State Tax News & Views: California Adopts Market-Based Sourcing

Welcome to this edition of our roundup of state tax developments. The State Tax News and Views is published biweekly. Consider the Eide Bailly State & Local Tax team for your state tax planning, compliance and incentive needs. 

Defining Digital Goods and Related Exemptions 

Tax Definitions For Digital Products Eyed By MTC Study Group - Maria Koklanaris, Law360 ($):

A study group tasked with defining certain digital products for state taxation purposes offered ways to distinguish between those products Thursday in a presentation to a Multistate Tax Commission work group.

The Digital Products Definition Study Group, a subgroup of a larger MTC work group studying how to harmonize state rules for taxing digital products, reported that it has come up with proposed definitions for certain terms. If accepted, the larger MTC work group could include the terms in a model act that states could follow when taxing digital products.

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The study group also proposed an exemption in taxing such products if they will be used business to business rather than business to consumer. Exempting such "business inputs" has been a focus of companies and practitioners advising the work group.

Sales and Use Tax Exemptions for Digital Inputs - Charles C. Kearns, Constance Chien, and Cyavash Ahmado, Tax Notes ($):

Nearly every year, a state legislature expands its sales and use tax base to include a new facet of the digital economy. These tax expansions include transactions involving digital goods, digital services, as-a-service software offerings, and other components of the digital economy. In doing so, policymakers should consider how sales or use tax would apply — if at all — to business purchases used to develop or provide those offerings.

When states expand their sales and use tax bases, they also have a unique opportunity to implement sound tax policy and exempt digital inputs. Most states that have recently enacted new taxes on digital goods, digital services, or computer software have adopted some form of digital input exemption, to varying degrees of success.

Market-Based Sourcing: Evolving Standards Across States

California Adopts Changes to Market-Based Sourcing Rules - Paul Jones, Tax Notes ($):

After a nine-year rulemaking process with multiple stops and starts, California’s Franchise Tax Board has adopted its second round of amendments to key sourcing rules.

The FTB announced September 10 that it had formally adopted Cal. Code Regs. tit. 18 section 25136-2 concerning market-based rules for sales other than sales of tangible personal property.

The rules clarify and simplify sourcing sales of services and intangibles, including professional services and asset management services. Work on the amendments began in 2016, after the FTB adopted its first round of amendments to the state's market-based sourcing rules, which were originally propagated in 2012. They will be applicable to tax years starting on or after January 1, 2026. 

Texas Justices Cast Doubt on NuStar's Interpretation of Tax Rule - Perry Cooper, Bloomberg Tax ($):

NuStar Energy LP appears to face an uphill battle in its challenge to a Texas franchise tax bill after several justices of the state’s high court questioned its statutory interpretation at oral arguments Wednesday.

The crude oil seller wants the Texas Supreme Court to overturn a 2023 ruling that upheld a rule on how to apportion business activities to the state for tax purposes.

The state tax code says gross receipts from business done in the state include sales of property “delivered or shipped to a buyer in the state.” The state comptroller interpreted that statute to source receipts to Texas under the “place of transfer” approach, whereas NuStar argued the proper focus is on the market—the destination of the goods where the customer will use them.

Burden of Proof and Taxpayer Outcomes

Miss. Landscape Biz. Can't Cut Sales Tax Bill, Court Says - Michael Nunes, Law360 ($):

A landscaping business owes $154,000 in sales tax, a Mississippi appeals court ruled, agreeing with a lower court that the owner failed to present adequate records showing the company's gross taxable revenue.

The appellate panel said in a ruling released Tuesday that the owner of Back Bay Lawnscapes LLC failed to present evidence to disprove the department's additional sales tax assessment. The department had audited the business, examining records from January 2015 through January 2019, and found that it failed to keep adequate records to prove its gross taxable sales.

Ore. Broker's $659K Income Addition Reversed By Tax Court - Sanjay Talwani, Law360 ($):

A $659,000 addition to the taxable income of an Oregon financial planner for a payment from a corporation of which he was sole owner constituted earnings that had already been reported, the state's tax court found, ordering the amount to be subtracted.

The Oregon Tax Court said in a decision Thursday that Thomas B. Hamlin, owner of multiple companies, met his burden of proof [of "more likely than not"] to show that the amount the state Department of Revenue added to his 2016 income after an audit of one of the companies, Somerset Securities, was already reported on his tax return.

Credits and Incentives

The Eide Bailly State & Local Tax team provides specialized credits and incentives services designed to help businesses maximize savings and growth potential. Identifying these opportunities early—before construction begins or hiring decisions are made—is key to unlocking their full value. It’s never too early to start the conversation; our team is here to guide you through the process and ensure you don’t miss out on valuable benefits. 

California Moves to Give Clean Energy Tax Breaks as Credits End - Casey Murray, Bloomberg Tax ($):

As the Trump administration ends federal tax credits for clean energy projects, California’s legislature has approved a measure to exclude developers who still receive those awards from state tax.

