Key Takeaways
- Data Center breaks - $3 billion annually.
- SALT cap prominent in federal tax debate.
- Apportioning broadcast income in a streaming world.
- Arkansas ends state grocery tax.
- State tax on university endowments floated in Minnesota.
- Montana tax cut goes to governor.
- The economics of film tax credits.
- Taxing illegal 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.
Publication note: State Tax News & Views will take next week off for meetings. When we return, the Eide Bailly SALT team takes over the regular SALT roundup. The SALT news you crave, with the added perspective of full-time SALT professionals! Look for a fun new feature, "Tax Bites: Tips, Tricks and Opportunities" as well.
State Losses From Data Center Tax Breaks Top $3 Billion Annually - Michael Bologna, Bloomberg ($):
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Currently 32 states offer tax incentives for the construction and operation of data centers. Most programs waive sales and use taxes on business purchases of construction materials, servers, and other equipment. A smaller group of states also offer limited exemptions on property and income taxes.
Why the SALT Deduction Is Key to Trump’s Tax Bill: QuickTake - Zach Cohen, Bloomberg ($):
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Since the start of his 2024 campaign for the presidency, Trump has repeatedly said he wants to raise the cap , but hasn’t said by how much. He promised to “get SALT back” while campaigning on Long Island, New York last year, where Republicans were defending competitive House seats in the state. He also reiterated his desire to change the cap in private meetings with House Republicans at the White House and Mar-a-Lago after inauguration.
MTC Market-Sourcing Project Recommends Updating Broadcasting Rule - Amy Hamilton, Tax Notes ($):
That is in contrast to the general market-based sourcing model regs adopted by the MTC in 2017, the briefing book pointed out. The MTC’s revised Uniform Division of Income for Tax Purposes Act section 17 model regs apply market-based sourcing principles to receipts from the sale of services and intangibles. The model regs define “services delivered by electronic transmission” very broadly to include “without limitation, services that are transmitted through the means of wire, lines, cable, fiber optics, electronic signals, satellite transmission, audio or radio waves, or other similar means.”
State-By-State Roundup
Arkansas
Arkansas Ends State Sales Tax on Groceries - Matthew Pertz, Tax Notes ($):
H.B. 1685 was signed by Gov. Sarah Huckabee Sanders (R) on April 22 after it passed the House 96 to 2 on April 7 and unanimously passed the Senate on April 14. Sanders said at the start of the legislative session that ending the grocery tax was one of her key priorities in 2025.
California
California Digital Ad Tax Bill Lacks Details but Wins First Vote - Laura Mahoney, Bloomberg ($):
The bill (A.B. 796) doesn’t specify the tax rate yet, and its author, Assemblymember Josh Lowenthal (D), said that discussion will take place as it moves next to the Assembly Revenue and Taxation Committee. The privacy committee must first make an official declaration that its vote is final. The tax would be levied from Jan. 1, 2026, through Dec. 31, 2030, on ads that originate in California and target the state’s residents.
California Bullish on Corporate Tax Credit Despite Dip in Awards - Laura Mahoney, Bloomberg ($). "Economic uncertainty and the program’s shift away from small businesses in 2018 partially explain how California Competes tax credits are piling up, according to program officials. Fewer strong applicants are coming forward for credits that in the past have gone to the likes of Tesla Inc., General Motors Co., and Microsoft Corp. And officials are getting better at weeding out applications from companies unlikely to fulfill their promises."
Connecticut
CT Senate leaders offer new plan to tax rich to mitigate federal cuts - Keith Phaneuf, CTMirror:
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Looney and Duff’s plan would boost the tax rate from:
- 6.9% to 7.5% for all earnings between $250,000 and $500,000 by single filers, and between $500,000 and $1 million by married couples.
- 6.99% to 7.99% for all earnings greater than $500,000 by single filers and above $1 million by married couples.
Iowa
House votes to ‘flush’ sales tax on toilet paper - Kathie OBradovich, Iowa Capital Dispatch. "House File 1019 passed the House on a vote of 82-11 and moves to the Senate. If signed into law, the bill would take effect July 1."
Indiana
Cigarette tax, higher ed cuts help cover $2B shortfall - Arika Herron, Axios Indianapolis. "Raising the cigarette tax by $2 per pack and the tax on other tobacco products by a proportional amount will generate approximately $800 million over the biennium and go toward the cost of Medicaid."
Indiana Senate sends finalized local property, income tax plan to governor - Casey Smith and Leslie Bonilla Muñiz, Capital Chronicle. "The legislation caps total local income tax rates for all counties to 2.9%, down from 3.75%. Municipalities would be authorized to impose rates up to 1.2% within that county total — a tool they have not had before. Under current law, they have to get county officials on board to nab a local income tax."
Louisiana
Louisiana legislators to consider college athletics subsidies - Piper Hutchinson, Louisiana Illuminator:
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But what might be considered the academic parallel to paid student-athletes — graduate assistants — would still be subject to state income tax.
