Top SALT stories of 2025

1. State reaction to major OBBBA provisions

Following the enactment of the OBBBA, many states have spent the second half of 2025 assessing the likely revenue impact of the major business tax provisions of the GOP bill. As we anticipated earlier this year,⁷ several states have already acted to decouple from the taxpayer-favorable OBBBA provisions in an effort to prevent significant revenue shortfalls. Such decoupling measures are all but guaranteed to impact the state income tax filing posture for both corporate and noncorporate taxpayers, adding to the complexity of navigating the 2025 tax compliance season.

Several OBBBA provisions are critically important to the states from a revenue perspective, including the treatment of domestic research and experimental (R&E) expenditures under Internal Revenue Code (IRC) Section 174A; bonus depreciation under IRC Sec. 168(k), the adoption of a full deduction for qualified production property under IRC Sec. 168(n), and changes to the business interest expense limitation under IRC Sec. 163(j).

During their legislative sessions since the federal bill’s enactment, states have grappled with the challenge of balancing the desire to incentivize investment with declining revenues that would result from the federal tax changes. The challenge is especially difficult for states that conform to the IRC on a rolling basis, meaning that they adopt IRC changes as the changes occur and would automatically conform to the OBBBA’s provisions unless they take specific action.

Ultimately, the need to prevent revenue shortfalls has driven some recent state legislative efforts to decouple from federal tax changes. Rhode Island became the first state to address the new law, decoupling from all aspects of the OBBBA in budget legislation enacted just prior to the enactment of the OBBBA itself.⁸ In October, California enacted significant legislation moving its IRC conformity date forward from Jan. 1, 2015 — but only to Jan. 1, 2025, ensuring that the revised conformity date does not incorporate any OBBBA provisions^.9

More recently, several rolling conformity states have acted to decouple from federal income tax changes as part of budget legislation or during special legislative sessions. For example, Michigan¹⁰ and Pennsylvania¹¹ have enacted budget legislation to address potentially significant revenue losses resulting from OBBBA changes. Michigan projected approximately $2 billion in revenue losses over the next five fiscal years resulting from the federal tax changes, while Pennsylvania projected a $1.1 billion revenue loss for the 2026 fiscal year if no legislative action had been taken.¹²

Beginning with the 2025 tax year, both states will decouple from the immediate expensing of domestic R&E expenditures, the new depreciation allowance for qualified production property, and the more generous calculation of the business interest expense limitation.

Delaware convened a special legislative session in November to address an estimated $400 million revenue loss, choosing to decouple from the bonus depreciation provisions under IRC Secs. 168(k) and 168(n), as well as from the transition rules addressing the acceleration of unamortized amounts of R&E expenses from the 2022–2024 tax years.¹³ Most recently, the District of Columbia enacted emergency legislation that decouples its corporate income tax from the OBBBA changes to IRC Sec. 163(j) and 168(k), along with the new provisions under IRC Secs. 174A and 168(n), effective Jan. 1, 2025.¹⁴

The rapid state responses to the major business tax provisions enacted this year are indicative of a flurry of legislative activity that is likely to carry into 2026 as states continue to evaluate the impact of federal tax changes on their own revenue collections and attempt to balance their budgets. It will be critical for taxpayers to monitor the state legislative responses and understand the implications.

Some areas of immediate concern for businesses include financial statement reporting, estimated state income tax payments for the last quarter of 2025, extension payments for 2025 state income tax returns, and return preparation later in 2026.

2. Maryland and Washington lead in broadening sales tax bases

Maryland and Washington, two states with dire budget situations in 2025, acted to fill a portion of the economic breach with broad-based indirect tax increases. Maryland expanded its sales and use tax base to include a number of technology services.15 In Washington, a state that has leaned on a business and occupation (B&O) tax and a sales and use tax for a long time, the legislature went back to the well in a comprehensive manner by increasing the tax rates and broadening the tax bases.¹⁶

Maryland’s decision was necessitated in part by a difficult local economic environment that was exacerbated by federal employee layoffs and the continuing effects of the Maryland Key Bridge disaster. Specifically, Maryland decided to tax most types of sales of data or information technology services (described under the 2022 North American Industrial Classification System (NAICS) Sector 518, 519, or 5415) and system software or application software publishing services (described under NAICS Sector 5132) at a 3% rate.¹⁷ This rate is discounted from the 6% tax rate generally applied to taxable transactions.

While considered to be a preferential tax rate, the tax rate for transactions that were previously taxable and fall under the newly taxable transactions remains at 6%. Importantly, the state’s treatment of custom computerized software as exempt through a rule is no longer in effect.

