This Week in State Tax

The Office of the California State Controller has launched an initiative to encourage businesses to comply with state unclaimed property laws by participating in its Voluntary Compliance Program (VCP). Starting in mid-November, the Controller will send notices to about 4,000 businesses identified as major potential holders of unclaimed property to encourage participation in the program. Outreach is planned to continue through 2026, and the Controller may use responses from unclaimed property questions on state income tax returns to identify businesses for the program.

Established by legislation in 2022, the VCP offers a significant benefit to holders using it: a complete waiver of the 12 percent annual interest typically imposed on past-due unclaimed property. To receive this waiver, holders must complete mandatory training and meet all reporting deadlines. To be eligible, a business cannot be under an unclaimed property audit or investigation. Additionally, businesses that have had interest assessed or waived within the last five years are generally not eligible. However, exceptions may apply for liabilities arising from mergers or acquisitions. The VCP is open to holders of past due unclaimed property, even if they do not receive a letter from the Controller.

For questions or assistance with the California VCP, please contact a member of KPMG’s Unclaimed Property practice, including Will King, Marion Acord, Jamie Aquino, Ryan Hagerty, Quin Moore, Keela Ross, and Karen Anderson.

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The Hawaii Intermediate Court of Appeals held that a taxpayer’s purchases of aircraft parts were purchases of tangible personal property subject to Hawaii’s general excise tax (GET), rather than exempt service and maintenance costs. The taxpayer operated aircraft manufactured by a commercial airplane manufacturer and purchased parts from the manufacturer to maintain its planes under an agreement which required the taxpayer to pay the GET on the parts purchased.

In 2021, the Department of Taxation notified the manufacturer that it owed additional GET on its aircraft part sales to the taxpayer. Per its agreement with the manufacturer, the taxpayer paid the assessed tax under protest and filed suit in the Tax Appeal Court for a refund. The Department challenged the court’s jurisdiction, and the Tax Appeal Court initially dismissed the case for lack of jurisdiction. On appeal, the Hawaii Supreme Court held that the Tax Appeal Court had jurisdiction and remanded the case.

While the initial case was pending, the taxpayer filed a second action seeking a refund of the tax paid under protest, and this claim became the subject of the appellate decision. The central issue before the appellate court was whether amounts paid for aircraft parts qualified for a GET exemption under HRS § 237-24.9, which excludes “amounts received from the servicing and maintenance of aircraft.” The taxpayer argued that the exemption should apply to purchases of parts necessary for aircraft maintenance, especially since the state use tax exempts imported parts used for maintenance. The Department countered that the exemption applies only to amounts received for actually performing servicing and maintenance, not for sales of tangible personal property such as aircraft parts.
The appellate court agreed with the Department, explaining that Hawaii imposes the GET on sellers of tangible personal property, and the exemption for amounts received from servicing and maintenance of aircraft does not extend to the sale of parts, even if those parts are used for maintenance. The court further rejected the taxpayer’s argument that the use tax exemption for imported parts required a parallel GET exemption for local purchases. It noted that the two taxes were designed to complement each other and avoid discrimination against interstate commerce, but that the existence of a use tax exemption for imported parts does not violate the Commerce Clause and mandate a GET exemption. Accordingly, the appellate court affirmed the Tax Appeal Court determination that the taxpayer’s purchases of aircraft parts were subject to GET as sales of tangible personal property and did not qualify for the exemption for service and maintenance costs. For more information on  In re Tax App. of Hawaiian Airlines, Inc. v. Dep’t of Tax’n, contact Reid Okimoto. 

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The Illinois Department of Revenue recently issued Private Letter Ruling ST 25-0006-PLR, clarifying the application of the Service Occupation Tax (SOT) to tangible personal property transferred in connection with the sale of services. The taxpayer that requested the ruling provides security monitoring services to customers under agreements that include both the provision of security equipment and the associated monitoring services. The Department first determined that the taxpayer was subject to the SOT and not the Retailers’ Occupation Tax because the equipment transferred was of minimal value without the service, and the true object of the transaction was the monitoring service. The key issue then addressed was whether the security monitoring equipment transferred to the customer as part of a service contract is subject to SOT and the proper determination of the base for the SOT.

Effective January 1, 2025, servicemen who sell services that include the transfer of tangible personal property by lease, such as security monitoring equipment, are subject to SOT. The ruling states that the taxpayer separately states the selling price of the monitoring equipment from the charge for the monthly security monitoring service. The Department accepted the taxpayer’s statement that the value of the property transferred incident to the services provided was greater than 35 percent of the taxpayer’s total annual gross receipts from sales of security monitoring services, meaning the taxpayer is not considered a de minimis servicemen. Therefore, the taxpayer owes SOT on the separately stated selling price of the equipment, but the base cannot be less than its cost price for the equipment transferred. Had the taxpayer not separately stated the selling price of the security monitoring equipment, the SOT would have been due on 50 percent of the taxpayer’s entire service bill, but not less than the cost price of the tangible personal property transferred. For questions on Private Letter Ruling ST 25-0006-PLR or the intricacies of the SOT and new tax rules regarding leasing, please reach out to Drew Olson.

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With the signing of HB 416 by Governor Shapiro on November 12, Pennsylvania becomes the most recent state to decouple from certain One Big Beautiful Bill Act (P.L. 119-21) (OB3) corporate tax provisions.  Recall, Pennsylvania conforms to the IRC on a rolling basis, so any changes made to the IRC automatically become Pennsylvania law unless the state takes action to the contrary.

Under HB 416, the Commonwealth will decouple from the OB3 amendments to IRC § 163(j) (business interest limitation), thus continuing to adopt the version of IRC § 163(j) in effect on Dec. 31, 2024. Pennsylvania will also decouple from IRC § 168(n) (bonus depreciation for qualified production property) by adopting a state addition modification for amounts deducted under IRC § 168(n) on the federal return and a subtraction modification equal to the depreciation deduction that would have been allowed under IRC §§ 167 and 168 without IRC § 168(n). Finally, Pennsylvania will not adopt the OB3 version of IRC § 174/174A (deductions related Research & Experimental expenditures). Pennsylvania will require that the deductions made under IRC § 174/174A be added back to taxable income. Pennsylvania then provides a 20 percent deduction for all R&E expenses, including foreign R&E. For taxpayers that elect under the IRC § 174A transitional rule to accelerate unamortized domestic R&E expenses from tax years 2022 through 2024, Pennsylvania will require an addback of any deduction claimed under IRC § 481 relating to those R&E expenses. The corporate tax modifications appear to go into effect for taxable years beginning after December 31, 2024, apart from the modifications related to IRC § 168(n), which went into effect upon enactment of House Bill 416.

HB 416 also creates a new Working Pennsylvanians Tax Credit (WPTC), a refundable tax credit linked to the federal Earned Income Tax Credit (EITC). The WPTC will be available to taxpayers who qualify for the federal and will allow qualifying taxpayers to claim up to 10 percent of the federal EITC amount against their Pennsylvania personal income tax due. The WPTC is available to individual taxpayers beginning in tax year 2025. Please contact Mark Achord with questions on H.B 416.

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