Key Takeaways
- When a Federal Tax Change Follows You to the State Level
- CO Moves Forward With Ballot Initiative to Tax High-Earners
- A Challenge to WA Millionaire's Tax
- CT Tackles Affordability
- SC Enacts Tax Cuts
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.
The first quarter of 2026 confirmed many of the trends we flagged at the start of the year, while also sharpening the consequences for taxpayers operating across state lines. As we outlined in our early‑year outlook, budget pressure, federal conformity fallout, and renewed scrutiny of tax bases quickly moved from theory to action.
From January through March, states grappled with persistent budget pressure, federal conformity fallout from the One Big Beautiful Bill Act, and renewed debates over who should bear the cost of funding public priorities. Legislatures advanced proposals to raise revenue through millionaire taxes, digital advertising taxes, and expanded sales tax bases, while other states moved just as aggressively in the opposite direction—cutting income tax rates, extending SALT cap workarounds, or shielding businesses from new local taxes.
Courts also played a central role this quarter, weighing in on nexus thresholds, sourcing methodologies, bundled transaction taxability, and constitutional limits on state taxing authority. At the same time, credits and incentives remained under scrutiny, particularly for data centers, clean energy projects, and large economic‑development deals, as lawmakers re‑evaluated whether long‑standing incentives still deliver the promised return.
Taken together, Q1 painted a picture of a highly fragmented SALT landscape—one where states are experimenting, recalibrating, and, in many cases, testing the edges of established tax doctrine. The developments highlighted below reflect where those tensions are coming to a head as we move into the second quarter of the year.
Millionaire Taxes, Wealth Taxes, and Residency Risk
As explored in our residency post, states continue to look to high‑income taxpayers as a primary revenue source—but as millionaire and wealth taxes expand, so does scrutiny of residency and migration risk. Recent developments in California and Washington underscore how closely tax policy, enforcement posture, and taxpayer behavior are intertwined. From aggressive residency audits to constitutionally questionable income‑based levies, these proposals raise critical questions about sustainability, compliance, and whether states can tax mobility without encouraging it.
CALIFORNIA
California Can’t Afford the Reckless Gamble of a Billionaire Tax - Keely Martin Bosler and Lenny Mendonca, Bloomberg Tax ($):
Yet the proposed California Billionaire Tax Act is a profoundly ill-conceived measure that threatens to inflict more damage than it promises relief. Far from a silver bullet for the state’s finances, it would introduce radical complexity, guarantee legal chaos, and virtually assure an exodus of high-wealth residents if enacted—all for the sake of one-time revenue that fails to address the problems California faces.
COLORADO
Colo. Justices OK High-Earner Tax Ballot Plan - Sanjay Talwani, Law360 ($):
Without comment or opinion, the Colorado Supreme Court affirmed Thursday the state Title Board's actions on proposed Initiative 195 and two similar measures that would remove the flat tax mandate in the Taxpayer's Bill of Rights, part of the state's constitution. The proposed measures, advanced by the board Feb. 4, would also establish graduated state income tax structures with higher rates for taxpayers earning more than $500,000, dedicating the resulting increased revenue to public education, child care and healthcare efforts.
WASHINGTON
Washington High Court To Review Millionaire's Tax Referendum Case - Paul Jones, Tax Notes ($):
[...]
The legislation enacting the millionaire's tax — a 9.9 percent tax on income over $1 million — has a necessity clause that states the tax is “necessary for the support of the state government and its existing public institutions.” The clause was inserted by lawmakers to trigger a constitutional exemption from a referendum. If upheld, the provision means challengers must seek to qualify a ballot measure to repeal the tax, a more difficult process.
Sales Tax Classification and the Fight Over “What’s Taxable”
As state tax bases expand, the line between taxable products and nontaxable services continues to blur. Courts and tax agencies are wrestling with bundled transactions, platform‑based business models, and evolving intermediary roles—often with inconsistent results. These recent cases and administrative updates highlight where sales tax exposure can hinge on classification nuance rather than economic reality.
GEORGIA
Uber Gets Another Chance to Fight $9 Million Georgia Sales Tax Bill - Caitlin Mullaney, Tax Notes ($):
In its March 26 decision in Uber Technologies Inc. v. O’Connell, the Georgia Supreme Court found that the state appeals court incorrectly concluded that the question of whether Uber was subject to the sales tax was answered by the supreme court in Collins v. Adam Cab. But the Collins decision “did not involve any argument that the regulation at issue was invalid and thus did not decide that question,” the high court wrote.
NEVADA
Nevada Tax Commission Proposes Amendments to Marketplace Facilitator Sales Tax Collection, Reporting Rules - Bloomberg Tax ($):
NEW YORK
New York's Extension of the Primary Function Test Leaves Taxpayers Buzzing - Jeremy P. Gove and Periklis Fokaidis, Tax Notes ($):
State Tax Relief, Affordability, and Limits on Local Taxing Authority?
Not all state tax changes are about raising revenue. Several legislatures are moving in the opposite direction—paring back local taxing authority, exempting essentials from sales tax, or restructuring income taxes to improve affordability and competitiveness. These measures reflect growing political pressure to deliver visible tax relief while keeping state and local systems administrable.
