This Week in State Tax

The California Attorney General has issued an opinion stating that the Office of Tax Appeals (OTA) is not bound by tax regulations promulgated by the Franchise Tax Board or Department of Tax and Fee Administration in determining matters before it. Recall, the California legislature created the OTA as an “independent and impartial appeals body” charged with assuming certain duties formerly held by the Board of Equalization (BOE), including the ability to conduct tax appeals hearings. While the OTA inherited the adjudicatory powers of the BOE, it was uncertain whether it also had the authority to consider the legal validity of regulations promulgated by the California state tax authorities. The OTA proposed a regulation providing that it had no such authority, but it later retracted the proposed regulation and asked the Attorney General for clarification.

The recently released opinion provides that clarification. After a lengthy analysis of the authority transferred from the BOE, state judicial precedents, and the state constitution, the opinion states that when adjudicating a taxpayer appeal, the OTA may decline to apply a duly promulgated regulation to the taxpayer if doing so would conflict with the governing statute. However, the OTA is required to afford “appropriate deference” to the agency that promulgated the regulation (as would a court on judicial review). Further, the opinion noted that the OTA does not have authority to remove a regulation from the California Code of Regulations nor to enforce its view of the validity of the regulation beyond adjudicating a particular taxpayer appeal. Contact Candace Axline or Geoffrey Way with questions about California Attorney General Opinion No. 23-701.   

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Governor Jared Polis has called for the state legislature to convene in a special session on August 21 to address an estimated $800 million budget deficit for FY 2026 (which began July 1, 2025) attributable in significant part to the One Big Beautiful Bill (OB3) signed into law by President Trump on July 4, 2025. For both individual and corporation income tax purposes, Colorado conforms to the Internal Revenue Code definition of federal taxable income on a rolling or automatic basis, meaning that enacted federal changes affecting the computation of taxable income are automatically incorporated into the state tax unless the state enacts legislation to decouple from certain provisions. Current projections are that the provisions of OB3 will reduce state income tax revenues in FY 2026 by $1.2 billion, a portion of which can be offset by surplus revenues, leaving the $800 million current year budget deficit.

The Governor’s budget office estimates that OB3 will reduce state corporate income tax revenues by $825 million in FY 2026, or about 35 percent, due largely to the full expensing allowed for business property and domestic research and experimentation expenses, as well as the special allowance for qualified production property and extension of the qualified business income deduction for passthrough entities from which the state had previously decoupled through tax year 2025. Individual income tax reductions, on a net basis, are estimated at about $375 million in FY 2026 (3.5 percent) with the most significant reductions occurring from the increased standard deduction, the temporary special deduction for seniors, and new deductions allowed for overtime pay and tip income. For years beyond FY 2026, the individual income tax changes are expected to be roughly revenue neutral, presuming that a state law enacted prior to OB3 providing that overtime pay will be considered taxable income becomes law in 2026. An action has been filed against this measure, alleging it violates the state tax limitation amendment (TABOR) which generally requires state tax increases to be approved by a vote of the electorate. Reductions in the corporate revenues are projected to occur at about 75 percent of their FY 2026 levels in future budget years; the first-year impact is larger certain federal changes were retroactive to the beginning of tax year 2025.

The call for a special session did not lay out a comprehensive approach to eliminating the budget deficit, but the session is expected to focus on ways to reduce state expenditures as the TABOR limitation significantly restricts the ability of the state legislature to enact state tax increases without voter approval. For a presentation regarding the income tax impacts of OB3 in Colorado, click here. Please contact Amanda Bennett for questions on Colorado and follow TWIST for further developments on OB3.

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The Illinois Department of Revenue (Department) recently released Private Letter Ruling ST 25-0004-PLR, addressing whether certain types of subsidy payments must be included in a taxpayer’s gross receipts for purposes of the Retailers’ Occupation Tax (ROT). The taxpayer involved enters into agreements with employers to operate cafeterias for their employees. Under the agreement, employers provide the physical space and equipment for the cafeterias, and the taxpayer purchases, prepares, and sells food to the employees. The taxpayer and the employer collaborate on the cafeteria operating policies, including the price of food, but the employer has the final say on pricing. For compensation, the taxpayer receives a fixed administrative fee from the employer plus receipts from the sale of meals. If the sales to employees do not cover the cost of conducting the business, the employer must pay the taxpayer a subsidy to make up the difference. The subsidy is based on total operating results for the cafeteria and is paid at the end of an accounting period as specified by the contract.

The taxpayer requested a ruling from the Department on whether these subsidy payments should be considered taxable gross receipts for ROT purposes. Under Illinois law, a taxpayer’s “gross receipts” subject to the ROT generally encompass total consideration from retail sales. The Department explained that because the subsidy is not directly tied to an individual sale at retail, it would not be subject to the ROT. In support, the Department cited an Illinois Supreme Court case from 1978, Chet’s Vending Service Inc. v. Department of Revenue, 71 Ill. 2d 38 (1978), wherein the court found that similar subsidy payments were not related to any individual sale and, therefore, not subject to ROT. For questions on ST 25-0004-PLR (July 17, 2025), please contact Drew Olson.

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