Maryland’s legislation applies the existing sourcing rules to determine the operation of the Maryland sales and use tax, relying upon the location of the customer’s tax address. This location is determined via a series of cascading provisions, which could be the business location of the vendor in the case where the customer receives the service, the primary use location of the service, or potentially the physical location or billing address of the customer.

Further, a purchaser of taxable digital items or information technology or software publishing services may obtain “multiple points of use” certificates so that they can effectively apportion the amount of sales to Maryland based on the use of the applicable product or service.

Reliance on NAICS code designations rather than specific statutory definitions in determining taxability is a novel approach that will require regulatory guidance, which was just provided by the Maryland Comptroller earlier this month and is aligned with emergency regulations previously provided given that that the tax went into effect on July 1, 2025.¹⁸

In short, the NAICS code references are there, there are many of them, and they drive the taxability analysis. It is important to understand that, under the Comptroller’s approach, the NAICS business activity descriptions define the types of services that are now classified as taxable services and as such, the taxpayer’s primary business activity code on their business reports is not dispositive.

In addition, the proposed regulation sets forth significant detail regarding the tax treatment of taxable services when coupled with personal, professional or insurance services (that independently would not be taxable). The Comptroller also provides an example in the proposed regulation in which a presumably taxable web design service sold by a graphic design company independently from the sale of a nontaxable logo design service would be taxable. This treatment reflects the need for taxpayers to separately state charges for taxable items versus nontaxable service charges on invoices.

On the B&O tax side, Washington acted to broadly raise tax rates, generally in two tranches. The B&O tax rate for services and other activities for businesses with gross income over $5 million was increased on Oct. 1, 2025, from 1.75% to 2.1%^.19 Further, the B&O tax rate for the standard manufacturing, extracting, wholesaling, and retailing classifications, along with a large swath of additional industry classifications, will rise on Jan. 1, 2027, from a range of 0.471%–0.484% to 0.5%.²⁰

If that were not enough, a new 0.5% surcharge that will be in effect from 2026 to 2029 will be imposed on businesses that have Washington taxable income over $250 million, with some exemptions available from this tax for specially defined income streams.²¹ Washington also increased the surcharge on certain profitable financial institutions from 1.2% to 1.5%,²² and increased the workforce education investment surcharge imposed on “select advanced computing businesses” with significant worldwide gross revenue from 1.22% to 7.5% of gross income, with an enhanced maximum tax that could be paid under this provision.²³

Finally, Washington set forth a legislative clarification of the investment deduction in a manner intended to be consistent with the Washington Supreme Court’s decision in Antio LLC v. Washington State Department of Revenue.²⁴ Generally, this clarification results in taxpayers being allowed to deduct investment income that is incidental to the main purpose of the taxpayer’s business.²⁵

However, the term “incidental” is interpreted in a very narrow manner. Investments are incidental to the main purpose of the taxpayer’s business if the total worldwide income derived from these investments is less than 5% of the taxpayer’s total annual worldwide gross income. The Washington Department of Revenue has issued interim guidance on the Antio legislation as applied to collective investment vehicles and investment income,²⁶ and has commenced an amnesty program for businesses that have not reported investment income subject to the B&O tax.

Beyond the B&O tax rate increases and investment deduction clarification, the services subject to retail sales and use tax and retail B&O tax were greatly expanded as of Oct. 1, 2025, to include such services as information technology training services, custom software development, advertising and certain digital automated services.²⁷ Certain affiliated transactions providing for information technology training services, custom website development services, investigation and security services, and advertising services are exempt from tax.²⁸

The B&O and sales and use taxation of digital automated services also has been expanded through the elimination of exclusions for services primarily involving the application of human effort by the seller after customer request, live presentations, advertising services and data processing services.²⁹

3. Maryland and Washington also expand capital gains taxes

In Maryland and Washington, the indirect tax base broadening efforts were not enough to resolve the budgetary gaps. Given that reality, these states also managed to lead the way in developing significantly higher taxes that will impact high-income individual taxpayers. The most novel aspect of this policy revolved around the creation and expansion of capital gains taxes.

