This Week in State Tax

On December 20, 2025, the Chicago City Council approved a 2026 budget for the Windy City totaling $16.6 billion; the provisions took effect on January 1, 2026. Among the most notable changes are the creation of the Social Media Amusement Tax (SMAT) and an increase in the Personal Property Lease Transaction Tax (PPLTT) rate.

The newly established SMAT is imposed on for-profit social media businesses that collect consumer data (other than customer contact information) from more than 100,000 Chicago consumers in a calendar year.  The rate of tax is $.50 per Chicago consumer in excess of 100,000, calculated on a monthly basis. “Chicago consumer” is defined as a Chicago resident using social media accessed through an account registered with a social media business without regard to any charges for registering or using the media, and “Chicago resident” is defined as a person in the City for other than a temporary or transitory purpose or who is a “domiciliary of the City.” The ordinance establishes a rebuttable presumption that a user with a Chicago address or IP address on record with or available to the social media business is a “Chicago consumer.” Certain types of businesses are not considered a “social media business” including Internet search engines, Internet service providers, certain streaming services and advertising networks, telecommunications providers and cloud computing services. Neither is the tax to be construed to apply to or affect various news organizations, websites and platforms. Tax remittances will be due monthly on the 15th day of the following month. An annual tax return is also required in August each year. The initial return will cover January 1, 2026, through June 30, 2026, and will be due by August 17, 2026. While certain terms are defined in the ordinance, many questions remain on matters such as the tax treatment of controlled groups with multiple social media platforms, the sourcing of transactions, and the proper determination of who constitutes a Chicago consumer, among others. The City Department of Finance is expected to provide further guidance regarding the administration and scope of the tax.

As to the PPLTT, the budget increases the rate from 11 percent to 15 percent, effective January 1, 2026 and provides further that the PPLTT rate shall not be “increased prior to January 1, 2028.” In addition, the budget increased several other taxes, including the motor vehicle lessor tax, boat mooring tax, checkout bag tax, and ground transportation tax. It also introduced a new internet and mobile sports wagering amusement tax. For further information or assistance regarding these changes or other Chicago tax matters, please contact Drew Olson.

A New York appellate court upheld an administrative determination that the reduced corporate tax rate applicable to “qualified emerging technology companies” (QETCs) was only available to a combined group if each group member individually met the criteria for the reduced rate. The taxpayer, an affiliated group of companies located both within and without New York that provided video, high-speed data, and digital voice services to both residential and business customers, filed its New York combined returns using the 6.5 percent rate applicable to QETCs. On audit, the Department of Taxation and Finance determined that the group was not a QETC and applied the regular 7.1 percent rate. An Administrative Law Judge (ALJ) rejected the taxpayer’s subsequent petition for redetermination, and the matter was taken to the appellate court.

New York law, for the years at issue (2012-2014), provided two methods for determining whether a taxpayer was entitled to the reduced rate. The first method (“Method One”) required that an entire combined group may be considered a QETC if the taxpayer “(1) is principally engaged in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing; (2) has property principally used for that purpose in New York; and (3) the adjusted basis of such property is at least one million dollars or all of its real and personal property is located in New York.” The second method (“Method Two”) was available only to QETCs that are located in New York. It did not explicitly provide for the treatment of combined groups. In this matter, the taxpayer argued that, even though certain members of the group were not located in New York, the group, taken as a whole, met the criteria to be considered a QETC and was entitled to the reduced rate under Method Two.

It was undisputed that certain members of the combined group were not located in New York during the relevant time, thus the question before the appellate court was whether the applicable statutory provisions required every member of a combined group to independently meet the definition of QETC and be located in New York for the combined group to be entitled to the reduced rate. In interpreting the statutory language and legislative intent, the court upheld the ALJ decision that the taxpayer’s combined group was not entitled to the reduced tax rate, because under Method Two, certain members of the combined group were not located in New York and accordingly failed to meet the QETC criteria. This conclusion centered on the fact that the legislature had explicitly provided requirements to determine if a combined group could be a QETC under Method One, but “failed to delineate a specific set of criteria” for combined groups in Method Two. Treating the entire group as a QETC under Method Two when not all members were located in New York would, therefore, grant a reduced rate to one or more entities that were not statutorily entitled to it and was contrary to the legislative intent to incentivize investment in the emerging technology industry in New York. The court also rejected an argument that the reduced rate should be available at least to those members that individually met the QETC criteria, determining that this would “effectively result in decombining the group and ‘distort the group’s economic activity in New York’.” As to qualifying under Method One, the court indicated that New York law treated each individual member of a combined group as a taxpayer, and it was clear that not all members had the requisite amount of personal and real property in the state. Finally, the court rejected an argument that denying the group QETC status because one or more of its members lacked New York presence would violate the dormant Commerce Clause. On this issue, the court noted that “legislative enactments carry an exceedingly strong presumption of constitutionality” and that the system did not discriminate against out-of-state commerce because a non-New York entity could still qualify for QETC status through some New York presence. Contact Aaron Balken or Alec Schwartz with questions about Matter of Charter Communications.

