This Week in State Tax

During its November 2024 special session on tax reform, the Louisiana legislature approved a constitutional amendment to substantially rewrite the Finance and Revenue Article of the state constitution. The amendment was before the electorate for ratification on March 29, 2025; the proposed amendment  (Constitutional Amendment No. 2) was not adopted as about 65 percent of voters opposed it. Among other things, the proposed amendment would have required a two-thirds vote of the legislature to enact any new or increase any existing state tax deduction, exemption, credit, exclusion, or rebate; authorized local governments to eliminate or reduce the inventory property tax; and provided a one-time payment to localities that eliminated the inventory tax. The legislature also approved, and Governor Landry signed, several bills to substantially reform the state and local tax system in the Bayou State during the special session. As outlined in our December 2, 2024 TWIST,  the enacted changes are independent of the failed constitutional amendment,  included reductions in the personal and corporation income tax rates, repeal of the corporate franchise tax in 2026, increasing, temporarily, the state sales and use tax rate, and adding certain transactions to the sales and use tax base.

With the exception of the inventory tax credit (an offset of state income or franchise taxes for inventory property taxes paid to local governments), the rejection of the constitutional amendment does not generally have a near-term, direct impact on the other income and sales tax changes enacted the during the special session. Act 5 (House Bill 2) of the special session repealed the inventory tax credit for C-corporations only effective July 1, 2026, apparently expecting localities to eliminate or reduce inventory taxes if the amendment had passed. As a result, with no further legislative changes, local governments will not have the ability to eliminate or reduce the inventory tax, and C-corporations will not be able to claim the inventory tax credit against their income or franchise taxes beginning on July 1, 2026.  This matter is expected to be a topic of discussion in the upcoming legislative session as several bills have already been filed. For further information on the Louisiana constitutional amendment or state tax reform, contact Randy Serpas or Lori Wright.

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The statutory $5 million limit on the ability of a taxpayer to claim the South Carolina investment credit is an annual limitation and not a lifetime cap, according to a recent appellate court decision. South Carolina offers a credit against its income tax for any investment in qualified manufacturing and productive equipment property. For investments made after June 30, 1998, the credit is limited to $5 million by statute. Using tax forms that called for the application of the credit cap on an annual basis, the taxpayer claimed a credit of approximately $25 million over a five-year period. The South Carolina Department of Revenue (Department) subsequently updated the relevant tax forms to apply the credit cap on a lifetime basis. On audit, the Department imposed an adjustment of approximately $20 million (reflecting the difference between the application of the cap on a lifetime basis instead of an annual basis. An administrative law court upheld the adjustment, ruling that while the statute was ambiguous, the Department correctly treated the cap as a lifetime one and that the change in interpretation of the credit cap was not improper.

On appeal, the taxpayer argued that the statute unambiguously applied on an annual basis; alternatively, it argued that the Department’s fifteen-year history of applying the cap on an annual basis precluded it from later applying it on a lifetime basis. Although the court acknowledged that the statute did not contain any time-specific language concerning the credit cap, it noted that the statute provided that the credit itself was available “in any taxable year” and that the credit was against a tax that was imposed “annually.” It also noted that the purpose of the credit was to encourage “the formation of new businesses and the retention and expansion of existing businesses;” applying the credit on a lifetime basis would preclude its ability to encourage the expansion of an existing businesses that had reached the lifetime cap. Accordingly, the court ruled that the statute was not ambiguous and applied the credit cap on an annual basis, reversing the administrative court. Contact Jeana Parker with questions on Duke Energy Co. v. Department of Revenue.

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The Texas Comptroller of Public Accounts (Comptroller) amended its rule on data processing services, with the most significant changes revolving around bundled transactions. The Texas rule now provides that if a data processing service is sold for a single charge with another service that does not have a separate value, and the other service is ancillary to the data processing service, the entire charge will be taxable as a data processing service. Conversely, if a data processing service is sold for a single charge with another service, and the data processing does not have a separate value, the data processing service is ancillary to the other service. The Comptroller will consider whether the services are distinct and identifiable and whether each service is of the type that is commonly provided on a stand-alone basis or commonly provided as an additional service for a greater single value to determine if the data processing service and other service have separate value.

