This Week in State Tax

California’s budget bill trailer was signed by the governor on June 27; it changes both the apportionment formula for financial businesses and the availability of the pass-through entity tax (PTET) election. Recall that California generally applies a single sales factor apportionment method to most businesses unless the business generates more than 50 percent of its gross receipts from one or more “qualified business activities,” which was defined to include savings and loan activities and banking and financial business activities. The budget bill removes “savings and loan activity” and “banking or financial business activity” from the definition of “qualified business activities” for tax years beginning on or after January 1, 2025. Thus, financial businesses will now be required to use the single sales factor method of apportionment. The law does not repeal the special regulatory sourcing rules for banks and financial institutions, meaning that these rules will remain in effect unless further action is taken.

For taxpayers that are partners or members in one or more passthrough entities, the bill extends the availability of the PTET election through taxable year ending on or before December 31, 2030. In addition, for taxable years beginning on or after January 1, 2026, the bill permits an entity to make the election even if it had not made the required estimated payment. When this occurs, the associated credit will be reduced by 12.5 percent of any underpayment of the June 15 estimated payment. Finally, the bill makes a minor technical change that ensures fiscal year partners will be able to claim the appropriate PTET credit in the final year available. Please contact  Oksana Jaffe or Geoff Way with questions about S.B. 132.

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The Colorado Court of Appeals (Court) ruled that Netflix subscriptions are tangible personal property subject to the Colorado retail sales tax. The primary question in the matter was whether Netflix’s digital streaming subscriptions constitute “tangible personal property” and are thus subject to tax under state’s century old sales tax law. The Court ruling overturned a district court holding that the subscriptions to the streaming service did not meet the statutory definition of tangible personal property.

The Colorado retail sales tax is imposed on “the purchase price paid or charged upon all sales and purchases of tangible personal property at retail.” The law references that tangible personal property means “corporeal personal property” which embraces all goods, wares, merchandise, products, and commodities, and all tangible or corporeal things and substances that are dealt in and capable of being possessed and exchanged. Netflix argued that tangible personal property includes only physical objects that have a real body that can be both seen and touched, while the Department of Revenue (Department) asserted that tangible personal property includes things that are perceptible to the senses, have some degree of “physical presence capable of transfer,” and ultimately are not intangible rights. [Note that Department rules and statutory amendments adopted over time made clear that subscriptions to streaming services and various digital goods were within the ambit of the tax; the focus of the decision here was solely on the meaning of tangible personal property as embodied in the original sales tax of 1932.]

The Court sided with the Department, emphasizing that the contemporaneous understanding of “corporeal” in 1933—as reflected in Black’s Law Dictionary—included all things perceptible by the bodily senses, not just touch. The Court noted that while physical touch once distinguished corporeal from incorporeal property, by 1933 the law evolved along with advancing technology concluding that “corporeal” encompasses all things perceptible to any of the bodily senses, not just touch. “The images and sounds that a Netflix subscription permits customers to view and hear physically exist because subscribers can perceive them with their eyes and ears,” the Court wrote. Therefore, a Netflix subscription is tangible personal property subject to the retail sales tax. In a bit of gilding the lily, the Court closed by noting that ruling for the taxpayer would “[cast] aside nearly a century of historical practice simply because technological advancements have altered the specific form of delivery….” Please contact Steve Metz for more information on Netflix, Inc. v. Department of Revenue of the State of Colorado. 

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Effective July 2, 2019, Hawaii Act 232 requires partnerships, estates, and trusts to withhold income tax for nonresident taxpayers based on the taxpayers' distributive share of income attributable to Hawaii for tax years beginning after December 31, 2018. The Department of Taxation (Department) had previously issued Announcement No. 2019-08 informing taxpayers that enforcement of Act 232 was delayed during as it prepared for implementation. Recently, the Department issued superseding guidance in Announcement No. 2025-02 informing taxpayers that it will begin processing nonresident withholding for tax year 2025 and thereafter. Taxpayers must use Hawaii Form N-4P and Schedule NP to report income taxes withheld from a nonresident partner, and Hawaii Form N-4T and Schedule NT for income taxes withheld from a trust or estate. Note, quarterly withholding payments are not required, but payments can be made with the entity’s tax return. Optional quarterly withholding payments can be made by filing Hawaii Form N-201V or online at Hawaii Tax Online. For any questions, please reach out to Julie Quick.

