This Week in State Tax

The Illinois Department of Revenue recently released a General Information Letter addressing transactions involving the leasing of tangible personal property. Historically, businesses that acquired assets for purposes of leasing paid Illinois use tax on the purchase price and subsequent lease payments were not subject to Illinois sales tax. Effective January 1, 2025, the term “sale” in Illinois includes leases. As a result, lessors of tangible personal property in Illinois are considered retailers for the Retailers’ Occupation Tax (ROT) purposes, and they must collect ROT on the stream of lease payments made on or after January 1, 2025, regardless of whether use tax was previously paid on the asset at acquisition.

Take for example a business that purchased equipment in 2024, paid Illinois use tax on the purchase and entered into a multi-year lease with a customer with lease payments beginning in 2024 and continuing into 2025 and beyond. Under prior rules, the lessor’s tax obligation was satisfied with the use tax paid at purchase, and lease receipts were not taxed. Under the new rules, lease payments made after January 1, 2025, are subject to ROT, even though use tax was already paid. The Department has clarified in the GIL that there is no offset or credit for use tax previously paid; ROT must be collected on the lease stream.

Of note is that any lessor of tangible personal property into a home rule jurisdiction that had its own lease tax in place prior to January 1, 2023, such as the Chicago Personal Property Lease Transaction Tax, is exempt from Illinois lease tax and would instead be subject to the home rule jurisdiction tax regime only. For questions regarding General Information Letter ST 25-0051-GIL, the ROT rules for lessors, or planning for asset disposition at lease-end in Illinois, please contact Drew Olson.

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The Nebraska Department of Revenue recently issued guidance addressing a bill enacted earlier this year that prohibits taxpayers with certain relationships to entities operating in select “foreign adversaries” from receiving benefits under various Nebraska corporate income tax incentive programs. Among the provisions of LB 644 (effective October 1, 2025) is a limitation on the receipt of certain tax incentives by “foreign adversarial companies.” In this context, “foreign adversarial company” is defined to include any company (1) organized under the laws of a foreign adversary; (2) with its principal place of business in a foreign adversary; (3) owned or controlled by the government of a foreign adversary; or (4) owned by or owning a company that qualifies under one of the other three conditions. “Company” is defined broadly to include any corporation, partnership, association, organization, or other combination of persons. “Foreign adversary” is defined by reference to federal law and includes China, Cuba, Iran, North Korea, Russia, and the Venezuelan Maduro regime. A Note to the guidance indicates that a foreign adversarial company includes a taxpayer being owned by or owning a subsidiary or affiliate located in a foreign adversary jurisdiction, as well as a subsidiary of a taxpayer that owns a subsidiary or affiliate located in such a jurisdiction.

The guidance specifically states that these restrictions extend to foreign adversarial companies applying for credits, as well as to investors who would claim the entity's credits on their tax returns and to all other taxpayers who would claim incentive credits from the foreign adversarial company. Additionally, incentive credits held by foreign adversarial companies on or after October 1, 2025, will be permanently disallowed, even if such credits are later transferred to an eligible entity. Furthermore, if any incentive credits are transferred to a foreign adversarial company, such credits will become disallowed once transferred, including credits from past years that have been carried forward. The new legislative restriction applies to over 25 listed incentive programs as well as any other tax or incentive programs created for recruiting or retaining businesses in Nebraska per the Notice. Contact Kara Hernandez with questions on Nebraska’s Foreign Adversarial Company Notice or LB 644.

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The New York City Tax Appeals Tribunal recently affirmed an Administrative Law Judge (ALJ) determination that the New York City Department of Finance improperly denied a taxpayer’s interest expense deduction related to a debt-financed distribution. The Department had asserted Unincorporated Business Tax (UBT) deficiencies against a television network for the audit period covering tax years 2012 – 2014. The core dispute centered on the interpretation of "unincorporated business deductions," specifically whether the City could deny a deduction for interest expense that was allowable for federal income tax purposes, even when no specific UBT statutory modification applied.

The New York City Administrative Code defines “unincorporated business deductions of an unincorporated business” as:

“… the items of loss and deduction directly connected with or incurred in the conduct of the business, which are allowable for federal income tax purposes for the taxable year (including losses and deductions connected with any property employed in the business), with [certain] modifications….” (emphasis added).

For the tax years at issue, the taxpayer deducted interest expenses related to financing used to redeem the equity interest of one of its partners in arriving at federal taxable income. The Internal Revenue Service audited the deduction and issued a no-change letter. Despite the Service having accepted the deductibility of these expenses, the Department denied them for UBT purposes, claiming that the language of the City Administrative Code imposes two separate requirements: that the expense must be allowed for federal income tax purposes and must be directly connected with or incurred in the conduct of the business for UBT purposes. Therefore, the Department argued that even if a business expense is permitted at the federal level, the expense must also pass a second level of scrutiny and be “directly connected with trade or business” under the UBT.