Maryland’s unique personal income tax system has progressive state-level and relatively flat county-level components. When factoring in both components, the highest state and local tax rate historically has been 8.95% (consisting of a 5.75% state tax rate on Maryland taxable income above $250,000 or $300,000, depending upon filing status), and a 3.2% county tax rate in several of the state’s most populous counties.³⁰

In its budget legislation, effective for 2025 and beyond, Maryland increased its personal income tax rates on high-income taxpayers, while incorporating the concept of a special capital gains tax. For purposes of the state income tax, Maryland adopted a new 6.25% tax rate on Maryland taxable income of $500,001 through $1 million for single or married filing separate filers, or above $600,000 through $1,200,000 for joint or other filers and a 6.5% tax bracket beyond those amounts. With respect to the county tax, Maryland authorized localities to increase the maximum county-level tax rate from 3.2% to 3.3%.³¹

In addition to the personal income tax increases, Maryland adopted a capital gains tax surcharge of 2%. The surcharge, which is permanent and applies to transactions occurring in 2025 and thereafter, is applicable to all federal net capital gains recognized by individuals with more than $350,000 in federal adjusted gross income.

There are several limited exemptions to the surcharge, including capital gains from primary residences sold for less than $1.5 million, and assets held in a variety of retirement accounts.³² However, when summed together, Maryland’s new maximum state and county income tax rate has grown to 9.8%, with an all-in tax rate of 11.8% on the proceeds of a transaction resulting in a capital gain.

Washington stands in contrast to Maryland in that it is not allowed to impose a state or local-level income tax. However, the state adopted a 7% capital gains tax that became applicable in 2022 on Washington-allocated long-term capital gains of individuals over $250,000 resulting from the sale of certain capital assets held for at least one year.³³

The tax was immediately challenged, but in Quinn v. Washington, the Washington Supreme Court ultimately confirmed the constitutionality of the tax.³⁴ Perhaps emboldened by that decision, and again driven by revenue concerns, Washington adopted a supplemental capital gains tax of 2.9% on Washington-allocated long-term capital gains of individuals over $1,000,000 for the 2025 tax year and beyond.³⁵

Taxpayers located in Maryland and Washington will need to be careful when engaging in transactions that will result in the triggering of federal long-term capital gains, which in many circumstances would carry with it very positive connotations from an overall tax perspective. Moreover, taxpayers that engaged in transactions prior to the enactment and expansion of these taxes will have to ensure that estimated payments are made to account for this change.

This will come as particularly unwelcome news to individuals who may have purchased stock many years ago, but will be required to pay significant amounts of capital gains tax on the appreciation of such stock which may have largely occurred prior to the creation of such tax. In response, individuals could be motivated to hold onto the stock (or other property) until they leave Maryland or Washington for a lower-tax jurisdiction, dampening the states’ expected revenue from these taxes while causing ancillary adverse effects on these states’ housing markets and local economies.

4. Public Law 86-272 developments: the incredibly shrinking law?

The interpretation of Public Law 86-272 (P.L. 86-272) continues to be a source of controversy and has dominated the SALT headlines once again this past year, with state tax authorities continuing to narrow the scope of the federal law as applied to a technologically advanced economy. In particular, 2025 was marked by continued state adoption of the revised statement issued by the Multistate Tax Commission (MTC) in 2021 on this subject, along with additional litigation challenging states’ activity in this area.

P.L. 86-272, enacted by Congress in 1959, prevents states from imposing a net income tax on sales of tangible personal property if the taxpayer’s business activity in a state is limited to the solicitation of orders that are approved and shipped from outside the state.³⁶ In 2021, the MTC adopted a revised statement addressing the application of P.L. 86-272 in the context of the modern economy and internet-based transactions.³⁷

The MTC’s revised statement has been controversial because it tends to substantially narrow P.L. 86-272 protections for vendors conducting business over the Internet. Several states have taken action to adopt the MTC’s revised statement in some form, with New York promulgating regulations on the subject in December 2023.³⁸

In April 2024, the American Catalog Mailers Association (ACMA, recently rebranded as the American Commerce Marketing Association) filed a lawsuit in New York state court, seeking a declaration that the regulations are invalid as conflicting with and preempted by P.L. 86-272. In April 2025, the New York Supreme Court in Albany County upheld the constitutionality of the regulations, finding that they were not preempted by federal law.³⁹

The court found that the regulations do not broadly tax internet sales, but rather delineate specific online activities that create substantial nexus between remote sellers and the state. ACMA has appealed the ruling to New York’s intermediate appellate court.⁴⁰

Undeterred by the ACMA litigation challenging the New York regulations, several states adopted their own regulations consistent with the MTC statement. In June, the New Jersey Division of Taxation promulgated regulations addressing the application of P.L. 86-272 to internet activities,⁴¹ consistent with earlier administrative guidance issued on the subject.⁴²

The new rule is generally consistent with the Division’s prior guidance and the MTC’s statement. In response, ACMA in September filed a complaint in New Jersey Tax Court, arguing that New Jersey’s adopted P.L. 86-272 regulations violate the Supremacy Clause of the U.S. Constitution by attempting to rewrite federal law.⁴³

With the adoption of an amended corporate excise tax nexus regulation in October, Massachusetts became the latest state to adopt the MTC statement on internet activities.⁴⁴ The amended regulation provides that out-of-state retailers placing internet cookies on consumer devices in Massachusetts may not claim P.L. 86-272 protections against the imposition of state income tax.

Most recently, New York City issued proposed regulations on the application of P.L. 86-272 to internet activities, planning to substantially adopt the principles outlined in the MTC statement^.45 ACMA has criticized both Massachusetts and New York City with respect to these regulatory efforts.

While the growing adoption of the MTC statement by the states has also generated debate about the MTC’s authority to interpret federal law, there has likewise been debate regarding the need to update the language of the federal statute itself to address advances in the modern economy.

Prior to the enactment of the OBBBA, the House Judiciary Committee included language in an earlier budget reconciliation proposal that would have expanded the protections provided under P.L. 86-272.⁴⁶ The proposed legislation would have redefined “solicitation of orders” to encompass business activities that serve an independently valuable business function apart from the solicitation of orders. However, the proposed revisions did not make it into the enacted version of the OBBBA.

Given these developments, it will be important for taxpayers to continue to monitor state actions to narrow the scope of protected activities under P.L. 86-272 and business group efforts to undo those actions heading into 2026.

5. Market based sourcing developments: inconsistency remains the norm

The inexorable shift from cost of performance to market-based sourcing of sales other than tangible personal property again dominated the SALT headlines. Arkansas⁴⁷ and Kansas⁴⁸ both decided to change course this year, and will source sales according to the location of the marketplace in the near future.

The statutes in both states are relatively consistent with Multistate Tax Commission model statutes, with sales of services sourced to the location of delivery, receipts from intangible property generally sourced to the location of use, and application of sales factor throwout/exclusion rules in situations where sourcing jurisdictions cannot be determined or reasonably approximated, or the taxpayer is not subject to tax in the jurisdiction in which the sale is sourced.⁴⁹

Arkansas enacted its provision effective for the 2026 tax year,⁵⁰ with Kansas applying its new statute beginning with the 2027 tax year.⁵¹ The Kansas legislation also shifts the state to a single sales factor from an equally-weighted three-factor formula for most taxpayers.⁵²

The move from cost of performance to market-based sourcing of sales other than tangible personal property is designed to be particularly beneficial for service businesses that have large amounts of payroll and property in these states that also serve a broad multistate market. Both states will now have to grapple with the drafting and eventual adoption of regulations that further clarify how the sourcing rules work for different types of sales, and a variety of industry-specific situations. Though both states could utilize the Multistate Tax Commission (MTC) model rules as a guide, there is no guarantee that the final regulations that each state promulgates will be completely uniform with the MTC model, or with other states’ efforts in this area.

To be sure, the Arkansas and Kansas regulatory efforts are very unlikely to resemble the market-based sourcing regulations developed in California. Following many years of drafting, public hearings, and redrafting, California finalized the adoption of lengthy, long-awaited final market-based sourcing regulations.⁵³

The regulations, which are effective for the 2026 tax year and beyond, generally look to the location where the taxpayer’s market for the sales is located.⁵⁴ For sales of services, that typically means looking to where the customer receives the benefit of the service,⁵⁵ while sales from intangibles are sourced to the location where the property is used.⁵⁶ Sales from marketable securities are sourced to the location of the customer, which is the billing address for individual customers, and the commercial domicile for businesses.⁵⁷ Finally, sales derived from real or tangible personal property are sourced to the location of such property.⁵⁸

The regulation addresses the use of reasonable approximations, an issue that frequently arises when sourcing data and related information cannot be easily derived. This guidance allows the taxpayer’s reasonable approximation to be used unless the California Franchise Tax Board (FTB) shows by a preponderance of the evidence that the taxpayer’s method is not reasonable.⁵⁹

While that rule allows the taxpayer some level of flexibility in determining the reasonable approximation to be used, the taxpayer must notify and describe to the FTB the revised reasonable approximation method. The FTB has the right to evaluate the taxpayer’s chosen reasonable approximation method. Once accepted, the FTB must accept the reasonable approximation method in future years absent a change of a taxpayer’s material facts that results in such method no longer being considered reasonable.⁶⁰

The regulation provides for significant changes in the way asset management services are sourced, with the introduction of a “look-through” sourcing rule under which receipts are sourced to the domicile of the investor or its beneficial owner.⁶¹ Once the locations of the beneficial owners are determined, receipts from asset management services are sourced to the sales factor “in proportion to the average value of the interest in the assets held by the investors or beneficial owners domiciled” in California.⁶² If the taxpayer does not have information regarding the average value of the assets held by investors or beneficial owners in California, then it may use a reasonable estimation.⁶³

The regulation adopts a safe harbor rule as a means to make it easier for businesses that provide professional services to a large number of customers to source their revenues. Businesses that provide services to more than 250 customers in any single professional service will be required to source receipts based on the billing addresses of those customers, unless any single customer accounts for more than 5% of a taxpayer’s receipts from that service.⁶⁴

The regulation also modifies the hierarchy of data that should be used to determine the location of where the benefit of the service is received. The taxpayer is required to look to its contracts or books and records kept in the normal course of business, but if that location is not determinable, other sources of information are reviewed to substantiate the location of benefit. Reasonable approximation and customer billing address rules are used in succession if the location of benefit is not determinable using the prior sourcing rules.⁶⁵

With respect to sourcing receipts from the sale of intangibles, the sourcing methodology used depends on the composition of the assets of the entity being sold. If more than 50 percent of the entity’s assets consist of real or tangible personal property, the sale is sourced based on the average of the entity’s California property and payroll factors (either based on the prior 12 months or current year based on when the sale occurs during the tax year).⁶⁶ If more than 50 percent of the assets are intangible property, the sale is sourced based on the entity’s current year California sales factor.⁶⁷

While the rules are not technically in effect until the 2026 tax year, and as such, taxpayers do not have to amend prior returns based on the policies set forth in the new regulation, the FTB could consider the regulation as it audits taxpayers on sales factor sourcing issues, and may revisit related guidance that had been issued before the regulation went final.⁶⁸

Beyond statutory and regulatory developments, courts also had their say on how to interpret market-based sourcing statutes. Minnesota, a longstanding adherent to market-based sourcing, decided in Humana MarketPoint Inc. v. Commissioner of Revenue that receipts from pharmacy benefit management agreements are sourced to the state in which the benefit of the transaction is received by the ultimate plan members, not the location of the service provider’s direct customer.⁶⁹

The case reflects the fact that in defining the marketplace for services that have a direct and an indirect beneficiary, the location of the ultimate customer may need to be determined in order to properly source a sale. Further, the case highlights the consideration of market-based sourcing rules that are applied on a cascading basis, in which the first rule must prove to be inconclusive or indeterminate prior to moving to a secondary rule.

All of these market-based sourcing developments make clear that literally nothing is clear in this area. The implicit goal of states to move to one specific sourcing methodology that could be applied by taxpayers in a relatively uniform manner has not been achieved in the least.

The diverse application of market-based sourcing measures in the states will lead to situations in which some states exclude significant sales from the sales factor altogether, while others continue to include them. In some cases where a sale is includible in the sales factor, more than one state may lay claim to inclusion in its sales factor numerator, potentially leading to a double taxation result.

In this environment, it will be wise for taxpayers to perform due diligence on the specific revenue streams that they have in order to identify whether historic sourcing methodologies in material states are still valid. As expectations from state tax authorities regarding the availability of data at the audit level have grown over time — particularly with respect to sales factor sourcing — taxpayers should consider updating their data collection processes as appropriate.

Finally, multistate tax modeling and documentation of the impact of evolving and complex guidance in this area is an extremely valuable exercise for taxpayers as a means to assess their overall sales factor posture and react quickly to legislative and judicial changes when necessary.

6. Tariffs and state and local tax impact

Beginning in February 2025, the Trump Administration announced the imposition of tariffs on international trading partners, some of which are country-specific and some of which are product-specific. While the President derives his power to impose many of these tariffs from the International Emergency Economic Power Act of 1977 (IEEPA), his authority to do so on that basis has been subject to legal challenge.

Most recently, the U.S. Court of Appeals for the Federal Circuit ruled that the tariffs exceeded the authority delegated to the President by IEEPA.⁷⁰ The administration appealed the decision to the U.S. Supreme Court, which heard oral arguments in November.⁷¹ To the extent the tariffs remain in effect, the imposition of tariffs on the sale of imported items have gained renewed interest as they carry important implications from a state indirect tax perspective.

