This Week in State Tax

The California Department of Tax and Fee Administration (CDTFA), in conjunction with the Department of Resources Recycling and Recovery (CalRecycle), will be administering a new fee, effective January 1, 2026, on the retail sale of “covered battery-embedded products” (CBE products). A CBE product is one that contains a battery “not designed to be easily removed from the product by the user of the product with no more than commonly used household tools,” as put forth in Senate Bill 1215.

The fee will be imposed on consumers and collected by retailers at the time of the retail sale or lease of a CBE product. The fee is currently proposed at 1.5 percent, and CalRecycle has until October 1, 2025 to finalize this rate. Beginning July 2028, CalRecylcle may evaluate and adjust the rate annually. Products exempt from the fee include certain medical devices, items with screens over four inches, energy storage systems, and electronic nicotine delivery systems.

The law imposes requirements for both retailers and manufacturers of CBE products. Penalties may be imposed for noncompliance by either retailers or manufacturers.

• Retailers (including marketplace facilitators) must collect the fee at the point of sale on each new or refurbished CBE product, clearly itemize the fee as a separate line on the receipt or invoice, and remit the collected fees to the CDTFA on a quarterly basis. Retailers are permitted to retain 3 percent of the fee collected to offset costs associated with collection and reporting. In addition, retailers must provide clear notice to customers regarding the fee and its purpose. Retailers are strictly prohibited from selling CBE products that are sourced from manufacturers who are not in compliance with the law, or from selling products that lack required labeling, such as the manufacturer’s name and battery chemistry information, which must be readily visible on the product or available on the manufacturer’s website.
• Manufacturers must annually identify and report all CBE products offered for sale in California by brand and model number and must notify both customers and CalRecycle of which products are subject to the recycling fee and which are exempt. Manufacturers are required to submit comprehensive annual reports to CalRecycle detailing sales volumes, battery chemistry for each product, the amount of recycled content used, and a list of all retailers to whom notices have been provided. Additionally, manufacturers must make information available to consumers describing where and how to return, recycle, and safely dispose of CBE products, maintain records for a minimum of three years, and provide those records to CalRecycle upon request.

Online registration for the program opens October 1, 2025, and the first quarterly return is due by April 30, 2026. Both CalRecyle and CDTFA have web pages for the CBE fee. For any questions or concerns regarding this fee, please contact Jim Kuhl. 

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The Minnesota Supreme Court recently addressed whether a taxpayer’s income from the provision of pharmacy benefits management services was properly sourced in part to Minnesota (i.e., the location of the plan members) as opposed to Wisconsin where the taxpayer argued the service was received by the customer. The case focused on contracts between two members of a combined group—an insurance provider (HIC) that offers medical and drug insurance products to plan members in Minnesota and other states, and a pharmacy benefits manager (HPS) that provides various services related to HIC’s plan members. Among the services provided by HPS were maintaining the formulary for the plans (i.e., covered drugs), recruiting and maintaining a network of pharmacies to provide services to customers, and claims adjudication. Minnesota law attributes receipts from the performance of services to “the state where the services are received.” If the location where services are received is not readily determinable, Minnesota applies a cascading set of sourcing rules that looks to the ordering location or billing address of the customer.

On its original 2016 Minnesota tax return, Humana sourced its receipts based on where the HIC plan member resided when the member purchased the drug plan, including Minnesota. Subsequently, Humana amended its 2016 Minnesota return, attributing all HPS receipts to Wisconsin, the location of HIC’s headquarters and sought a refund of over $800,000. After the Commissioner of Revenue denied Humana’s refund claim in full, Humana appealed to the district court, which transferred the case to the state Tax Court. In upholding the Commissioner, the Tax Court found that the plain language of Minnesota’s sourcing rule as applied to the sale of services did not limit the receipt of services to direct customers of the taxpayer. Instead, the determination of who received the services was fact specific, and Humana failed to prove the receipts were provided only to HIC and received only by HIC at locations outside Minnesota. Humana subsequently appealed to the Minnesota Supreme Court.