Graduate students must be paid more than they were when I was one, if income taxes are even a consideration.
Minnesota
Minnesota Senate Panel Backs Tax On University Endowments - Sanjay Talwani, Law360 Tax Authority ($):
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Under the bill, the excise tax would apply to universities with endowments topping $100 million in value, with at least 500 students and at least half of them from Minnesota.
Missouri
St. Louis Earnings Tax Excludes Passive Income, Court Rules - Perry Cooper, Bloomberg ($):
Helmsing argued that passive income from rental activities that she didn’t participate in doesn’t count as “earnings.” The state supreme court has held that the term is limited to compensation for work or services and doesn’t include other kinds of income such as interest on investments or capital gains, she said.
Montana
Major income tax cut heads to the governor’s desk - Eric Dietrich, Montana Free Press. "Advocating for the bill during a hearing before the Senate Taxation Committee on April 9, Ler argued the legislation would produce an income tax cut across the income spectrum."
New York
New York Democrats Push to Bring Back State Tax on Stock Sales - Michelle Kaske, Bloomberg ($). "The levy would be similar to a sales tax on goods and services, with stock buyers paying, on average, half a penny per dollar of stock, according to the proposed legislation by a group of Democratic state lawmakers who estimate it will bring in as much as $16 billion annually. The revenue would be dedicated to New York City’s transit system, K—12 education, healthcare and renewable energy projects, they said."
New York Tribunal: Taxpayer Subject to Resident Income Taxes - Cameron Browne, Tax Notes ($).
In its April 18 decision in Matter of Ryan, the New York Tax Appeals Tribunal upheld a $5,683 determination, plus interest and penalties, against Matthew Ryan for tax year 2009, finding that the state tax department had the authority to use information from the taxpayer’s federal tax return that showed he had a New York address and income from multiple New York sources.
New York aggressively goes after taxpayers with New York income who claim non-resident status.
Washington
Washington Lawmakers Advancing Capital Gains, B&O Tax Increases - Paul Jones, Tax Notes ($):
The bill would also modify the estate tax, which currently has an exclusion amount of $2.193 million and a tiered rate that varies from 10 percent on the first $1 million of the estate’s taxable value to 20 percent on the value in excess of $9 million. Under S.B. 5813, as amended by the committee, for decedents dying after July 1 the exclusion threshold would be at $3 million, with inflation adjustments. The tax rates would also be adjusted and range from 10 percent on the first $1 million worth of an estate’s taxable value to 35 percent on the amount exceeding $9 million.
Tax Policy Corner
Affleck's Accountant 2 Is a Tax Credit Coup for California — But Does It Add Up? - Paul Jones, Tax Notes ($):
“The state’s analysts admit the current incentive drains more from the treasury than it puts back,” Thom told Tax Notes in an April 18 email, adding,“That’s true of every other state.” He argued that California’s finances are also too tight to justify “flushing even more money down the drain,” and that elected leaders are responding to industry lobbyists when they approve subsidies for the film industry.
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Georgia’s credit has also come under scrutiny. A December 2023 audit said that the state was set to issue roughly $1.35 billion in credits in 2024, “the largest tax expenditure among Georgia’s economic development incentives,” and that “consistent with studies of other state film tax incentives programs, the State of Georgia loses money” with a return on investment of 19 cents for every dollar.
Years ago, before I was affiliated with Eide Bailly, I wrote extensively on the Iowa film tax credit, which collapsed in scandal in 2009. This got me invited to a conference of state legislators to discuss film tax credits. I remember an Illinois legislator from Chicago going on about how her niece was so excited to see a Transformers movie being made in Chicago as a result of the Illinois tax credit program. The (questionable) economics of film incentives aren't why legislators vote for them.
Tax History Corner
Manley Sullivan was a hard-working entrepreneur in the distilled spirits industry in South Carolina. One of the many business challenges he faced was that it was illegal to sell distilled spirits at the time. This created a tax filing problem - if he reported his illegal income to the IRS, he would be telling the same government that enforced prohibition that he was making money violating alcohol laws.
So he didn't file a tax return at all.
The revenuers eventually caught up with Manley, and his argument made it to the Supreme Court, where his case was argued 98 years ago next week.
The Supreme Court said he had to file:
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In the decision that this was contrary to the Constitution, we are of opinion that the protection of the Fifth Amendment was pressed too far. If the form of return provided called for answers that the defendant was privileged from making, he could have raised the objection in the return, but could not on that account refuse to make any return at all.
We are not called on to decide what, if anything, he might have withheld. Most of the items warranted no complaint. It would be an extreme, if not an extravagant, application of the Fifth Amendment to say that it authorized a man to refuse to state the amount of his income because it had been made in crime. But if the defendant desired to test that or any other point, he should have tested it in the return, so that it could be passed upon. He could not draw a conjurer's circle around the whole matter by his own declaration that to write any word upon the government blank would bring him into danger of the law.
You don't see expressions like "draw a conjurer's circle" anymore. Alas.