Generally for sales and use tax purposes, tariff surcharges added to the price of an item will be included in the sales tax base. If the product itself is subject to sales tax, the surcharge will also be taxable as part of the amount charged for the item. Some states exclude taxes separately itemized on a purchaser’s invoice from the sales tax base, but this exclusion is generally limited to taxes arising from the retail sale or legally imposed on the purchaser, with all others treated as non-excludable expenses of the seller.

Some states have previously adopted regulations or released guidance clarifying the sales and use tax treatment of tariff surcharges imposed on foreign goods. For example, South Carolina guidance has clarified that tariff surcharges added to a purchaser’s invoice must be included in the sales price subject to sales tax, because they are not imposed with respect to retail sales.⁷²

While a California regulation arrives at the same conclusion, the regulation notes that the importer of record (or consignee of imported goods) is responsible for the cost of the tariff.⁷³ The Streamlined Sales Tax Governing Board, of which 23 states are full-member states, takes a similar position.⁷⁴

Earlier this year, the Illinois Department of Revenue issued guidance that is consistent with the Streamlined Sales Tax position, stating that tariffs are characterized as part of the importers’ cost of doing business and that tariff surcharges may not be deducted when calculating sales tax on the retail sale of goods.⁷⁵

Washington State published similar administrative guidance for retail sales tax purposes, clarifying that tariff surcharges may not be deducted from the selling price of imported goods, even if they are separately listed on an invoice.⁷⁶

While the sales and use tax treatment of tariff surcharges may not be all that surprising, it carries important implications for state revenue collections and consumer behavior should the Trump Administration’s current tariff regime be permitted to continue. From an operational perspective, companies should be aware of tax determination settings so that any tariff amounts billed to customers are included in the correct tax base. Additionally, the correct representation of tariffs on customer invoices has the potential to create under- or over-collection of state sales taxes if not aligned with the required state sales tax treatment.

7. The staying power of state PTE taxes

States began enacting PTE regimes as a way to work around the SALT deduction limitation instituted by the TCJA, with many rushing to do so after the issuance of IRS Notice 2020-75 in November 2020, which essentially endorsed the workarounds.⁷⁷ State PTE tax regimes generally allow PTEs to pay state and local income taxes at the entity level, where they may be fully deducted as a business expense for federal income tax purposes.

The state then provides a corresponding credit or exclusion to the PTE owners so that the income is not taxed again at the individual level. Since the issuance of Notice 2020-75, approximately 36 states and New York City have enacted state PTE tax regimes.

The future of pass-through entity (PTE) tax regimes was in doubt with the looming expiration of the $10,000 SALT deduction limitation adopted under the TCJA at the end of 2025. However, the OBBBA made the limitation permanent and expanded it to $40,000 effective with the 2025 tax year, with a scheduled reversion back to $10,000 by the 2030 tax year.⁷⁸

As a result, to the extent that states still want to keep them, PTE tax regimes are likely to remain an attractive vehicle for PTE owners to work around the SALT limitation where they still exceed the elevated SALT cap or are over the modified adjusted gross income (MAGI) limits.

While many state PTE tax regimes are permanent or are tied to the existence of the SALT cap itself, several states were required to take additional action to extend their PTE tax regimes beyond 2025 due to specific expiration dates that required legislative action. For example, California’s elective PTE tax was set to sunset at the end of 2025 in line with the expiration of the federal SALT cap.

As part of revenue trailer legislation comprising its 2026 budget package, California enacted legislation that extended its elective PTE tax through the 2030 tax year, providing certainty for qualified entities considering making a PTE election.⁷⁹ Virginia enacted legislation earlier this year extending the sunset date of its PTE tax only through the end of 2026.⁸⁰ In contrast, Illinois enacted legislation in December that makes its PTE tax regime permanent by amending its PTE tax law to eliminate the scheduled Jan. 1, 2026, sunset date.⁸¹

Other states did not move quickly enough in 2025 to enact legislation to prevent the expiration of their PTE taxes. Without further legislative action, the PTE tax regimes in Minnesota, Oregon and Utah are scheduled to expire at the end of 2025. Although Minnesota and Oregon introduced legislation that would have extended their PTE taxes beyond 2025, such legislation did not advance during the states’ 2025 legislative sessions. While these states potentially could introduce PTE tax extension bills in 2026, PTE taxpayers in these states will lose the benefit of the SALT cap workaround until further legislative action is taken.