The taxpayer first argued that the plain language of the sourcing rule required a determination of where the taxpayer’s “direct customer” received the services, not where the customer’s customer received the services. Further, in the taxpayer’s view, the third and fourth cascading rules in the sourcing statute (i.e., the location of the ordering office or billing office), foreclose the possibility of sourcing by looking to where the plan member received the services. Finding in favor of the state, the court first looked to the dictionary definition of the term “received”. Based on these definitions, it concluded that “received” plainly means “to come into possession of or get from some outside source.” This definition, in the court’s view, does not limit “received” to exclude indirect beneficiaries. The court also reviewed the cascading rules, finding that the structure of the rules “implicitly acknowledges that a business’s services may not be received by the direct customer and may instead be received by the customer’s customer.”

The taxpayer also pointed to a Minnesota Supreme Court decision in Lutheran Brotherhood Research Corp., in which the court rejected a look-through approach for sourcing services provided by a mutual fund service provider to a family of funds. The court noted that the sourcing statute in Lutheran Brotherhood required service receipts to be attributed to where the benefit of the service was consumed. Thus, the case has only limited value in interpreting the current statute. Based on the facts presented, the Supreme Court held that the tax court did not err in finding that Humana had not successfully met its burden to show HPS’s services were received entirely outside Minnesota. As such, Humana’s refund claim denial was upheld. For questions about Humana MarketPoint, Inc. v. Comm’r of Revenue, contact Dale Busacker and Miriam Sahouani.

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The Washington Department of Revenue recently announced an expansion of the eligibility criteria for its Voluntary Disclosure Agreement (VDA) program effective September 1, 2025. The VDA program allows previously unregistered businesses to come into compliance with state tax laws by voluntarily registering with the state and paying tax liabilities from prior periods. In exchange for coming forth voluntarily, the state limits the “look back” period to four years plus the current year and waives up to 39 percent in potential penalties.

Prior to the change, a business was eligible for the VDA program only if it had never been registered with the Department, reported taxes to the Department, or received communication from the Department that they may be required to register. With the recent update, if a business was previously registered with the Department but closed that registration before the statutory period for which it now seeks a VDA (i.e., before January 1, 2021 for most taxes), then that taxpayer is now permitted to participate in the Washington VDA program. Likewise, if a business received communication from the Department that they may be required to register with the Department, but such communication occurred before the statutory period, the taxpayer is now permitted to participate in the VDA program. A taxpayer with an active registration at the beginning of the statutory period are not eligible for the VDA program but may be eligible for a waiver of the 5 percent assessment penalty.

Note that these VDA program changes are in addition to those covered in SALT Alert! 2025-09, discussing the temporary expansion to the program for investment income. For questions regarding changes to Washington's VDA Program, please contact Michele Baisler, Alex Low, or Jayson Miller.

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Unclaimed property administrators in Iowa and Washington have issued guidance clarifying additional reporting requirements for suspected fraudulent unclaimed property, following release of the Delaware State Escheator policy on reporting “Illicit Property” recently covered in TWIST on August 25, 2025. In brief, the Delaware State Escheator guidelines indicate that if a holder has identified property as “illicit,” the holder should file a separate “Illicit Property” unclaimed property report.

As in Delaware, both Iowa and Washington are instructing holders of abandoned or unclaimed property, when the holder knows or suspects the property to be fraudulent, to report the property on a second annual unclaimed property report, but only after the property has met the standard dormancy period. Both states direct holders to email the second report to their respective departments and include the name and FEIN of the holder, along with the amount of suspected illicit property. Washington further specifies that the second report should be labeled as “potentially fraudulent” in the property description. If the rightful owner is known, all identifiable information should be included; if unknown, the property should be reported under an “unknown owner.” Please contact Will King, Marion Acord, Ryan Hagerty, Keela Ross, Karen Anderson, or Quin Moore for more information on Iowa and Washington unclaimed property reporting guidelines.

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