The new rule abandons the “essence of the transaction” evaluation (i.e., what the buyer ultimately wants) and focuses on what the service provider is doing.  The rule clarifies that routine or repetitive manipulation of data by the seller of data processing is a factor that suggests its data processing service is not ancillary and, therefore, is taxable. For example, per the rule, the insertion of data into form title or loan documents for a client would ordinarily be a taxable data processing service. The primary service is the compilation, retrieval, and accurate manipulation of the data into the forms, even though there may be an element of independent judgment in correctly entering the data. On the other hand, manipulation of data that depends on the external knowledge and discretionary judgment of the service provider is a factor that suggests the data processing activity is ancillary to another service and should not be taxable. For example, the preparation of a title opinion would not ordinarily be a taxable data processing service. The primary service is the application of legal knowledge and judgment to a set of facts, even though there may be elements of data processing. These examples are illustrated in the recent opinion in Hegar v. Black, Mann, & Graham, L.L.P. The rule provides several other examples of services that are and are not taxable data processing services based on the routine and repetitive manipulation test or the use of external knowledge and discretionary judgment test.

A significant modification from the proposed rule to the adopted rule was applying an effective date of October 1, 2025, for marketplace provider services. The rule states marketplace provider services may be providing taxable data processing services when they perform the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information provided by the purchaser or the purchaser’s designee. For example, storing product listings and photographs, maintaining records of transactions, and compiling analytics are taxable data processing services.

Finally, the newly adopted rule provides that a data processing service performed in Texas but used in multiple states is exempt from tax to the extent the service is used outside of Texas. Further, the Comptroller is to develop a form that a purchaser may provide to the seller indicating the use in multiple states and indicating that the purchaser assumes responsibility for paying the required tax.  A purchaser may use a reasonable and consistent method supported by its business records to allocate the service between jurisdictions. Under the prior rule, the purchaser was required to demonstrate that the non-Texas use was attributable to a separate, identifiable business segment to avail itself of the multistate benefit if its principal place of business was Texas. For more information on  Comptroller's Revised Rules on Data Processing Services, contact Karey Barton. 

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Utah Governor Spencer Cox recently signed several bills affecting the state tax regime into law. The major changes include a reduction in the corporate income and franchise tax rates, a modification to the state’s apportionment method for financial institutions, an amendment to the state’s sales and use tax economic threshold for remote sellers, and a new sales and use tax exemption for certain purchasers of property used in the operation of a battery manufacturing facility.

• House Bill 106, signed by the Governor on March 26, lowers the income and franchise corporate tax rates from 4.55 percent to 4.5 percent for taxable years beginning on or after Jan. 1, 2025.
• Senate Bill 219 directs the State Tax Commission to establish special apportionment rules for financial institutions, as defined in the bill. The rules must include receipts from investment activities and assets as well as trading activities and assets in the denominator of the sales factor but exclude them from the numerator. Items comprising investment and trading assets and activities are specified in the bill, which is effective for tax years beginning on or after January 1, 2026.
• Senate Bill 47 eliminates the requirement that a remote seller (i.e., one with no physical presence in Utah) must collect and remit sales and use tax if the seller makes 200 or more separate transactions with purchasers in the state. With this repeal, a remote seller will be required to collect and remit tax only if it receives more than $100,000 in gross revenue from sales of tangible personal property, products transferred electronically, or services for storage, use, or consumption into the state. The bill takes effect on Jul. 1, 2025.
• Senate Bill 213 creates a sales and use tax exemption for manufacturers of energy storage devices or equipment. Starting July 1, 2025, a business that operates a qualifying energy storage manufacturing facility will be able to claim an exemption from sales and use tax on purchases of tangible personal property incorporated into equipment or a device that stores and discharges energy at the facility.  In addition, the exemption will apply to the operator’s purchases or leases of machinery, equipment, and repair or replacement parts that are used exclusively in the operation of the qualifying energy storage manufacturing facility.

Contact Michael Larkin with questions about H.B. 106, S.B. 219, S.B. 47 and S.B. 213.

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