This Week in State Tax

A Florida court has recently ruled in favor of a multi-state financial institution sourcing credit card interest income using market-based sourcing. In this case, the Taxpayer earned interest and fees from issuing credit card loans, including to Florida customers. The Taxpayer received credit card payments from its Florida customers in three ways: by mail, electronically, or through ATM machines. The Taxpayer did not have a mailing address in Florida and electronic payments were received by Taxpayer’s bank account outside of Florida. The Taxpayer did receive a small number of ATM payments at ATMs in Florida. The Taxpayer also received “Interchange Income,” for transactions in which it was the issuing bank that were processed by third party card processors. For each transaction, the Taxpayer would transfer funds to the acquiring bank an amount equal to the customer’s credit card purchase, less the interchange fee to a third-party processor. The Taxpayer had no contractual relationship with the Florida merchants and ultimately received the Interchange Income in Taxpayer’s non-Florida bank accounts.

Florida imposes a bank franchise tax on taxpayers classified as banks. The Taxpayer was required to use specific financial organization rules in computing its bank franchise tax liability. Under these rules, receipts from interest other than interest on loans secured by real or tangible personal property is sourced to Florida if the “…interest is received [within Florida].” A Florida statute provides that the location where a financial organization’s fees, commissions, or compensation for services are received is based on where the financial services were rendered. Regulations promulgated by the Florida Department of Revenue (the Department) further provide that “where the income-producing activity in respect to business income from intangible personal property can be readily identified” such income is sourced to Florida “if the income producing activity occurs in Florida…”

On its Florida bank tax returns, the Taxpayer sourced its credit card interest income and Interchange Income outside of Florida. In assessing the Taxpayer for additional taxes, the Department argued that, under financial organization sourcing rules, the “income-producing activity” related to credit card loans occurred within Florida because the situs of the related asset (i.e., the credit card loan) was the location of the Florida cardholder. As such, credit card interest income derived from Florida cardholders should have been sourced to Florida. Moreover, the Department asserted that because the Interchange Income was received directly from Florida merchants, the Taxpayer performed its services in Florida, so the resulting income should have been sourced to Florida.

In its decision, the Florida circuit court held that because credit card interest payments mailed by Florida customers were received at a mailing address outside of Florida, and electronic payments were received by a bank account outside of Florida, this interest income was not received in Florida under the financial organization sourcing statutes. However, the interest income derived from payments made at the Taxpayer’s Florida locations was received in Florida as contemplated by the statute. The court found no statutory support for the notion that credit card interest income should be sourced based on the situs of the debt. Additionally, the court noted that the Department’s regulation which sources services based on the “income-producing activity” contradicts the interest income sourcing statute, which looks to where the income is received, so the statutory language controls. The court held that the Interchange Income was not service income, but was generally understood to qualify as interest income based on federal rulings and opinions from other states. Since the Taxpayer’s Interchange Income was received in bank accounts outside of Florida, the income was correctly sourced outside of Florida. Even if the income was classified as service income, as the Department suggested, the court found it would not be sourced to Florida because the Taxpayer has no direct relationship with the Florida merchants, and thus no service by the Taxpayer was rendered in Florida under the income producing activity rules. The court permitted the Taxpayer to source both streams of income as interest income, holding that interest income should be sourced based upon where it was received, which in effect, clarifies that Florida sources this type of interest income using market-based sourcing for financial organizations.

Please contact Henry Parcinski with questions on Capital One Bank, N.A. v. State of Fl. Dep’t of Revenue.

Chicago Mayor Brandon Johnson recently released his 2026 budget proposal, the “Protecting Chicago Budget,” with the stated goals of enhancing financial stability and funding city programs while closing a projected $1.15 billion budget gap. As required by state law, the City is required to produce a balanced budget each year, which means that appropriated expenditures may not exceed the amount of revenue estimated to be available for the year. To meet these objectives, the budget introduces several new taxes on businesses, while avoiding increases to property tax or imposing a local grocery tax, coinciding with the expiration of the state grocery tax on January 1, 2026.

The budget’s key tax proposals include the following:

• The “Community Safety Surcharge,” which would require companies with 100 or more full-time employees who perform 50 percent or more of their work within the city to pay $21 per month per employee.
• An increase to the Personal Property Lease Transaction Tax from 11 percent to 14 percent, which would impact businesses selling access to software and cloud infrastructure to customers in the city.
• The Social Media Amusement & Responsibility Tax (SMART), which would levy on large social media companies a $0.50 charge per active user over 100,000 users in the city.
• The Online Sports Wagering Tax, which would apply a 10.25 percent tax to the adjusted gaming receipts of licensees engaged in online sports betting.

