Key Takeaways
- Digital Nexus in IL, MN and NJ
- Sourcing Digital Goods
- Alaska Weighs Implementing a State Sales Tax
-
Millionaire and Wealth Taxes in CA, MA, NY, and WA
Welcome to this edition of our roundup of state tax developments. The State Tax News and Views is published weekly. Consider the Eide Bailly State & Local Tax team for your state tax planning, compliance and incentive needs.
As states modernize tax systems to keep pace with digital business models, familiar guardrails—like P.L. 86‑272, sourcing rules, and ITFA protections—are being tested, narrowed, or outright challenged. This week’s developments show how online activity, digital advertising, and intangible transactions are driving new compliance risks, litigation, and policy shifts.
States are continuing to push the boundaries of what constitutes “doing business” in the digital age. The Multistate Tax Commission’s expanded interpretation of P.L. 86‑272—particularly its focus on internet cookies and data collection—has opened the door to increased nexus assertions and inevitable legal challenges. Meanwhile, states like New Jersey are actively defending their authority to tax companies whose only in‑state presence may be virtual, signaling that digital footprints alone may now be enough to trigger income tax exposure.
Digital advertising remains a prime revenue target—but not without resistance. As more states look to tax digital ad services directly or indirectly, taxpayers are increasingly challenging whether these regimes run afoul of the Internet Tax Freedom Act. The Chicago litigation and Minnesota’s proposed expansion of its sales tax base illustrate a growing split between states attempting to tax modern advertising models and businesses pushing back on constitutional and federal preemption grounds.
Bottom line: Digital business models may be virtual—but the tax consequences are very real, and states are moving faster than ever to claim their share.
Digital Nexus and P.L. 86‑272: When Online Activity Triggers State Income Tax
MTC's Cookie Nexus Rule Could Face Legal Challenges, Maria Koklanaris, Law360($)
The provision, which concerns "placing internet cookies on computers of customers that are designed to gather market or product research," is part of the MTC's updated statement on how to apply the law in the internet age. The law is P.L. 86-272, formally known as the Interstate Income Act of 1959. Some provisions of the updated statement are less controversial, but the one addressing cookies ""is a big one,"" said Bruce Fort, senior counsel for the MTC. Fort, who said he spoke for himself and not the quasi-governmental state tax agency, was part of a panel in New Orleans hosted by the American Bar Association's tax section and the Institute for Professionals in Taxation.
ILLINOIS
NetChoice Alleges Chicago's Social Media Tax Violates ITFA, Cameron Browne, Tax Notes($)
In a March 13 complaint in NetChoice v. Chicago filed in the Illinois Circuit Court of Cook County, NetChoice argues that Chicago's social media tax should be declared invalid because it is preempted by the ITFA, is an unlawful occupational tax under the Illinois Constitution, and violates the due process and commerce clauses of the U.S. Constitution.
MINNESOTA
Minnesota Bill Would Tax Sales of Digital Advertising Services, Emily Hollingsworth, Tax Notes($)
Under H.F. 4343, advertising services, defined as all digital and nondigital advertising services, would be subject to the state's 6.5 percent sales tax. That would include services such as graphic design, advertising advice provided to clients, and online search engine marketing, according to the bill. Print, radio, and television advertising would be excluded.
NEW JERSEY
NJ Tax Agency Looks To Sink Challenge To PL 86-272 Rules, Paul Williams, Law360($)
The rules that the New Jersey Division of Taxation adopted in June were updated to reflect which online activities from businesses go beyond solicitation of sales and can render an out-of-state company subject to tax, the division said in a brief filed Friday in the state's tax court. The tax agency asked the court to toss a challenge from the American Catalog Mailers Association that claims the rules conflict with P.L. 86-272.
Sourcing Digital Services and Intangibles Gets More Complicated
Sourcing rules designed for tangible goods are increasingly strained when applied to digital services and financial technology. Tax practitioners are warning that inconsistent sourcing approaches—particularly the tension between market‑based sourcing and cost‑of‑performance frameworks—are creating audit risk and uncertainty. Recent Florida decisions reinforce that states cannot simply “look through” to customer location when their statutes still hinge on where services are performed.
Tax Pros Warn of Complexity, Risk in Sourcing Digital Goods, Christopher Jardine, Tax Notes ($)
Bob Mahon of Perkins Coie LLP, Deeann DeSanto of Microsoft Corp., and Steve King of T-Mobile USA Inc. said that existing sourcing frameworks are being stretched to address modern digital commerce, while Supreme Court decisions such as Goldberg v. Sweet and Oklahoma Tax Commission v. Jefferson Lines Inc. provide only limited guidance for today’s digital environment.
FLORIDA
Fiserv Unit Beats $3.4 Million Florida Corporate Income Tax Bill, Perry Cooper, Bloomberg Tax ($)
[...]
The state’s cost of performance rule looks to where the taxpayer provides the services, not where the customer receives the benefit of those services. This isn’t the first case where the trial court has rejected the Florida Department of Revenue’s push for an approach that looks more like market-based sourcing—it previously ruled in favor of Target Enterprises Inc. and Billmatrix Corp. on the issue.
Revenue Pressures Drive Aggressive State Tax Policies
State Tax Pros Signal Litigation Potential for OBBBA Changes, Caitlin Mullaney, Tax Notes ($)
[...]
The OBBBA (P.L. 119-21) changed the rules for taxing foreign income, converting the global intangible low-taxed income regime to a new net controlled foreign corporation tested income (NCTI) regime. In states that update their tax code to conform to the NCTI regime, the taxation of foreign income earnings will be significantly increased.
