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Key Takeaways
- Tariffs subject to sales tax.
- Sourcing Partners’ Payments (MTC study).
- Broadening PL 86-272 Protections.
- Uber owes tax in Georgia.
- Kansas to switch to single-sales factor.
- Massachusetts nonresident owes tax on gain.
- Freight charges by third party not taxable in Mississippi.
- New York retroactivity.
- Fargo increases tax rates.
- Texas amends data processing rules.
- Washington clarifies investment income.
Welcome to this edition of our roundup of state tax developments. Consider the Eide Bailly State & Local Tax team for your state tax planning, compliance, and incentive needs.
Cost of Trump's Tariffs Subject to Sales Tax, States Clarify - Michael Bologna, Bloomberg ($):
The Illinois Department of Revenue recently release a letter stating the tariff portion in the price of an imported product is subject to the state's sales and use tax, whether the amount is separately stated or embedded in the final selling price. The only exception to this general rules occurs when the importer is also the end user of the product.
MTC Group Finalizing Work On Sourcing Partners' Payments - Maria Koklanaris, Law360 ($):
The Multistate Tax Commission group working on the state taxation of partnerships said Tuesday it is preparing for the final stages of one of its major fields of research, the state sourcing of partnership income.
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The draft white paper, presented to the uniformity committee for its comments, contains information about rules states are already using to source income from partnerships. The MTC work group is collecting this information to find commonalities among states, with a goal of eventually giving them a draft model they can use to be more uniform.
The draft white paper also looks at ways to handle the most complex parts of what is already one of the most complex general topics in state taxation. For example, it examines blended apportionment, in which the apportionment factors of a partnership or limited liability company are merged with those of a corporate partner that may own part of the partnership.
House Judiciary Panel OKs Broadening PL 86-272 Protections - Paul Williams, Law360 ($):
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Under the bill, the term "solicitation of orders" in P.L. 86-272 would be defined as any business activity that facilitates the solicitation of orders even if the activity could "also serve some independently valuable business function apart from solicitation." That provision matches language in bills that committee member Rep. Scott Fitzgerald, R-Wis., filed the last two years, which he said in an April 2024 statement would prevent "overzealous states" from taxing businesses "simply for having a website."
State-By-State Roundup
Georgia
Uber Needed To Collect Tax Pre-Wayfair, Ga. Panel Affirms - Maria Koklanaris, Law360 ($):
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Whether Uber could fall under the jurisdiction of the taxicab regulation was at the heart of the controversy and the subject of oral arguments in December. The company strongly maintained that it is not a taxicab, nor could the app that drivers and riders use to manage rides be considered "a headquarters."
Kansas
Kansas To Require Single Sales Factor For Multistate Cos. - Laura Mahoney, Bloomberg ($):
H.B. 2231, which Democratic Gov. Laura Kelly signed Thursday, will require multistate corporations to use a single sales factor to apportion their income based on where the receipt of sale is, beginning in 2027. The bill also will adopt market-based sourcing beginning in 2027, which requires the point of sale to be considered where a service is received.
Massachusetts
Mass. Appeals Court Backs Tax on Nonresident's $4.7M Gain - Maria Koklanaris, Law360 ($):
A former Massachusetts resident owes tax on a $4.7 million capital gain from the sale of stock in a Massachusetts company he co-founded, a state appeals court ruled Thursday, affirming a decision by the state's Appellate Tax Board.
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"Because Welch obtained the stock soon after founding AcadiaSoft, expected that in the future AcadiaSoft would be worth a lot more than it was when he started it, and was looking forward to the payout from his hard work, the board had substantial evidence on which to base its determination that Welch's gain from the sale of the AcadiaSoft stock was derived from his employment," Justice Grant wrote.
The panel also did not accept the Welches' argument that Craig Welch held his AcadiaSoft shares as an investment. Justice Grant wrote that the Welches pointed to an example in the relevant regulation saying that if an employee of a Massachusetts corporation lives out of state and buys stock in his employer's corporation "as an ordinary investment unrelated in any way to his compensation," a gain from the sale of that stock would not be treated as Massachusetts source income.
Mississippi
Miss. Justices Agree Gas Co.'s Freight Charges Not Taxable - Michael Nunes, Law360 ($).
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Justice Jenifer B. Branning, who wrote the court's majority opinion, said if the entity that sold the items to Tennessee Gas had also shipped the goods, they "would likely" be taxable. However, she added, the charges from the third-party shipping company "constituted a second closed transaction.
Montana
Montana to Cut Top Individual Income Tax Rate, Adjust Brackets - Zak Kostro, Law360 ($):
Montana will lower its top individual income tax rate, adjust ax brackets so that more income is subject to a lower tax rate and double the state's earned income tax credit under a bill signed by the governor.
New York
NY State Income Tax Expansion Mostly Survives Legal Attack (2) - Perry Cooper, Bloomberg ($):
The rule “does not broadly tax any and all internet sales, but rather identifies for taxation purposes, those internet activities that establish substantial nexus between an out-of-state seller and New York,” Justice James H. Ferreira of the New York Supreme Court for Albany County wrote Monday.
But retroactive application of the challenged regulations violates taxpayers’ due process, the judge said, noting that the final rule published in 2023 was made retroactive to 2015.
North Dakota
City of Fargo Increases Sales, Use & Gross Receipts Tax - Melissa Menter, Eide Bailly LLP:
The North Dakota Office of State Tax Commissioner issued a notice stating that, effective April 1, 2025, the City of Fargo will increase its sales, use and gross receipts tax from 2% to 2.25%. Total sales, use and gross receipts tax rates will now range from 5.75% to 9.75%, depending on the item sold.
Texas
Texas Proposes Key Amendments to Data Processing Services Rules - Sales Tax Institute:
Effective April 2, 2025, the Texas Comptroller of Public Accounts (Comptroller) has adopted amendments to Section 3.330 of Title 34 of the Texas Administrative Code. These amendments aim to clarify the tax implications of data processing services and are designed to align with statutory changes from Senate Bill 153. The changes focus on critical areas such as expanding and updating definitions, clarification on taxable and non-taxable services, new rules for bundled services, and refinement of multi-state allocation rules.
Washington
Washington Bill Clarifies Tax on Investments Under Court Ruling - Perry Cooper and Laura Mahoney, Bloomberg Daily Tax Report ($):
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Under the measure, “incidental” is defined for the first time as less than 5% of the annual gross income of a person’s business. Nonprofit organizations, collective investment vehicles such as mutual funds, retirement accounts, and family investment vehicles would be allowed to deduct all investment income.
Tax Bites: Tips, Tricks and Opportunities in SALT
Matt Carlson, Senior Manager, Eide Bailly:
With the rise of terrifying tariffs, many businesses are looking for other tools to help reduce the impact of those rising costs. One of those tools is Tax Incentives, which can include Credits, Abatements, Grants, Reimbursements, Exemptions, and many others. An example of this is Kansas Senate Bill 98, which will grant 100% sales and use tax exemption on the construction of qualifying data centers effective July 1, 2025. Most business types qualify for these lucrative incentives, but you must be proactive in getting ahead of projects to maximize those opportunities. Our team can help explore these and other tools to help lessen the impact of those tariffs on your business and we are eager to help!
Kansas Enacts Data Center Tax Break and Housing Credit Phaseout - Emily Hollingsworth, Tax Notes ($).
Two recently enacted Kansas bills establish a sales tax exemption for data center investments and phase out the state’s affordable housing tax credit.
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In an April 25 release, Kelly said S.B. 98 gives Kansas “another tool in the toolbox to bring jobs, infrastructure, and prosperity to Kansas communities through economic development.”