Recent Developments in State and Local Tax

State and local tax developments are constantly changing. From new legislation to expanded compliance obligations, businesses must constantly stay aware of their potential state tax exposure.

Administrative Tax Updates

Massachusetts

The Massachusetts Department of Revenue announced a tax amnesty program offering penalty waivers for eligible taxpayers. Eligible taxpayers include those with:

Unfiled returns
Underreported tax
Unpaid assessments
Current audits resulting in penalties
Pending resolution cases

The amnesty period began on November 1, 2024, and will end on December 30, 2024. To receive amnesty and penalty relief, eligible taxpayers must submit an online request for amnesty, file all required returns, and pay all taxes and interest during this period.

Income & Franchise Tax Updates

Colorado: New Equipment Tax Credit Announced

The Colorado Department of Agriculture announced a new Equipment Tax Credit. The refundable credit is equal to 85% of the amount spent and is available to Small Food Retailers and Small Family Farms.

Purchased equipment must help increase access to or lower prices for healthy food in low income, low access, and underserved areas of the state.

District of Columbia: Combined Reporting Changing from Joyce to Finnigan Method

Following passage of the Budget Support Act of 2024, for tax years beginning after December 31, 2025, corporate franchise taxpayers that are part of a combined group must aggregate the sales of all group members (Finnigan Method). This includes those whom do not have nexus in the District to determine the apportionment factor for the entire group. Currently, the District requires each group member to calculate its apportionment factor individually (Joyce Method).

Starting with tax years beginning after December 31, 2025, corporate franchise taxpayers in the District of Columbia who are part of a combined group must use the Finnigan Method to calculate their apportionment factor. This means that the sales of all group members — including those without nexus in the District — will be aggregated. Currently, the District uses the Joyce Method, where each group member calculates its apportionment factor individually.

Kansas: Decoupling from Federal for 163(j)

For tax years beginning after December 31, 2020, Kansas has decoupled from section 163(j), permitting a full deduction for the current year’s interest expense. Under the Department’s recently released guidance, taxpayers are allowed to amend their 2021 state income tax returns to adjust the interest deduction for that year. Additionally, taxpayers can recapture any interest expense disallowed under IRC section 163(j) for the tax years 2018, 2019, and 2020 in their 2021 amended return.

Decoupling from section 163(j) has significant impacts on businesses in Kansas, including:

Increased Deductions: Businesses can now fully deduct their current year’s interest expenses, which can reduce their taxable income and overall tax liability.
Amended Returns: Companies can amend their 2021 state income tax returns to adjust the interest deductions. This can result in tax refunds or reduced tax liabilities for that year.
Recapture of Disallowed Interest: Businesses can recapture interest expense that was disallowed under section 163(j) for tax years 2018, 2019, and 2020. This can provide additional tax relief and improve cash flow.

Minnesota: High Court Affirms Out-of-State Company’s Market Research Exceeds P.L. 86-272 Protections

In Uline, Inc. vs. Commissioner of Revenue, the Minnesota Supreme Court held that an out-of-state taxpayer’s market research activities in Minnesota were not ancillary to the solicitation of sales, and therefore were not protected by Public Law 86-272.

P.L. 86-272 is a federal law designed to limit states from imposing income tax on businesses whose only activity in the state is the solicitation of sales of tangible personal property. Historically, courts have found that activities that are ancillary to the solicitation of sales, or activities considered to be de minimis, do not break the protection of P.L. 86-272.

This ruling narrows the definition of which activities are protected in Minnesota and may serve as guidance for other states to take a similar approach.

Missouri: New Law Revises Pass-Through Entity Tax Election

In 2022, Missouri introduced an elective pass-through entity tax (PTET). In July 2024, Missouri passed H.B. 1912, which introduces new rules for this elective tax:

Opt-Out Election: Any member of an electing pass-through entity can choose to exclude their share of the entity’s separately and non-separately stated items from the PTET by making an “opt-out” election. This election must be filed before or with the member’s annual tax return.

Nonresident Members: A nonresident member may only opt out if they agree to file a Missouri income tax return and make timely payments of taxes imposed on the electing pass-through entity’s income.

Exclusions and Changes:

Publicly traded partnerships cannot make a PTET election.
The legislation changes how the PTET tax base is calculated.
A representative is now allowed to sign the PTET election on behalf of the entity.

Missouri: Rule Update for Net Operating Losses

The Missouri Department of Revenue updated its administrative rule on computing Net Operating Losses (NOLs).

Key updates include:

NOL Carryforward and Carryback: NOLs carried back more than two years or forward more than 20 years on federal returns must be added to federal taxable income for Missouri tax purposes. NOLs disallowed for Missouri tax purposes can be carried forward for up to 20 years.

Affiliated Group NOLs: NOLs from a corporate member of an affiliated group filing separately or not filing in Missouri cannot be carried to a consolidated Missouri return unless deducted on the group’s federal return. This requires strategic planning for affiliated groups to ensure optimal use of NOLs.