ALASKA
Alaska Debates First State Sales Tax to Plug Big Budget Hole, Aaron Balken, Bloomberg Tax ($)
[...]
The plan would impose a 2% levy on most retail purchases year-round, increasing to 4% during peak tourism season. Designed as a targeted, time-limited measure, the tax would expire after seven years, with the expectation that state finances will stabilize in the interim.
MASSACHUSETTS
Massachusetts Weighs Tying Business Tax Breaks to Ballot Measure, Bloomberg Tax ($), Daniel Moore
The state’s $1.8 billion fiscal year 2026 supplemental budget bill (H. 5264) includes a measure that prevents Massachusetts from aligning with federal corporate tax breaks should the state’s personal income tax drop below its current rate of 5%. The bill passed the House on a 150-3 vote Wednesday night, sending it to the Senate for consideration next.
MINNESOTA
Minn. House Blocks Revival Of SALT Cap Workaround Bill, Law360 ($), Sanjay Talwani
In a 63-62 vote Monday with a two-thirds majority needed for passage, the House rejected a motion to suspend its rules and advance H.F. 3127 for consideration by the full chamber. If the bill as amended were enacted, it would extend Minnesota's currently expired optional tax on pass-through entities and corresponding state credit, allowing entity partners and owners to get around the federal cap on SALT deductions.
Millionaire and Wealth Taxes: Migration Risk and Revenue Trade‑Offs
States continue to wrestle with how far they can push progressive tax policies before economic behavior shifts. New millionaire and wealth taxes are advancing in some jurisdictions, even as data from others suggests taxpayer migration and revenue volatility may follow. These developments highlight the delicate balance between raising revenue from high‑income earners and maintaining long‑term tax base stability.
CALIFORNIA
Would California's Wealth Tax Be Temporary?, Tax Foundation, Jared Walczak
MASSACHUSETTS
Massachusetts Loses Billions in Income After Millionaire Tax, Bloomberg Tax ($), Greg Ryan
[...]
This was the first year that residents were subject to a 4% surtax on incomes over $1 million after voters approved the levy in 2022 to fund schools and transportation.
NEW YORK
The Limits of New York’s 'Tax the Rich' Policy, Manhattan Institute, Edmund J. McMahon
WASHINGTON
Seahawks GM Shouldn’t Fret Over Millionaire Tax, Bloomberg Tax ($), Andrew Leahey
Washington’s new tax applies only to income above $1 million, generated from games played in Washington state, and not until 2028. So it affects a slice of earnings from home games a few years from now, rather than a whole paycheck today.
SEASONED WITH SALT
Tax Tips, Tricks and Opportunities
The Washington Millionaire’s Tax: Will It Stick? John Gupta, Eide Bailly
The Washington legislature recently passed SB 6346, which would impose a 9.9% tax on incomes above $1 million (the so-called “Millionaire’s Tax”). As of this writing, the bill awaits Governor Bob Ferguson’s signature. He has indicated he will sign the bill into law and should do so within the coming days. The tax would be effective for tax years on or after January 1, 2028.
SB 6346 follows a wave of new tax proposals targeting high earners. What is remarkable about Washington’s legislation is that the state’s constitution and statutes prohibit income taxes. The Millionaire’s Tax is computed starting with the taxpayer’s federal adjusted gross income and after certain modifications that income is taxed at the 9.9% rate. If that sounds like an income tax to you that is because it is an income tax by virtually all common definitions. If income taxes are unconstitutional in Washington, why do the governor and other proponents think it has a chance of surviving legal challenge?
Things are not so simple or obvious in Washington state. The specific constitutional provision is not expressed as an outright ban on income taxes, but instead requires any tax on property to be uniform and cannot exceed a general cap of 1%. The oft-cited ban on income taxes comes from a 1933 Washington Supreme Court case (Culliton v. Chase) which held that income is property and therefore, subject to the state constitution’s uniformity and rate limitations. This precedent has stood for almost 100 years and cited to strike down many legislative and voter-initiated attempts to impose taxes on income. It is a certainty that opponents will initiate litigation to challenge the Millionaire’s Tax on these same constitutional grounds.
Proponents have hope that the tax can survive based on the 2023 Washington Supreme Court case of Quinn v. State. In this case, the Court decided that the state’s 7% Capital Gains tax was not a tax on income or property and therefore was not subject to the state constitutional limitations or the Culliton precedent. The court justified the ruling by classifying the tax as not an income tax but an excise tax. That is, the tax is not on income but on the privilege of engaging in a transaction. Those legal gymnastics give proponents hope that they will apply a similar theory to sustain the tax as an excise tax. The legal path to finding the Millionaire’s tax an excise tax is certainly more strained than in the case of the Capital Gains tax. However, the legislation is deliberately crafted to support its branding as an excise tax by a potentially result-oriented court.
It should be noted that the Washington legislature adopted in 2024 a citizen initiative specifically banning income taxes. Because this ban is statutory and was not directly approved by voters, it can be legislatively overturned by a simple majority vote in the Washington legislature. Because proponents comfortably hold this majority, it should be easily overturned leaving the constitutional question as the only legal barrier to the enactment of the Millionaire’s tax.
Expect opponents to initiate litigation immediately following the governor’s signature. Since the bill is not effective until 2028, there is some time for the litigation to proceed before full certainty comes with respect to the tax. In the meantime, potential taxpayers should consider whether and how the new tax might impact them and also consider planning opportunities with their tax advisors.
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