The Ohio Supreme Court recently held that a taxpayer was not entitled to a refund of Commercial Activity Tax (CAT) paid on gross receipts earned from the sale of products received by the customer at a distribution center in Ohio and subsequently shipped by the customer out-of-state.

The taxpayer is a contract manufacturer of various brands of personal care products. The taxpayer was contracted by one of its customers to produce bars of soap; these products were manufactured at the taxpayer’s facility in Kansas, shipped to a third-party distribution center in Ohio, and subsequently shipped by the customer to out-of-state retailers. From 2010 to 2014, the taxpayer sourced the receipts generated from the sale of the products to Ohio and paid the CAT on gross receipts derived from those sales. The taxpayer later filed a refund with the Tax Commissioner, claiming that the CAT was not owed because the soap was eventually shipped out of Ohio by the customer for subsequent sale by retailers. The Commissioner denied the claim, stating that the receipts were correctly sourced to Ohio on the taxpayer’s initial return. In the Commissioner’s view, the transaction comprised two separate sales: (1) the taxpayer’s sale to its customer, and (2) the customer’s subsequent sale to its out-of-state retailers. The taxpayer appealed to the Board of Tax Appeals (BTA).

At an evidentiary hearing, the taxpayer contended that its customer would direct a third-party courier to pick up the soap from the taxpayer and transport the goods to the Ohio distribution center to be stored until retailers placed orders for the soap, typically about two months after arriving at the distribution center. The bills of lading prepared by the taxpayer showed a destination of Ohio. The taxpayer was not aware at the time of shipment where its customer would ultimately ship the product. In preparing the CAT refund claim, the taxpayer learned that over 96 percent of the sold products were subsequently shipped out of Ohio. Based on this evidence, the BTA determined that the Commissioner erroneously denied the taxpayer’s refund claim, disagreeing with the “separate sale” characterization, and stating that the delivery to Ohio was but one portion of the taxpayer’s delivery process. The Commissioner appealed the BTA decision to the state Supreme Court.

The task of the court was to determine whether the BTA decision was reasonable under Ohio law. For CAT purposes, sales of tangible personal property are sitused to Ohio if the property is received in the state by the purchaser. Sales of tangible personal property delivered by motor carrier are sitused to the place at which such property is received after all transportation has been completed. Ultimately, the court agreed with the Commissioner’s central argument that the BTA incorrectly treated the taxpayer’s customer’s sale to retailers as part of a single transaction rather than two separate transactions. As the taxpayer’s customer received the soap in Ohio, the receipts should be sourced to Ohio. The court also emphasized that, unlike many other state laws, Ohio does not look to the “ultimate destination” of a sale of tangible personal property, but instead sources based on where the goods are received. Please contact Dave Perry with questions on VVF Intervest, L.L.C., v. Harris, Slip Opinion No. 2025-Ohio-5680.

In a recent ruling, the Pennsylvania Commonwealth Court rejected a taxpayer’s argument that past state Supreme Court rulings concerning the unconstitutionality of caps on the utilization of Net Loss Carryovers (NLCs) must be applied on a case-by-case basis to determine whether a retroactive remedy is appropriate. The ruling comes after a lengthy series of state court decisions holding that Pennsylvania’s flat cap on the use of NLCs is unconstitutional under the state Uniformity Clause.

Recall, at various times, Pennsylvania has implemented either a flat cap on the amount of NLCs that may be applied on a return, or a cap equal to the greater of a flat amount or a percentage of taxable income. In recent years, the Pennsylvania Supreme Court has invalidated both models as violating the Uniformity Clause of the state constitution. In Nextel, the state high court invalidated the flat-cap portion of the then-existing law; this invalidation did not advantage the taxpayer, and there was no discussion of remedy for requiring use of the unconstitutional method. In General Motors the taxpayer had actually paid additional tax because of an unconstitutional NLC limitation; the state Supreme Court determined that the only appropriate remedy was to permit a refund for the taxes paid by the taxpayer on unused NLCs. In Alcatel, the Supreme Court repudiated its General Motors opinion, citing (among other factors) the potentially devastating impact of potential refunds on the state fisc; it concluded that the Nextel line of cases should only be applied prospectively. [For a complete write-up on Alcatel and more background on the Nextel line of cases see our TWIST of November 25, 2024.]

In the current case, the taxpayer (under the laws in existence at for the tax years at issue) reported their NLC as 100 percent of its taxable income, resulting in no tax liability for that year. On audit, the Department of Revenue applied the percentage-of-income NLC cap and assessed additional tax. At the taxpayer’s request, the Board of Appeals continued the taxpayer’s appeal until the conclusion of the then-pending Nextel case; as a result, the taxpayer had not yet paid the disputed tax at the time Nextel was decided. Here, the parties agree that the NLC cap in existence during the year at issue was unconstitutional under Nextel; however, the state argued that, under Alcatel, the taxpayer was not entitled to any relief for the non-uniform treatment. The taxpayer countered that the Alcatel decision applies only to refunds and does not permit the state to affirmatively collect unconstitutional taxes. In upholding the assessment, the state Supreme Court held that Alcatel “definitively decided the issue of retroactivity across the board, and it therefore controls regardless of the procedural posture of a taxpayer’s appeal.”  In other words, the court is not required to reexamine the Chevron factors as applied to each taxpayer that may bring a uniformity challenge. Moreover, as Nextel applies only prospectively, the NLC deduction provision was constitutional until that case was decided in 2017. Thus, in the court’s view, the Department’s assessment was valid as it was issued prior to the 2017 decision. Please contact Lawrence Joseph with questions on Dow Chem. Co. v. Commonwealth of Pa. 