Corporate Mergers: In mergers where the loss-incurring corporation does not survive, NOL modifications must reference the loss year of the non-surviving corporation. This requires careful tracking of NOLs through corporate restructurings to avoid losing valuable tax deductions.

The updates emphasize the need for precise compliance and record-keeping. Overall, these changes require businesses to adopt more sophisticated tax planning and compliance strategies to effectively utilize NOLs under the new rules. For additional information see Missouri Register Volume 49, Number 15 August 1, 2024 and Missouri Register Volume 49, Number 5 March 1, 2024.

New Jersey: New Law Imposes a 2.5% Surtax on Certain New Jersey Corporations

Effective for Corporate Business Tax (CBT) privilege periods beginning on or after January 1, 2024, through December 31, 2028, taxpayers with more than $10 million of New Jersey allocated taxable net income are subject to a new 2.5% Corporate Transit Fee. The fee does not apply to S corporations or public utilities. The Corporate Transit Fee applies in addition to a taxpayer’s CBT liability.

Pennsylvania: Net Operating Loss Limitation Related to Related Party

Under recent legislation and beginning with the 2026 tax year, the limitation on the use of Net Operating Loss (NOL) carryforwards will increase by 10 percent each year until it reaches 80 percent in the 2029 tax year.

NOLs generated before January 1, 2025 (pre-reform NOLs), will remain limited to 40 percent of taxable income. Taxpayers with both pre- and post-reform NOLs can first deduct up to 40 percent of their income using pre-reform NOLs, and then apply the remaining increased NOL limitation for that tax year using post-reform NOLs.

Additionally, starting in tax year 2023, affiliated entities can elect to take a deduction for certain intangible expenses or related interest expenses, which were previously required to be added back.

Texas: Statute of Limitations Start Date Guidance

The Texas Comptroller issued guidance on the application of the franchise tax statute of limitations (SOL) when a taxpayer requests an extension to file their franchise tax report. Under Texas law, the SOL is four years from the date the tax “becomes due and payable.”

Without an extension, the SOL starts on May 16 . For taxpayers required to make payments via electronic funds transfer who have requested a valid extension, the SOL begins on August 16 . This guidance applies to all reports originally due on or after January 1, 2021, and replaces the previous policy memo published on April 24, 2024.

Sales & Use and Indirect Tax Updates

Illinois: New Law Amends the Retailers’ Occupation Tax Act

Effective January 1, 2025, a retailer that maintains a place of business in Illinois and makes retail sales of tangible personal property to Illinois customers from a location outside of Illinois is subject to the Retailers’ Occupation Tax Act. Such retailers are deemed to be engaged in the business of selling at the Illinois location to which the property is shipped or delivered.

Iowa: New Laws Provide Multiple Sales Tax Updates

Iowa’s Department of Revenue released multiple Sales and Use Tax Updates in Iowa Administrative Bulletin 07-24-2024. The changes addressed topics including:

Blanket exemption certificates are effective until canceled by the purchaser or until 12 months elapse with no purchases between the same purchaser and seller.
Clarifications for manufacturing and processing exemptions.
Bundled transactions are generally subject to tax with a few enumerated exceptions.
Any tangible personal property or taxable enumerated services exchanged between affiliated entities are subject to tax.

North Carolina: New Law Repeals Remote Seller Transaction Threshold

Under House Bill 228, North Carolina no longer requires sellers to collect and remit state sales tax when they reach 200 sales transactions in the state. Going forward, only sellers with $100,000 or more of sales sourced to North Carolina in the previous or current calendar year, and those with a physical presence in the state, will be required to collect and remit sales tax.

For more details, see NC SD-24-1.

South Carolina: State Supreme Court Invalidates Exemption for Durable Medical Equipment

The South Carolina Supreme Court issued a ruling that invalidates the state’s sales tax exemption for durable medical equipment. The South Carolina Department of Revenue issued an Information Letter giving notice that all sellers of durable medical equipment are required to collect and remit sales tax after June 26, 2024.

Vermont: Prewritten Computer Software is Subject to Sales Tax

The Vermont legislature passed Act 183 (H.887), repealing a sales and use tax exemption for remotely-accessed prewritten computer software. Effective July 1, 2024, tangible personal property includes “prewritten computer software regardless of the method in which the software is paid for, delivered, or accessed.” Such property is subject to sales and use tax at a rate of 6%.

Notable State Rate Changes Q3 2024
State	Tax Type	Old Rate	New Rate	Effective Date	Link to Support	Notes
KS	Privilege Tax	2.25%	1.94%	TY24	Notice 24-11	Applies to national banking associations and state banks.
KS	Privilege Tax	2.25%	1.93%	TY24	Notice 24-11	Applies to trust companies and savings and loans associations.

Monitor State and Local Tax Changes

Recent developments in state and local tax and unclaimed property can have a lasting impact on businesses throughout the country. These developments highlight the importance of staying up to date with state and local tax obligations and the potential risks associated with non-compliance.

Professional guidance can help you understand and address your own state and local tax situation. Eide Bailly’s state and local tax team can help you take a proactive approach to managing your taxation issues.