This Week in State Tax

The Arizona Court of Appeals recently affirmed a state Tax Court decision in Arizona Cardinals Football Club LLC v. Department of Revenue, regarding the applicability of the Transaction Privilege Tax (TPT) to facility use fees.  The Arizona Cardinals (Team) collected facility use fees as part of the total ticket price for events at the stadium and subsequently transferred the fees to the Arizona Sports and Tourism Authority, which was authorized by statute to impose and receive such fees to fund stadium operations and related public purposes. The Team argued that these fees should not be included in its taxable gross receipts as it acted merely as an agent for the Authority.

Arizona state and city TPTs are imposed on businesses for the privilege of engaging in various types of economic activity, including amusements, the business classification assigned to the Team. The TPT base is generally defined as “the gross receipts of a taxpayer derived from trade, business, commerce or sales ... without any deduction on account of losses.” The Tax Court found that because the Team collected the fees directly from ticket buyers as part of the ticket sale, and the statutory amusement classification for TPT broadly covers all amounts received from admissions and user fees, the collection of the fee is taxable under the TPT statute.

The appellate court rejected the Team’s agency argument, emphasizing that the transfer of the fees to a public entity did not alter the character of the fees as taxable receipts when collected by the Team. The ruling clarified that the nature of the transaction, along with statutory definitions, take precedence over contractual arrangements or the intended use of the funds. The original Tax Court ruling was covered in TWIST on August 19, 2024. For further information, please contact Eric Gee. 

The North Carolina Supreme Court recently addressed the sales tax treatment of gift cards sold by a prepaid wireless services retailer.  The case, No. 272A23, focused on cards issued during two periods. For the first period, the cards could only be redeemed for prepaid wireless services, which are specifically defined as taxable at the point of sale under state law. As a result, the retailer was liable for collecting and remitting sales tax on these transactions.

During the second period, however, the retailer revised its agreement with the telecommunications provider, allowing the cards to be used for both taxable wireless services and non-taxable products. The court held that in this scenario, the retailer (i.e., seller of the cards) was not responsible for collecting sales tax at the time of sale. Instead, the tax liability shifted to the telecommunications provider, which would be required to collect and remit appropriate tax when the cards were redeemed for taxable products or services. The case was remanded for recalculation of the retailer’s liability based on those distinctions. For questions regarding N.C. Dep’t of Revenue v. Wireless Ctr. Of N.C., or responsibilities of retailers and telecommunications providers in North Carolina, please reach out to Nicole Umpleby or Scott Jackson. 

The Washington Court of Appeals, Division Three, recently reversed a Board of Tax Appeals decision and granted the taxpayer a use tax exemption for gases used in producing materials ultimately incorporated into solar panels. In this case, the court was required to determine the proper construction of a sales and use tax exemption for gases and chemicals in the production of semiconductor materials that was limited as follows:

This exemption is limited to gases and chemicals used in the production process to grow the product, … and other such uses whereby the gases and chemicals come into direct contact with the product during the production process ….

The taxpayer used natural gas in manufacturing solar grade polysilicon that was sold to solar panel manufacturers. The natural gas was used to help decompose and deposit silicon onto silicon seed particles which then grew in size to eventually form the solar grade polysilicon that was ultimately sold to the panel manufacturers. The natural gas did not come into contact with the silicon. The taxpayer sought a refund for tax paid on the purchase of the natural gas used in the process, arguing it was used to “grow the product” (i.e., the silicon).

The Department of Revenue denied the refund claim, arguing that the statute in question required all exempt uses enumerated in the statute to have “direct contact” between the gas and the final product. The taxpayer argued that the “direct contact” requirement did not apply to the use of gases to “grow the product,” but only to the “other such uses” phrase in the law. The Board of Tax Appeals agreed with the Department, and the Superior Court certified the case to the Court of Appeals.

In its review, the appellate court applied the “last antecedent” rule of statutory construction, concluding that the “direct contact” requirement modifies only the last catchall phrase “and other such uses,” and not the entire list of enumerated uses which included the “grow the product” language. In legal parlance, the court applied the “last antecedent” rule, rather than the “series-qualifier” rule which would say that the “direct contact” requirement should be applied to all uses of gases listed in the statute. The court determined that the syntax, structure, and legislative intent of the law favored a broader exemption to promote semiconductor manufacturing in Washington. For any questions on REC Solar Grade Silicon v. Department of Revenue, please contact Michele Baisler.

The Wisconsin Tax Appeals Commission determined that Wisconsin’s specific sourcing rule for software licenses did not apply when the software was incorporated by the taxpayer’s customer into another application that was subsequently sublicensed by the customer to its own downstream customers. The taxpayer licensed its database management software to a Wisconsin-based developer, which used the software in certain applications it produced and subsequently licensed to end-user medical providers throughout the United States. Under the terms of the agreement between the taxpayer and the intermediary developer, the taxpayer received a share of the proceeds from the licenses to end-users of applications that used the taxpayer’s database management system. When the intermediary sold an application incorporating the taxpayer’s software, the taxpayer would bill the intermediary an amount for each user of the application, and the intermediary would reimburse the taxpayer. The end-user customer did not make payments directly to the taxpayer.

The taxpayer took the position that, under Wisconsin’s sourcing rules for use of computer software by purchasers or licensees, its receipts should be sourced based on the location of the end-users of those applications in which its database system was incorporated. The Department of Revenue argued that the taxpayer’s only customer was the intermediary developer, and that all receipts from the transaction should be based on the intermediary developer’s business location under the general rules for royalty income.

The taxpayer supported its position by citing a past decision of the Commission. However, the Commission determined here that a subsequent Court of Appeals decision was on point and controlling, and to the extent that the appellate ruling conflicted with the Commission’s previous decision, the Commission decision was overruled. Next, it applied the logic of the Court of Appeals decision to the facts of this case, determining that the relationship between the taxpayer and the end-users was too attenuated to consider the end-users to be licensees of the taxpayer, noting that “[i]t is too much of a stretch to find that an addendum, which one ‘party’ cannot know has been provided to another ‘party’ constitutes proof of mutual assent to the end-user agreement” and that warranties contained in the contracts with the end-users were enforceable against the intermediary developer as well as the taxpayer. Finally, the Commission agreed with the Department that the taxpayer’s receipts from the sublicenses were best characterized as royalties, which are sourced to the intermediary developer’s Wisconsin location. Contact Bradley Wilhelmson with questions about Intersystems Corp. v. Wisconsin Department of Revenue.

As we get ready to sing Auld Lang Syne, four states – Illinois, New Jersey, Rhode Island, and Virginia - have spiced up the holidays by issuing additional guidance on incorporating the provisions of P.L. 119-25, the One Bill, Beautiful Act (OB3), into state law.

Illinois: Newly enacted legislation in the Land of Lincoln decouples state law from various Internal Revenue Code (IRC) provisions amended by OB3; the measure also extends the state Pass-Through Entity Tax (PTET) indefinitely. Illinois is a rolling conformity state, meaning any changes made to the IRC federally will automatically become a part of the state tax unless the state acts to decouple. Under the new legislation, Illinois will decouple from IRC section 168(n) (bonus depreciation for qualified production property) for certain facilities placed in service before January 1, 2031. The state had earlier decoupled from the bonus provisions in IRC section 168(k). In addition, earlier this year, Illinois enacted legislation that provides for a 50 percent dividends received deduction (DRD) for the amount of global intangible low taxed income (GILTI) included in taxable income. The bill adds references to “net controlled foreign corporation tested income (NCTI),” the new name for GILTI in OB3, and it will also be subject to the 50 percent DRD. Finally, Illinois eliminates the January 1, 2026, expiration date for the state PTET, which allows pass-through entities (e.g., partnerships and S-corporations) to pay an elective tax on the net income of the entity and accords the partners and shareholders of such entities a state income tax credit equal to their proportionate share of tax paid. Please contact Brad Wilhelmson with questions on S.B. 1911.

New Jersey: The Garden State automatically conformed to the OB3 amendments to IRC section 163(j) (business interest limitations) because of its rolling conformity. The Division of Taxation recently issued updated guidance for computing the limitation for state tax filing purposes. The updated guidance adds references to the OB3 version of IRC section 163(j) but does not change the substance of the computations from earlier filing guidance issued for the pre-OB3 version of IRC section 163(j). Please contact James Venere with questions on Technical Bulletin 87(R).

Rhode Island: The Division of Taxation recently adopted emergency regulations to reflect the changes made to the Rhode Island tax code in the FY 2026 state budget and the Division’s OB3 related guidance. The FY 2026 Rhode Island budget provided that for tax years beginning on or before January 1, 2025, Rhode Island will require corporate taxpayers to add to their taxable income “any amount of income, deduction or allowance” that would be subject to federal income tax but for the enactment of OB3. The new regulations align with state statute and reflect the guidance issued by the Division in the last several months detailing how taxpayers should prepare their returns to reflect the nonconformity with the key corporate provisions amended under OB3. [For details on Advisory Notice 2025-18 and Advisory Notice 2025-20, see our TWIST of September 22, 2025 and TWIST of October 13, 2025 .]

The emergency regulations published by the Division went into effect on December 15, 2025, and will remain in effect for 120 days unless extended or replaced. Please contact Jamie Posterro with questions on the Rhode Island Emergency Regulations.

Virginia: The Department of Taxation has released a video update for tax professionals addressing filing season updates and IRC conformity, as well as other changes to both income and indirect taxes. Notably, the video covers the 2025 Appropriations Act which paused the state’s otherwise rolling conformity to the IRC for changes made to the IRC in 2025 or 2026 that would have any revenue impact on Virginia during the next five years, other than federal tax extenders (e.g., the permanent extension of look-through for related CFCs). The Commonwealth legislature will need to take action to conform further to changes made by OB3.

Separately, outgoing Governor Youngkin has issued his proposed biennial budget and indicated it will be “substantially conforming” the state’s tax code to federal tax changes, expected to provide $730 million in reductions for taxpayers. Please contact Diana Smith with questions on the 2025 Update for Tax Professionals or H.B. 30, the Governor’s budget proposal. 

In response to the federal phase-out of the penny, more states are providing guidance for taxpayers on handling the application of sales tax to transactions that require rounding because of the inability to make exact change. Georgia and Michigan recently added their voice to the discussion.

Georgia: The Department of Revenue issued Policy Bulletin SUT 2025-02, which clarified that dealers must calculate and collect sales tax on the actual sales price of the taxable items. If the total amount to be collected cannot be done without pennies, then the dealer may round the total up or down to the nearest nickel; this leaves the taxable base and amount of tax collected unchanged. The bulletin emphasizes that rounding adjustments should not exceed four cents.

Michigan: The Department of Treasury issued a notice on December 8, explaining that, statutorily, sales and use tax must be computed to the third decimal place and rounded up or down to the nearest whole cent. Beyond this, the retailer is allowed to round up or down as they choose to address any shortage of pennies; the taxable base and tax amount collected and remitted will not be affected. For the sake of tracking and compliance, the Department recommends recording any rounding adjustments separately.

This guidance is similar to that issued earlier by Iowa and Texas, as covered in the TWIST on December 8. For any questions regarding Georgia, please reach out to Ben Cella; for Michigan, please contact Dave Perry.