The bill, S.B. 302, passed the assembly 79-0 on Wednesday before being given final approval by the state senate on Thursday. It first passed the senate 38-0 in May.

The impact of the bill is uncertain. It would allow companies earning federal renewable energy credits and payments awarded under the Biden-era Inflation Reduction Act to exclude them from California income tax. President Donald Trump’s recently enacted GOP tax law sunsets many of those programs for wind and solar projects early. 

Pass Go, Collect Millions: Hasbro to Get Tax Breaks for Boston HQ - Emily Hollingsworth, Tax Notes ($):

Hasbro Inc. could be eligible for up to $14 million in Massachusetts tax incentives when it relocates to Boston next year.

The games and toy giant, which is currently based in Rhode Island, announced in a September 8 release that 700 of its full-time employees are expected to relocate to the new headquarters in late 2026. The relocation “positions the company to accelerate innovation, attract top talent, and drive long-term growth,” the release says.

Hasbro [...] will qualify for tax credits under the Economic Development Incentive Program of $20,000 per job that relocates to the state [...]. 

New Jersey Auctioning $60 Million in Tax Credits - Matthew Pertz, Tax Notes ($):

New Jersey is auctioning off another round of tax credits to support innovative businesses and food desert relief.

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The Innovation Evergreen program auctions credits to established businesses to raise capital, and it then partners with private venture capital firms to invest the funds in qualified New Jersey-based innovative startups.

Credits can be purchased for at least 75 percent of their face value; minimum credit purchases start at $500,000. The credits can be used against the corporation business tax or the insurance premium tax.

Other SALT Updates: Legislative Changes and Court Decisions

Colorado

T-Mobile Unit Beats City Tax Bill at Colorado Supreme Court - Perry Cooper, Bloomberg Tax ($):

The Colorado Supreme Court Monday rejected a $1.64 million assessment on a T-Mobile unit, ruling that Lakewood, Colo., improperly changed its business and occupation tax on telephone service without putting it to voters.

Lakewood had asked the justices to overturn a trial court order striking down the tax ordinances for violating the state’s Taxpayer’s Bill of Rights. A 1992 amendment to the state constitution, TABOR requires state and local tax authorities to put any “new tax,” “tax rate increase,” or “tax policy change” on the ballot.

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The case gave the state’s high court a chance to better define the scope of tax changes that require voter approval. Proponents of TABOR say its protections ensure governments remain transparent and accountable, while others worry requiring every tax tweak to go to the ballot inhibits the ability of taxing authorities to change with the times.

New York

Coney Island Sunoco Buyer Held Liable for State Sales Tax Bill - Perry Cooper, Bloomberg Tax ($):

The purchaser of a Sunoco gas station near Coney Island is responsible for $76,000 in outstanding New York sales tax the seller failed to remit, a state tax tribunal ruled in an opinion released Friday.

Nacmias & Sons Auto Service LLC bought the gas station, along with the Sunoco lease and franchise agreement, in a 2008 bulk sale. But it failed to notify the state tax department of the sale in time to avoid taking on the former owner’s sales tax liabilities for 2006-2009, the New York Tax Appeals Tribunal ruled.

If you're exploring merger and acquisition opportunities, the Eide Bailly State & Local Tax team is well-positioned to help you navigate complex state tax sourcing issues—such as those raised in the Sunoco case.

Oregon

Ore. County Failed To Tell Biz It Lost Tax Break, Court Says - Sanjay Talwani, Law360 ($):

An Oregon meat processor was justified in failing to timely appeal property assessments because it was never notified in writing by a county assessor of its exclusion from an enterprise zone tax incentive program, the state tax court ruled.

The Oregon Tax Court said Monday the Deschutes County Assessor was required to notify the business in writing that it was disqualified from the enterprise zone program after having failed to submit certain forms. The assessor's lapse was an extraordinary circumstance under state law that caused the business to fail to appeal its property assessments for tax years 2022-23 and 2023-24 and allowed it to seek relief in the tax court outside the usual appeals process, the court said.

Washington

Washington's New B&O Tax Tier: What Service Businesses Need to Know - Colette Sutton, Eide Bailly:

Washington’s Business and Occupation (B&O) tax on most service businesses is 1.75% of gross income, with a reduced rate of 1.5% for certain small businesses--those earning under $1 million in the prior year and for hospitals. Effective October 1, 2025, House Bill (H.B.) 2081 creates a third tier targeting businesses generating $5 million or more annually from services and other activities, raising their tax rate to 2.1%. Businesses with $1 million to $5 million in service revenues will continue at 1.75%, so it’s critical to review your gross receipts now to determine the applicable rate and prepare for the change.

Want more information about the Washington tax changes? 

• Washington's B&O Tax and the Evolving Treatment of Investment Income
• Washington State Expands Sales Tax to Tech and Digital Services
• Washington State Increases Estate and Capital Gains Taxes

Tax Bites: Tips, Tricks and Opportunities in SALT

Washington To Expand Taxation of Services Beginning October 1 - Jennifer Barajas, Eide Bailly: