This Week in State Tax

The California Assembly Revenue & Taxation Committee voted last week to advance a bill which would update California’s conformity to the Internal Revenue Code (IRC) to January 1, 2025, applicable to tax years beginning on or after January 1, 2025. Recall, California currently conforms to the IRC as it existed on January 1, 2015, meaning it conforms only to those sections of the 2017 Tax Cuts and Jobs Act (TCJA) that were specifically incorporated into state law. If approved, the bill would bring California into conformity with TCJA, except for provisions from which the state has specifically chosen to deviate. Importantly, in testimony at a committee hearing, the committee chairman emphasized that, if enacted, the bill does not include conformity to the recently-enacted federal One Big Beautiful Bill (OBBB).

For example, the bill would conform to changes in the federal treatment of research and experimental expenditures (IRC 174) made by the TCJA, but only as they applied before January 1, 2022. The bill would not adopt the amortization regime that took effect starting in 2022 (and was later superseded for some taxpayers by the addition of IRC 174A under OBBB).

Although the fate of the bill is uncertain, it is poised to be the first state legislative response to the OBBB (which was signed into law by the President on July 4). Taxpayers should plan to monitor state conformity updates in all states during the 2025-2026 state legislative sessions carefully to determine the ultimate impact of OBBB in each state. For a comprehensive analysis of the tax provisions of OBBB, please review KPMG’s report on the new law. Please contact Oksana Jaffe with questions about S.B. 711. 

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The Louisiana Legislature passed, and Governor Landry signed into law, two measures that introduce changes to the state sales and use tax framework and S corporation reporting requirements.

House Bill 578 – Sales tax changes

The sales tax “cleanup bill” makes several changes to certain exemptions.

• Healthcare-related digital products and services: Effective January 1, 2025, licensed healthcare providers are now exempt from state and local sales tax on purchases of computer software, prewritten software access services, and information services used for storing or transmitting health data or for diagnosis and treatment.  Previously, the exemption applied only to purchases of digital products.
• State and local government public works projects: Current law provides that state and local governments and agencies thereof are exempt from sales and use tax. Effective July 1, 2025, the bill extends this exemption to purchases made by general contractors and subcontractors for the construction of various public works projects for state and local entities. Prior to claiming the exemption, a contractor or subcontractor will be required to provide certain information to the Department of Revenue and obtain a certificate of exemption for each project from the Department.
• Repairs for out-of-state property: Repairs performed in Louisiana on tangible personal property that is then transported outside the state by certain means are exempt from state tax, effective January 1, 2025, and local governments may exempt such transactions, effective July 1, 2025. 
• Expanded vessel definition: The definition of “vessel” has been broadened to include commercial fishing vessels, drilling ships, and drilling barges for purposes of certain exemptions, effective July 1, 2025. In addition, the exemption of items relevant to vessels is broadened to include software, prewritten software access, digital products, and information services when certain conditions are met.

House Bill 567 – Subchapter S changes

This measure amends the state reporting requirements for S corporations for tax years beginning on or after January 1, 2026. The bill repeals the provisions that subject an S corporation to the Louisiana corporate income tax, and each S corporation shareholder will be subject to Louisiana individual income tax on their pro rata share of the corporation’s income attributable to the state. Each S corporation will be required to file an informational corporation return with the state. The bill also allows an S corporation to file a composite return and make composite payments on behalf of its nonresident shareholders equal to the applicable maximum tax rate multiplied by the nonresident shareholder’s portion of the S corporation’s income attributable to Louisiana. When an S corporation makes a payment on behalf of a nonresident shareholder that exceeds the shareholder’s income tax liability, the shareholder is entitled to a refund or an overpayment that can be credited against future tax years. All credits previously earned by an S corporation subject to Louisiana’s corporate income tax must flow through to its shareholders based on each shareholder’s ownership interest.

Contact Randy Serpas with questions about House Bill 578 and Lori Wright with questions about H.B. 567.

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New legislation in Missouri enacts an individual income tax deduction equal to 100 percent of the income reported as capital gains for federal purposes, effective for tax years beginning on or after January 1, 2025. Further, if the top rate for the individual income is reduced to 4.5 percent, the deduction may also become available for corporations in the tax years following the individual rate reduction. Missouri is currently reducing the individual income tax rate by 0.1 percent when certain revenue growth thresholds are met, meaning this deduction may be available to corporations as soon as tax years beginning on January 1, 2027.

The Missouri legislature has also enacted a bill that significantly modifies the standard of review for state agency interpretations and guidance. Specifically, courts or administrative hearing officers shall not defer to a state agency interpretation of any statute, rule, regulation, or other sub-regulatory document. Instead, reviews must be de novo. In actions brought by or against a state agency, after all other customary tools of interpretation have been applied, a court is now required to decide any remaining doubt in favor of a reasonable interpretation that limits the agency’s power and maximizes individual liberty. This effect of this modification of the standard of review on tax administration in Missouri is unknown. Contact Alexander Karscig for questions about   H.B. 594 or S.B. 221.

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Two jurisdictions—New Jersey and Philadelphia—have recently updated their real estate transfer tax (RETT) and controlling interest transfer tax (CITT) regimes. These changes affect both direct and indirect transfers of real property. In addition, a Michigan court decision recently addressed when a transfer of interests in property will occasion a reassessment of the property.

New Jersey Bill A5804  introduced two significant changes to its imposition of an additional RETT and CITT levy (currently a flat 1 percent) on property transfers in which the consideration exceeds $1 million. The additional RETT fee is imposed on the direct transfer of real property classified as 2 [residential], 3A [farm property (regular)], 4A [commercial], as well as cooperative units for consideration in excess of $1 million; the additional CITT fee is imposed on the transfer of more than 50 percent of the ownership of an entity with real property classified as commercial with an equalized assessed value in excess of $1 million. First, the bill changes the party responsible for the additional fee from the buyer to the seller. Second, the bill introduces a graduated rate structure for the additional RETT and CITT for affected properties; the new rate structure for the additional fee ranges from 1 percent on transfers with a consideration or value in excess of $1 million but less than $2 million to 3.5 percent if the consideration paid or equalized assessed value exceeds $3.5 million. These changes took effect on July 10, 2025.

Philadelphia implemented several fee and rate changes, the most significant of which is an increase of its realty transfer tax rate from 3.278 percent to 3.578 percent (plus the 1 percent state rate for a total combined transfer tax rate of 4.578 percent). These changes took effect on July 1, 2025.

On the real property tax front, the Michigan Supreme Court issued an opinion on July 2, 2025, regarding whether a property tax assessment “uncapping event”  was triggered when a series of transfers resulted in more than 50 percent of the interest in a property being transferred. Under Michigan law, the value of property for real estate tax purposes may not increase more than 5 percent annually unless more than 50 percent of the interest in the property is transferred, at which time the property may be revalued for tax purposes.

In this case, two owners of a 24 percent share in a property purchased an additional 48 percent interest from other owners, and later that same year sold a 20 percent interest to others. Although the owners involved in the transactions ended up retaining 52 percent of the property, the Court determined that conveyance of the same interest multiple times should be aggregated in determining whether the 50 percent threshold had been crossed. As a result, the total interests transferred equaled 68 percent (48 percent plus 20 percent), thus triggering an “uncapping event” and reassessment of the property. The court held that the law on triggering a reassessment focused on conveyances, and there was no exception that covered the transactions in which the taxpayers engaged. The ruling highlights the importance of understanding state aggregation rules when contemplating property transfers to avoid unexpected reassessment events. For any questions regarding these updates, please reach out to Michelle Dohra.

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