of the employer rule, New York courts have held that nonresidents employed in New York who work outside the state when not required by their employer to do so must source their wage income to New York. As a result, many Connecticut residents who were employed in New York but required to work from home during the COVID-19 pandemic were subject to New York tax. The legislation creates an income tax credit for Connecticut residents who win a challenge in another state for taxing their income earned in Connecticut and denying them a refund on those taxes. The credit equals 60% of the amount of the Connecticut taxes owed because of the resulting adjustment of the credit the taxpayer received for taxes paid to the other jurisdiction.
Minnesota enacts omnibus tax bill intended to raise revenue
On June 14, 2025, Minnesota Governor Tim Walz signed an omnibus tax bill, H.F. 9, which was enacted as part of a one-day special legislative session. The legislation makes numerous amendments to Minnesota tax law. This summary addresses the most significant provisions, including a change to the income tax law that makes the research credit partially refundable, repeal of the electricity sales tax exemption for qualified data centers, change of the sales tax payment deadline for certain vendors, and increase in the cannabis gross receipts tax. With the exception of the amendment to the research credit, these changes are intended to increase state tax revenue.
Beginning with the 2025 tax year, a portion of the Minnesota research activities credit will become refundable. The existing credit equals 10% of the first $2 million of the difference between current-year research expenditures and a “base amount,” and 4% of the difference over $2 million. The research credit has not been refundable since 2013. Taxpayers are allowed to carry forward unused credits for up to 15 years. As amended, 19.2% of the current year credit that exceeds tax liability is refundable for the 2025 tax year. The refundable portion is increased to 25% for the 2026 and 2027 tax years. Beginning with the 2028 tax year, the rate of the refund will equal the lesser of 25% or the rate set by the Minnesota Commissioner of Revenue based on economic forecasts and the amount of the credit expected to be taken by businesses.
Effective for sales and purchases made after June 30, 2025, the legislation repeals the sales tax exemption for electricity purchased by qualified data centers and qualified refurbished data centers. Under current law, Minnesota exempts from sales tax purchases of enterprise technology equipment and computer software for use in a qualified data center or qualified refurbished data center. Prior to amendment, Minnesota exempted electricity used or consumed in the operation of these centers.
For sales tax remitted after May 31, 2027, vendors that remit sales taxes and have a tax liability of at least $250,000 during a fiscal year ending June 30 are required to remit 5.6% of the estimated June liability two business days before June 30 for calendar year 2027 and each subsequent calendar year. As a result, the collection of revenue is accelerated for these taxpayers. By Aug. 20 of the year, vendors must pay any additional amount of tax not remitted in June.
Finally, effective July 1, 2025, the cannabis gross receipts tax rate is increased from 10% to 15% on both cannabis and edible hemp cannabinoid products.
New Jersey adopts rules on P.L. 86-272 interpretations, market-based sourcing
Effective June 16, 2025, the New Jersey Division of Taxation adopted two new corporation business tax (CBT) rules and amended various existing CBT rules to reflect statutory changes and provide clarification and further guidance to taxpayers. Specifically, the Division promulgated a new rule which addresses the application of Public Law (P.L.) 86-272 protection to internet activity conducted by a business. Also, the Division amended the market-based sourcing rule to provide additional guidance regarding the use of reasonable approximation methods to determine the market for sourcing sales of services. Further, certain provisions are amended to note that the New Jersey sales factor should be determined in accordance with a taxpayer’s accounting method used for federal purposes and consistent with the receipts included in the tax base. Finally, a new rule was added that addresses New Jersey S corporation and qualified S subsidiary status.
P.L. 86-272, a federal law enacted in 1959, limits the state and local 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. In 2021, the Multistate Tax Commission (MTC) adopted a revised statement interpreting P.L. 86-272 as it applies to the modern economy and internet transactions. Several states, including California and New York, have taken action to adopt the MTC’s revised statements in some form. In September 2023, New Jersey issued updated nexus guidance, Technical Bulletin TB-108, to address the treatment of internet activities that generally was consistent with the MTC’s revised statement.
The new rule, N.J. Admin. Code Sec. 18:7-1.9A, addressing the application of P.L. 86-272 protection to internet activities, is consistent with the Division’s prior guidance and the MTC’s statement. Under the rule, certain business activities conducted by a foreign corporation within New Jersey through the internet in whole or in part exceed the protections of P.L. 86-272 and may subject a corporation to the tax based on or measured by income when the foreign corporation has nexus with New Jersey. The rule provides a list of eight internet activities or contacts with New Jersey that are not protected by P.L. 86-272 and will subject a taxpayer to CBT in the state based on or measured by net income. Also, the rule provides a list of six business activities conducted by a foreign corporation within New Jersey through the internet that do not exceed the protections of P.L. 86-272. However, the foreign corporation will still owe the statutory minimum tax if it otherwise has nexus with New Jersey.
Importantly, the rules provide that when a foreign corporation interacts with a customer via the corporation’s website or app, it is engaged in “business activity” within New Jersey that exceeds P.L. 86-272 protection. In contrast, if the website merely presents static text or photos, there is no engagement or facilitation within New Jersey. The new rule also provides additional details for certain activities that the MTC’s guidelines do not address, which includes subscription services for web-connected devices, consumer data sales, and electronic payments.