CONNECTICUT
Connecticut ‘Affordability’ Bill Includes Sales Tax, Social Security Exemptions - Matthew Pertz, Tax Notes ($):
Effective July 1, the bill would exempt from sales tax clothes and shoes under $100, other than specialty athletic wear and accessories like jewelry, handbags, wallets, and watches. Sales tax would no longer apply to other essentials like nonelectric school supplies, including lunchboxes, notebooks, and writing utensils. Also exempt would be Energy Star appliances for residential use, including air conditioners, furnaces, heat pumps, washing machines, dryers, and refrigerators.
From October 1 onward, sandwiches, grinders, and coffee or tea prepared and sold at grocery stores for takeout would also be free of sales tax.
GEORGIA
Georgia Needs to Aim for True Tax Improvement, Not Just Change - Janelle Fritts, Tax Foundation:
ILLINOIS
Illinois House Committee OKs Bill to Ban Local Per-Employee Taxes - Emily Hollingsworth, Tax Notes ($):
H.B. 5237, introduced by committee Chair Curtis J. Tarver II (D) and Rep. Anthony DeLuca (D), was advanced by the Illinois House Revenue and Finance Committee March 19. It comes after Chicago Mayor Brandon Johnson (D) in his fiscal 2026 budget proposed an employer expense tax equal to $21 per employee on businesses with more than 100 employees.
SOUTH CAROLINA
South Carolina Governor Signs Income Tax Cuts, Eyes Flat Rate - Kennedy Wahrmund, Tax Notes ($):
Gov. Henry McMaster (R) on March 30 signed H. 4216, which lowers and restructures the state’s income tax beginning in tax year 2026.
The measure consolidates the current multibracket system into a simplified structure with a new top rate of 5.21 percent for annual incomes of at least $30,000 and a lower rate of 1.99 percent applied to income levels under $30,000. The current top rate is 6 percent.
Credits, Incentives, and Data Centers Under Review
In Part I of this SALT C&I series, we outlined how states continue to use tax credits and incentives as a primary tool to drive economic growth. That strategy, however, is evolving. Rather than offering broad‑based incentives, states are becoming more selective about which industries qualify and under what conditions. Data centers highlight this shift, as lawmakers increasingly question infrastructure demands, fiscal cost, and overall return on investment—underscoring a more strategic approach to incentives.
GEORGIA
Data Center Break Survives Georgia Income, Property Tax Push - Daniel Moore, Bloomberg Tax ($):
The bills cleared the Republican-led legislature early Friday and now head to Gov. Brian Kemp (R), who previously vetoed an effort to claw back data center incentives in 2024.
ILLINOIS
Snack Food Giant Nets $43 Million in Illinois Tax Credits - Emily Hollingsworth, Tax Notes ($):
Through an agreement executed March 24 between Mars Inc., three of its subsidiaries, and the Illinois Department of Commerce and Economic Opportunity, the company is slated to receive $42,887,651 in tax credits.
MAINE
Maine Bill Would Exclude Data Centers From Some Tax Breaks - Emily Hollingsworth, Tax Notes ($):
L.D. 713 as amended (the bill was introduced as a concept bill) would prevent data centers from claiming the state's business equipment tax exemption (BETE) or participating in the Dirigo business incentive program. Eight members of the joint Committee on Taxation voted during a March 19 meeting to pass the bill as amended, while five voted against the bill.
SEASONED WITH SALT
Tax Tips, Tricks and Opportunities
When a Federal Tax Change Follows You to the State Level - Melissa Menter, Eide Bailly:
When the IRS audits your tax return, there’s often a collective sigh of relief when the final documents are signed and the IRS moves on. The same sense of closure follows when a taxpayer discovers an error on their federal return and files an amended return. But that relief may be short-lived. If taxpayers aren’t careful, a resolved federal issue can lead directly to future state tax headaches.
As we have previously discussed in this blog, most state income tax calculations begin with federal taxable income (see our post on state conformity to learn more). As a result, any change to federal taxable income or other federal tax attributes may need to be reported to the states.
This requirement frequently catches taxpayers off guard. Adding to the complexity, state rules around when, how, and under what circumstances amended returns must be filed vary as widely as the states themselves. Key issues include:
- Short reporting deadlines. Deadlines often range from 30 to 180 days after the federal adjustment has been finalized – far sooner than most taxpayers expect.
- Different rules for different kinds of changes. IRS Revenue Agent Report (RAR) adjustments may trigger different deadlines or notification mechanisms than a taxpayer-initiated amendment.
- Changes may vary by state. A change at the federal level may not have the same effect in each state due to state non-conformity with federal tax laws.
- Interest and penalties. These may apply back to the original date of filing.
- Refund timing limitations. The window for claiming a refund at the state level may be shorter than that at the federal level.
- Statute of limitations exposure. If an adjustment increases tax due, the statute of limitations may not begin to run until the taxpayer notifies the state of the federal change.
Navigating these rules can be challenging, particularly for taxpayers with multistate filing obligations. Eide Bailly’s SALT team can help taxpayers navigate these complexities, manage deadlines, and reduce the risk of penalties, interest, or missed refund opportunities.
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