With most state PTE tax regimes likely to remain in effect for the foreseeable future, one looming question is whether the IRS will issue proposed regulations addressing state PTE taxes as promised in Notice 2020-75. As long as the policy within Notice 2020-75 remains consistent, PTEs and their owners should continue analyzing the benefits of such regimes in different states and undertake the appropriate tax modeling to determine whether elections are worthwhile.

8. Florida v. California lawsuit

It is always newsworthy when two states are involved in state tax litigation, and the intriguing shot across the bow from Florida to California with respect to the application of the corporation income tax is no different. In this lawsuit, Florida, which applies a three-factor formula to apportion income to its state, is challenging California’s use of a special sales factor exclusion rule that according to the complaint, “supercharges California’s single-sales factor tariff.”⁸²

The special rule, Cal. Reg. 25137(c)(1)(A), states that when substantial amounts of gross receipts arise from an occasional sale of a fixed asset or other property held or used in the regular course of the taxpayer’s trade or business, the gross receipts are excluded from the sales factor. The rule cites sales of factories, patents or stock as examples of property that could come within the ambit of the rule.

A sale is considered to be substantial if the exclusion of the sale results in at least a 5% decrease in the taxpayer’s sales factor denominator. A sale is considered to be occasional if the transaction is outside the taxpayer’s normal course of business and happens infrequently.

While it may seem innocuous that a state is applying an exclusion rule for sales resulting from extraordinary transactions, especially as several other states have similar policies, Florida disagrees. Essentially, Florida is arguing that California’s application of the exclusion rule harms Florida businesses in a disproportionate manner.

For example, a business with significant Florida presence that triggers a large gain from operations in the state will be required to account for that sale in both the Florida and California corporate income tax bases. The Florida three-factor formula could result in a very high apportionment factor applied to the gain.

At the same time, with the application of California’s special rule, the California apportionment factor may be substantially higher than it would be if the gain were includible in the California sales factor and sourced outside the state. Florida believes that the California rule violates the U.S. Constitution in several ways.

Further, Florida has concluded that there is no way to obtain relief from the application of the special rule without going directly to the U.S. Supreme Court on the basis of original jurisdiction, under which the Court is compelled to hear a case between two states.

As California considers its response to Florida’s complaint, we would expect the U.S. Supreme Court to decide whether to take this case by early next year. To be sure, the chance that the Court actually grants certiorari and sets up a bi-coastal showdown, which could have tremendous reach into the area of state corporate income taxation, is relatively small. One only need revisit the Massachusetts v. New Hampshire original jurisdiction border war claim relating to mobile workforce issues during the COVID-19 pandemic to find a state tax controversy that failed to garner the Court’s attention.⁸³

9. Remote work developments

The requirement that employees work remotely during the COVID-19 pandemic had a profound impact on personal income tax imposition and withholding requirements in many states and localities during the height of the pandemic in 2020 and 2021. Taxpayer challenges to aggressive state and local efforts to tax employees working outside the borders of their state continue to make their way through state courts and administrative tribunals, most notably in New York, with important implications for the taxation of remote work in a more pervasive and lasting hybrid work environment.

Taxpayer challenges to New York’s longstanding “convenience of the employer” rule have ramped up substantially since the pandemic. This rule requires that if employees work remotely for their own convenience, and not as a requirement of the employer, the employees are subject to New York personal income tax based on the employer’s New York location.

New York’s aggressive enforcement of the rule has an amplified effect in an environment where nonresident employees were unable to, or no longer regularly commute to, a New York office but are still “assigned” to that office in the absence of establishing a bona fide office at an out-of-state location.

The most famous example of New York remote work litigation is the case of Edward Zelinsky, a Connecticut-based law professor working for a New York law school. Professor Zelinsky filed a lawsuit challenging New York’s convenience rule during the 2019–2020 tax years, arguing that he is entitled to a refund of New York personal income tax for the days that the law school was closed during the pandemic and he could not physically commute to work from his New York office.⁸⁴

Earlier this year, the New York Tax Appeals Tribunal sustained an earlier administrative law judge ruling that New York tax applied, finding that Professor Zelinsky’s employer established nexus in New York by directing him to perform services in New York for its own necessity.⁸⁵ Professor Zelinsky has appealed the decision to the appellate division of the New York Supreme Court.

The New York Tax Appeals Tribunal also upheld the convenience rule as applied to a banker who argued that his income earned in 2020 should not be subject to New York tax during the time he worked remotely in Pennsylvania while his Manhattan office was closed.⁸⁶ The Tribunal reasoned that the taxpayer “was not obligated by his employer to work from any particular location in or out of state as a requirement of performing his job functions.”