The existing rule, N.J. Admin. Code Sec. 18:7-8.10A, addressing the application of market-based sourcing to services is amended to provide further guidance on “reasonable approximation” of the location of where the benefit of a service is received. The amendments recodify, rewrite, and provide additional options to use reasonable approximation methods and examples. The Division determined that there are a variety of additional methods that in certain instances may be better than relying on population data alone as a reasonable approximation. Accordingly, the amended regulation provides acceptable sources of population and gross domestic product (GDP) data, in addition to industry standard approximations and global positioning system and internet protocol approaches. The result of these amendments is a very complex regulation with significant flexibility and subjectivity in approximating the location of customer benefit. The amendments also address sourcing for marketing analysis services, asset management services, and the shipping and logistics industry. Finally, the rule is amended to clarify and reiterate that taxpayers must use their federal method of accounting for reporting sales for apportionment purposes.
The sales factor rule, N.J. Admin. Code Sec. 18:7-8.7, is amended to stress that the composition of the sales factor must be determined in conjunction with the entire net income to which it relates. Thus, sales attributable to excluded items of income are excluded from the sales factor. This is not a change in treatment, but the amendments are intended to make the rule clearer and easier to understand. Additionally, the amendments detail the rules for corporations in general and non-U.S. corporations that file returns separately and members that file under various combined group methods pursuant to legislation enacted in 2023.
A new rule, N.J. Admin. Code Sec. 18:7-20.4, clarifies the proper procedures and treatment of federal S corporations effective Dec. 22, 2022, resulting from statutory amendments enacted on that date. Specifically, the statutory amendments made New Jersey S corporation status and New Jersey qualified S subsidiary status automatic, and negated the requirement for a separate New Jersey election. Additionally, the statutory amendments allowed federal S corporations and federal qualified S subsidiaries to elect to be taxed in the same manner as a C corporation and to include statutory procedures for making the election. The new rule provides these details and procedures.
Philadelphia enacts budget legislation reducing certain tax rates
On June 12, 2025, the Philadelphia City Council voted to approve Mayor Cherelle Parker’s proposed budget, which includes incremental rate reductions to both the net income and gross receipts portions of the Business Income and Receipts Tax (BIRT), along with the Wage Tax and Net Profits Taxes (NPT). Notably, the budget legislation schedules the phaseout and elimination of the gross receipts portion of the BIRT by the 2038 tax year and reduces the net income portion of the BIRT to half the current rate by the 2038 tax year.
Philadelphia levies both a net income tax and gross receipts tax on business activity in the city. Currently, the net income portion of the BIRT is imposed at a 5.81% rate. Beginning with the 2025 tax year, the rate will decrease to 5.71% and will continue to gradually phase down to a 2.8% rate by the 2038 tax year.
The gross receipts portion of the BIRT is currently imposed at a rate of $1.1415 per $1,000 of taxable gross receipts. Effective beginning with the 2025 tax year, the rate will decrease to $1.41 per $1,000 of taxable gross receipts, and incremental rate reductions will continue annually until the elimination of the tax in 2038.
The budget legislation also resumes incremental reductions to the Wage Tax, which is currently imposed on city resident wages, salaries and other compensation at a 3.75% rate. The tax is also levied on nonresident wages and salaries at a 3.44% rate. By the 2029 tax year, the resident rate will be reduced to 3.7%, while the nonresident rate will be reduced to 3.39%. The same rate reductions also apply to the NPT, which is imposed on unincorporated businesses doing business in the city.
Finally, the legislation eliminates the BIRT filing exemption that previously applied for small businesses. Under the exemption, businesses with less than $100,000 in taxable gross receipts were not required to file a BIRT return. The budget legislation eliminates the exemption beginning with the 2025 tax year, due to legal challenges brought on the grounds that the exemption violated the Uniformity Clause of the Pennsylvania Constitution.
The enacted BIRT, Wage Tax and NPT reductions are more conservative than the reductions suggested by the Philadelphia Tax Reform Commission, which made tax reform recommendations to the mayor in a report released in February 2025. Among other things, the Commission recommended that the city eliminate the entire BIRT and reduce the Wage Tax rate to below 3% on both residents and nonresidents in an effort to spur business activity and economic growth.
Virginia temporarily suspends rolling IRC conformity
On May 2, 2025, Virginia enacted legislation, H.B. 1600, which temporarily suspends its rolling conformity to the IRC for the 2025 and 2026 tax years. Virginia historically followed a fixed date approach and periodically enacted legislation to update its IRC conformity, but enacted legislation adopting rolling IRC conformity in 2023. In this legislation, Virginia’s move from static to rolling conformity came with certain exceptions so that it could not automatically adopt IRC amendments in all cases, particularly where such amendments had significant revenue impact. Rather, the Virginia legislature was required to evaluate and determine whether or not to conform to those IRC amendments.
Under H.B. 1600, Virginia will not conform to amendments to the IRC enacted in 2025 or 2026, with a projected impact (on an individual or cumulative basis) that would change general fund revenues in the fiscal year in which the amendment was enacted or in any of the succeeding four fiscal years. This does not apply to any amendment to federal income tax law that is either subsequently adopted by Virginia or a federal income tax extender bill. Due to this legislation, and the possibility of significant federal income tax legislation that will impact Virginia general fund revenues, tax practitioners will need to closely monitor both federal and Virginia law to determine the state’s conformity status with respect to specific provisions.
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