These measures, along with other adjustments including new taxes on hemp products, are projected to generate over $500 million in new revenue for the City.

Before the end of the year, the City Council will hold hearings on the proposed budget and may make amendments to it. Once the budget is approved by ordinance of the City Council, the budget will take effect on January 1, 2026.

For questions regarding the Mayor’s proposed budget, please contact Drew Olson. 

The Indiana Department of State Revenue determined in a Revenue Ruling that a logistics company’s purchases of non-returnable wrapping materials, as well as machinery and equipment used in providing assembly and packaging services, are subject to sales and use tax. The taxpayer operates multiple distribution centers in Indiana, providing services such as supply chain management, warehousing, order fulfillment, assembly and packaging, and transportation management. The taxpayer receives customer-owned products, stores them, and prepares them for shipment using non-returnable packaging materials such as bags, boxes, bubble wrap, labels, stretch wrap, tape, pallets, and crates.

The taxpayer requested guidance on whether its non-returnable packaging materials were exempt as sales of wrapping materials and containers for use in shipping or delivery of tangible personal property, and whether its purchases of packaging equipment used to package and repackage products for customers were exempt as manufacturing machinery, tools, or equipment for direct use in production.

The Department explained that the exemption for non-returnable packaging materials applies only if the materials are used for shipping or delivering tangible personal property that the acquirer processes or services for the owner and that will be sold by the owner as part of their manufacturing or production business. The Department citied to Faris Mailing, Inc. v. Indiana Dep’t of State Revenue to clarify that fulfillment and packaging services, such as those provided by the taxpayer, do not transform a customer’s products or create a new marketable product. Therefore, the taxpayer’s use of non-returnable packaging materials to ship customer-owned products did not meet the requirements to qualify for the non-returnable packaging materials exemption.

Similarly, with respect to the exemption for manufacturing machinery and equipment, the Department concluded that the taxpayer’s activities of packaging and repackaging customer-owned products did not constitute direct production or manufacturing. The Department explained that merely assembling or packaging items does not transform the items into new products and, therefore, does not qualify for the manufacturing exemption.

For more information on Revenue Ruling #2025-04-RST, contact Dave Perry.  

In response to the federal enactment of the One Big Beautiful Bill Act (OB3), Commissioner Figueroa (the Commissioner) of Maine’s Department of Administrative and Financial Services (the Department) delivered a report to the state legislature describing the impact of OB3 on Maine’s tax code and the state budget, and set forth recommendations on how to preserve the state’s tax base and ensure efficient implementation of Maine’s tax laws. Recall, Maine is a state with fixed conformity to the Internal Revenue Code (IRC), currently conforming to the IRC as of December 31, 2024.  Maine passed a bill in its most recent session, L.D. 221 (codified as Me. Rev. Stat. tit. 36 § 5295), which requires the Commissioner to write a report to the Governor of Maine when federal tax changes will have an impact on Maine’s budget and laws, but when the legislature has not had an opportunity to adjust the state tax code prior to processing tax returns for the impacted tax year. Once the report is delivered, the Governor has the choice of whether to temporarily adjust the state’s tax laws in a manner consistent with legislative intent, but which is mindful of budgetary constraints and simplicity in administering Maine’s tax laws.

In its report, the Commissioner advised the Governor to decouple from several OB3 amendments impacting corporate income tax, such as IRC sections 174 and 174A (R&D expense deduction), IRC section 168(n) (accelerated depreciation for qualified production property), and IRC section 168(k) (bonus depreciation). However, the Commissioner also recommended that the state conform to other amendments made to the IRC under OB3, including IRC section 165(h) (qualified disaster loss), IRC section 168(b) (qualified farm property), IRC section 179 (immediate expensing of certain property), IRC section 163(j) (business interest deduction), and IRC section 174A (R&D expenses but only as it related to small business amended returns).

On October 1, 2025, Governor Mills submitted a directive to the Maine State Tax Assessor requesting that all the changes recommended by the Commissioner be adopted. [For details on L.D. 221, see our TWIST of July 14, 2025]. Please contact Melissa DelleMonache with questions on the Determination and Direction of the Governor of the State of Maine or the Maine Report on 2025 Conformity with Federal Tax Law Changes.