Similar to lower administrative forums, the Tribunal has consistently denied nonresident taxpayer challenges to New York’s convenience rule. The appeal of the Zelinsky case and others to New York’s appellate courts may finally provide clarity as to the legality of New York’s convenience rule on a prospective basis.

Meanwhile, other states have acted in 2025 to enact mobile workforce legislation providing income tax withholding relief for nonresident employees working inside their borders under a certain day threshold, in the absence of failed federal legislative efforts to enact legislation in this area. For example, Alabama enacted legislation providing an exemption from state and local nonresident income tax for nonresident employees working in the state for 30 or fewer days beginning in the 2026 tax year.⁸⁷

Alabama joins states including Illinois, Indiana, Louisiana, Montana and West Virginia in enacting mobile workforce legislation with a day-based threshold. Such legislative efforts provide clear guidelines and a safe harbor for employers with traveling employees or remote workers providing services in a state for a limited period of time, while also providing administrative relief for nonresident employees.

10. Texas amends its data processing services regulation

As sales tax bases have expanded over time to incorporate larger swaths of services, numerous jurisdictions have directed their efforts to taxing data processing services, including Texas, which imposes sales and use tax on data processing services, at 80% of the full Texas tax rate.⁸⁸

Following years of rulings from the Comptroller interpreting the term “data processing service” in a broad manner, the Texas Comptroller adopted an expansive rule covering the sales and use tax treatment of data processing services that became effective on April 2, 2025.⁸⁹ The rule as amended from prior versions, broadly defines a “data processing service” as “the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information.”⁹⁰

The Comptroller’s rule provides examples of taxable and nontaxable activities. Payroll services, production of business accounting data, insertion of data into documents, certain internet hosting involving data storage or processing, data migration service and data-focused creation, repair, and maintenance all may be considered data processing services.⁹¹ In contrast, the preparation of financial statements kept in accordance with generally accepted accounting principles is an example of a service that is not taxable.⁹²

With respect to data processing sold with other services, the term “data processing service” excludes data processing that is sold for a single charge with another service if the data processing service does not have a separate value and is ancillary to the other service.⁹³ However, the taxpayer has the burden of showing that the data processing service does not have a separate value and is ancillary to the other service. If the taxpayer cannot show this, the data processing charge component of the transaction becomes taxable.⁹⁴

The “ancillary” language has received extensive comments because it is replacing the “essence of the transaction” standard adopted in Texas case law.⁹⁵ The Comptroller will determine what is “ancillary” by focusing on whether the service provider’s activities in performing the service are considered routine, leading to a taxable result, or specialized, leading to a nontaxable result.⁹⁶

The regulation also addresses marketplace provider services, including them within the purview of taxable data processing to the extent such services involve the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information provided by the purchaser or the purchaser’s designee.⁹⁷ Data storage, maintenance and compilations of analytics are considered to be taxable data processing services.

As far as sourcing rules, states and localities have separate sets of rules to consider. On the state side, Texas sales tax is due if the data processing provider and the customer are located in Texas.⁹⁸ If delivered in Texas, the sale of a data processing service is presumed to be a sale for storage, use, or consumption in Texas^.99

If performed in Texas, taxability of the data processing service depends on where the service is used (unless an exemption applies), with an exemption for the portion of use that is made outside Texas.¹⁰⁰ To the extent a data processing service performed outside Texas is used in Texas, the Texas use tax applies (unless exempt).¹⁰¹ Multiple points of use documents are available to purchasers asserting that the data processing service is being used in business locations in multiple states, which results in payment of Texas and local tax on the taxable portion of the transaction.¹⁰²

On the local tax side, additional sales tax is due in a local jurisdiction where the sale is consummated.¹⁰³ Local use tax may also be due in a local jurisdiction where a benefit from the service is derived if the 2% local tax cap has not been exceeded.¹⁰⁴ Like the state sales tax, there is an option for an in-state customer purchasing data processing services for the benefit of more than one taxing locality to issue to the data processing service provider an exemption certificate claiming a multi-city benefit and determine the extent of benefit for each locality.¹⁰⁵

Since the adoption of the regulation, the Comptroller has continued to provide guidance on the issue of what constitutes data processing services through a series of rulings. The Comptroller found that a taxpayer providing services to employers sponsoring employer-based health plans that had numerous data reporting obligations regarding prescription drugs was subject to tax on these services as data processing services.¹⁰⁶