The Tribunal strongly disagreed with the Department’s interpretation based on the clear intent of the legislative history to bring the UBT into substantial conformity with the Internal Revenue Code as found by the ALJ.  The Tribunal further noted that the Department’s proposed reading would allow it to deny an allowable federal deduction under the UBT by imposing its own alternative interpretation of deductibility that differs from the federal income tax, an interpretation that “would produce an absurd result, essentially empowering the City to apply the federal income tax under the UBT whenever and however it chooses.” Because the legislature clearly intended for the UBT to substantially conform to the federal income tax, federal principles should control, absent a specific New York City modification. Please contact Aaron Balken and Alec Schwartz with questions about Matter of A&E Television Networks, LLC. 

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The Wyoming Supreme Court reversed a State Board of Equalization decision that had granted a taxpayer a sales tax refund for electricity used in certain oil field operations. The court held that the taxpayer was not “engaged in the transportation business” as required by law for the exemption.

The taxpayer operated oil fields in Wyoming, using electric submersible pumps and pumpjacks to extract a mixture of crude oil, water, and natural gas. After extraction, these fluids were moved to surface facilities for separation, and the crude oil was then conveyed to a Lease Automatic Custody Transfer (LACT) unit for custody transfer. The taxpayer sought a refund for sales tax paid on electricity used in these operations, arguing that the movement of the fluids constituted transportation. The Department of Revenue denied the request, prompting the taxpayer to appeal to the State Board, which ruled in its favor. The Department then sought review in the District Court, and the case was certified to the state high court.

On appeal, the substantive dispute centered on whether the taxpayer qualified for the sales tax exemption as a person “engaged in the transportation business” as set forth in state law. The taxpayer argued that its use of electricity to move fluids from the wellhead to the LACT unit qualified as transportation, and that its role as operator for working interest owners—moving oil it did not own—supported its status as being engaged in the transportation business. The taxpayer relied on utility studies showing the percentage of electricity used for post-wellhead movement.

However, the court found the phrase “engaged in the transportation business” to be unambiguous, requiring that an entity be uniquely employed in the commercial enterprise of moving goods or products from one place to another. In reaching this conclusion, the court rejected the State Board’s reliance on a broad federal tax definition of “engaged in a trade or business,” holding that this approach failed to give effect to the specific term “transportation.” The court determined that the taxpayer’s activities—moving fluids from the wellhead to the LACT and separating water from crude oil—were part of the oil production and gathering process, not transportation.

Finally, the Court concluded that the electricity in question was consumed largely for production purposes, with only a negligible amount used for moving marketable crude oil. Accordingly, the Court held that the taxpayer was not engaged in the transportation business for purposes of the sales tax exemption and denied the taxpayer’s request for a sales tax refund. The court also dismissed a collateral estoppel argument that the Department could not relitigate this issue because the State Board had approved an exemption for identical activities previously. The court noted the Department in the earlier matter had stipulated the taxpayer was in “the transportation business,” thus negating an estoppel argument. For more information on Dep’t of Revenue v. PacifiCorp, contact Steve Metz.

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The United States Mint produced the last penny on November 12, 2025. As reported by several national news outlets, some retailers are experiencing a shortage of pennies and are struggling to develop acceptable policies for handling cash transactions and sales tax matters when neither the customer nor the retailer can make exact change. Iowa and Texas have recently given taxpayers a penny for their thoughts, by issuing guidance to clarify sales tax obligations as businesses respond to the demise of the penny.

Iowa: The Department of Revenue issued a statement that retailers must continue to calculate and collect sales tax on the exact taxable sales price prior to any rounding, and that rounding cash transactions after the computation of tax will not affect the amount of tax collected and remitted to the Department. When filing returns, businesses should report the gross sales and sales tax numbers, before any rounding is applied.

Texas: The Comptroller of Public Accounts has issued Memo 202512001M setting forth the Lone Star State approach to cash transactions when exact change is not available. Per the policy, retailers must calculate sales tax based on the actual sales price and remit that amount of tax to the Comptroller. If a business has a policy of rounding the total transaction to the nearest nickel, regardless of up or down, the Comptroller will not adjust the tax owed. However, if rounding goes beyond the next highest or lowest nickel (e.g., rounding $324.74 to the nearest dollar, $325), the entire rounding amount is treated as additional sales price, and sales tax must be recalculated for reporting and remittance purposes.

The memo also indicates that for payments of tax in cash at Comptroller offices, the Comptroller will round transactions down to the nearest nickel if a shortage of pennies prevents payment of the exact amount owed.

For questions on the Iowa guidance, contact Crystal Hildebrand; for Texas, reach out to Sarah Vergel de Dios. The National Conference of State Legislatures has also published a report outlining the issues and options available in light of the cessation of penny production.

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