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Governor Janet Mills recently signed three measures affecting state taxes that were approved in the recently adjourned special session of the Legislature. L.D. 210 makes several changes to the Maine sales tax including imposition of the tax on "digital audiovisual and digital audio services," which are defined as the electronic transfer of digital works to an end user for non-permanent use, including when conditioned upon continued payment by the purchaser or under a subscription. The bill also repeals the service provider tax that was imposed in lieu of the sales tax on providers of certain services such as cable and satellite services, a narrow range of streaming services, and telecommunications. The various taxable services and exemptions in the service provider tax were transferred to the retail sales tax except for the expanded application to digital audio-visual and digital audio services. In addition, the bill enacts exemptions for certain durable medical equipment and mobility enhancing equipment (as defined). All changes are effective January 1, 2026.

The governor also signed L.D. 48 updating the state’s conformity to the Internal Revenue Code as of December 31, 2024, applicable for tax years beginning on or after January 1, 2024. In anticipation of federal income tax law changes, the legislature also enacted, and the governor signed,  L.D. 221. This bill provides that if it appears that the legislature has not had the opportunity to respond to federal income tax law changes before the Maine Revenue Services (Department) begins processing returns for the most recently completed tax year (i.e., tax year 2025 in this instance), the Commissioner of Administrative and Financial Services must prepare a report for the governor and legislature which includes a description of the federal law changes and the potential effect on Maine income tax law and the state budget. Based on this report, the governor is authorized to adjust some or all federal tax law changes contingent on the future enactment by the legislature. The adjustments must be consistent with the intent of existing Maine income tax laws, must consider budgetary implications, and should aim to reduce complexity for Maine taxpayers and the Department’s administration of the income tax. The legislation also requires inclusion of certain information in the tax return filing instructions or related public information such as: the instructions and processing are contingent on enactment of legislation by the Maine legislature, taxpayers have the option to wait for enactment of legislation by filing under a "material budgetary impact" extension, and taxpayers must file amended returns to address any variances caused by enacted legislation, but that no penalty or interest will be assessed for a late filing or erroneously issued refund. The determination made by the governor of actions to be taken is also to be reported to the legislature which may convene hearings and file legislation at the next special or regular session. For more information on L.D. 48 and L.D. 221, please contact Melissa DelleMonache. For more information on L.D. 210, please contact Ryanne Tannenbaum. 

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Governor Mike DeWine recently signed the Buckeye State budget for FY 2026-2027. The 3,000 page bill (HB 96) contains several significant changes to the state's indirect tax policies, including eliminating certain exemptions and changes to the payment of interest on refunds. Note that the governor  line-item vetoed certain exemptions that may subsequently be overridden by the legislature. The vetoes do not affect the matters addressed here.

The following exemptions are repealed effective January 1, 2026:

• Direct Marketing Exemption: The sale of certain items to direct marketing vendors including printed advertising materials as well as the purchase of telecommunications, computers, and similar equipment used to accept direct marketing orders. R.C 5739.02(B)(35) [See p. 2527 of the bill.]
• Printers Exemption: The use or consumption of materials to be used in the preparation and production of printed and other reproduced materials. R.C.  5739.02(B)(42)(f) [p. 2529]
• Electronic Publishing Exemption: The use or consumption of items acquired for preparing and disseminating data or information through electronic publishing. R.C. 5739.02(B)(42)(o) [p. 2530]
• Call Center Exemption: The sale of telecommunications service that is directly and primarily used to perform the functions of a call center. R.C. 5739.02(B)(45) [p. 2532]

In addition, the bill caps the vendor discount for timely remittance of the sales tax at $750 per month for each vendor’s license, applicable to returns required to be filed on and after January 1, 2026. [p. 2562] The bill also eliminates the payment of interest on refunds for certain county sales and use taxes found under R.C. sections 5739.021, 5739.026, 5741.021, and 5741.023, effective for refunds allowed on or after January 1, 2026. (p. 2566) Interest will still be paid on refunds of state taxes. Payment of interest on refund claims under a direct pay permit is also eliminated, effective for refund applications filed on or after January 1, 2026. R.C. 5739.07(G) (p. 2540) For any additional questions regarding the Ohio budget, please contact Dave Perry or Kenna Goodman.

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