The Texas Comptroller of Public Accounts on December 19, 2025 released a memo describing its recent policy change with respect to conformity to the Internal Revenue Code (IRC). Recall, earlier in December 2025, the Comptroller announced that a  “fresh legal review” determined that Texas would conform to tax year 2025 changes to bonus depreciation made by the One Big, Beautiful Bill Act despite a statutory conformity date of January 1, 2007. The new memo expands this policy to cover all tax return items not specifically tied to the Internal Revenue Code.

As background, Texas franchise tax law defines “Internal Revenue Code” to mean the IRC in effect for the tax year beginning January 1, 2007, along with any regulations adopted under the code applicable to that period. However, the law also requires that “total revenue from entire business”, which is the starting point for  the franchise tax base, be computed using the amount reportable on specific lines of federal Form 1120. The Comptroller’s revised position is that the starting point amounts referred to are the actual amounts reported for federal purposes under the IRC in effect for the tax year at issue. The taxpayer will then make adjustments to apply the 2007 version of the IRC for individual items specifically tied to the IRC under Texas law. As an example, the Comptroller notes that deductions for foreign royalties and dividends would be generally computed under the current year IRC, but deductions under IRC sections 78 and 951-964 would be computed under the IRC as of January 1, 2007, because Texas law regarding those items specifically references those IRC sections. Similarly, Texas apportionment is based on gross receipts, which is defined by reference to amounts reported on the federal tax return without any specific reference to the IRC; as such, apportionment will be based on gross receipts calculated under the IRC for the tax year in question, not the 2007 version of the IRC.

The memo also provides a transition rule for applying current bonus depreciation rules to the Cost of Goods Sold (COGS) calculation. The depreciation portion of COGS is now based on federal depreciation calculated under the IRC for the current year. Consequently, any amounts of depreciation previously deducted for federal, but not Texas, purposes would be lost without some accommodation. Accordingly, a taxpayer with one or more qualifying assets (assets placed in service prior to the accounting period for the 2026 franchise tax report, not disposed of prior to that date, and associated with and necessary for the production of goods) may claim a one-time net depreciation adjustment for each such asset. This adjustment is equal to the total difference between depreciation claimed on federal tax returns and that claimed on Texas franchise tax returns with respect to COGS in previous years. If this amount is positive (i.e., the taxpayer has taken more total federal depreciation than Texas depreciation amounts for that asset), the taxpayer may include that positive difference in its COGS deduction for the 2026 report. Any unused net depreciation may be carried forward. Contact Jeffrey Benson with questions about STAR Doc. 202512012M.

The Wisconsin Tax Appeals Commission recently issued a corrected ruling in Verizon Connect NWF, Inc. , v. Wisconsin Department of Revenue, a case involving the taxability of a fleet management service offered by the taxpayer. The taxpayer’s service is provided by installing devices in customer vehicles to collect diagnostic and location data, which is then transmitted, analyzed, and presented to customers via the taxpayer’s online platform. Customers use the service to monitor vehicle performance, receive alerts, and schedule maintenance.

On audit, the Wisconsin Department of Revenue determined that the taxpayer’s process of gathering, analyzing, and reporting vehicle data constitutes a taxable inspection service under the retail sales tax which is imposed on the “inspection, and maintenance of all items of tangible personal property” unless the inspected item is exempt from sales tax. Here, the taxpayer’s device captures diagnostic codes and other information generated by a vehicle’s onboard computer systems; it also captures vehicle location and other data via GPS. When customers access their data on the online platform, they can view a dashboard displaying performance and location data for a selected vehicle, and they can schedule appropriate vehicle maintenance. Based on these facts, the Commission agreed with the Department and upheld the assessment, reasoning that the taxpayer’s service provides customers with information regarding the mechanical status of their vehicles, like a traditional vehicle inspection.

The Commission further determined that the transmission of information from vehicles to the taxpayer’s servers is a taxable telecommunication service, and that subsequent communications to customers via e-mail and SMS text are taxable communication messaging services. As the entire fleet management service is provided for one price, the Commission determined it was unnecessary to decide how the offering should be taxed. The Commission determined that the entire service offering is a taxable inspection service and that the communication components of the bundled service are taxable telecommunication and communication messaging services. For further questions regarding this decision, or other Badger State indirect tax matters, please contact John Vann.

In response to the federal phase-out of the penny, states are continuing to provide guidance for taxpayers on handling the application of sales tax to transactions that require rounding because of the inability to make exact change. We will continue to track these through TWIST, providing a list of the states as well as links to where you can find the direct guidance.