This Week in State Tax

New provisions governing the treatment of digital financial assets (DFA) (e.g., virtual currencies) under California unclaimed property law became effective January 1, 2026. The statute sets a three-year dormancy period for DFAs, with dormancy being triggered by either (1) the date a written or electronic communication to the owner is returned as undeliverable by the U.S. Postal Service or by email, or (2) the date of the last exercise of ownership by the owner, if the owner does not receive written or electronic communications from the business holding the property or the holder lacks a systematic means to track or monitor the non-delivery of such communications. Importantly, the new law uses a different standard for determining which state law applies to DFAs than that used for other property in California. Specifically, the “last known address” definition for DFAs is either: (1) the address used for first-class mail delivery, or (2) any description, code, or other indication of the owner’s location that identifies the state of the owner’s last known address, even if that address is insufficient to direct first-class mail delivery.

If the holder of a DFA possesses only a portion of the keys or other information needed to transfer a dormant DFA, the law requires the holder to attempt to obtain the minimum number of keys necessary to transfer the asset within 60 days of determining that the DFA is eligible for escheatment.  If the holder still possesses only a partial key to the DFA or is otherwise unable to move the digital financial asset to the Controller, the holder must maintain the DFA until the additional keys required to transfer it become available or the holder is otherwise able to transfer the DFA.

Unlike some state laws governing unclaimed DFAs, California requires holders to remit eligible DFAs to the state in their native, unliquidated form. Further, the law mandates that holders send a pre-report owner notice via certified mail, return receipt requested. If the holder does not have a mailing address for the owner and the owner has consented to receiving email communications, the notice may be sent by email. Finally, the Controller is authorized to select one or more custodians for the management and safekeeping of escheated DFAs. For additional information or assistance on the California law, please contact a member of the KPMG Unclaimed Property practice: Will King, Marion Acord, Jamie Aquino, Ryan Hagerty, Quin Moore, Keela Ross, or Karen Anderson

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In a recent decision, the Ohio Supreme Court denied a taxpayer’s Commercial Activity Tax (CAT) refund claim due to insufficient evidence. It did, however, reject an argument that would limit the way a taxpayer could show that items transported to a customer’s Ohio distribution center were later shipped out of state by the customer.

The taxpayer, a shoe manufacturer, delivered its products to a retailer’s distribution center in Ohio. Under Ohio law, gross receipts from the sale of tangible personal property are sitused for CAT purposes to “the place at which such property is ultimately received after all transportation has been completed.” According to the taxpayer, the retailer subsequently distributed most of the products to its brick-and-mortar stores in multiple states, from which they were sold to retail customers. The taxpayer initially reported all sales sent to the Ohio distribution center as Ohio gross receipts on its CAT returns, but later claimed a refund based on the percentage of shoes it alleged were shipped to stores in other states. The Tax Commissioner denied the refund claim, reasoning that consideration of “secondary” evidence (i.e., evidence generated after the date of delivery) would create unreasonable compliance and administrative issues. On appeal, the Board of Tax Appeals affirmed the denial of the claim but rejected the Commissioner’s argument that secondary evidence was impermissible. Instead, the Board determined that the taxpayer’s evidence (which included testimony comparing the customer’s Ohio sales to the total value of the shoes the taxpayer sold to the customer, along with evidence that the taxpayer’s shoes were available for sale at the customer’s stores in other states) was insufficient to properly measure the amount of the refund. The taxpayer and the Commissioner cross-appealed the decision.

The Ohio Supreme Court denied both appeals. It found nothing in Ohio law to support the Commissioner’s contention that a taxpayer must have “contemporaneous knowledge” of a product’s ultimate destination to source beyond the location to which the product was immediately delivered. Even if a taxpayer does not know where its product will ultimately be received at the time it ships the product to the customer, subsequent discovery of that information can support a refund claim. The state high court also rejected the taxpayer’s argument that evidence showing “some portion” of the taxpayer’s merchandise was subsequently transported out of state could support a quantitatively definitive refund. Instead, the court determined that the taxpayer was obligated to prove the amount of the requested refund, which its provided evidence failed to do. Contact Dave Perry with questions about Jones Apparel Group/Nine West Holdings v. Harris.

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In a recent opinion, the Wisconsin Court of Appeals ruled that a taxpayer operating an online marketplace for reselling tickets to live entertainment events was subject to sales tax during the period at issue (2008 – 2013). The taxpayer’s online marketplace allowed holders of tickets to sporting events, concerts, theatre, or other live events to list their tickets for sale to other buyers. The website was used primarily by individuals rather than businesses, and the taxpayer did not buy tickets on its own behalf to sell through its platform. When a sale occurred, the buyer paid the ticketholder’s listing price plus fees charged by the taxpayer, comprising a percentage of the sale price plus a logistics fee. Fees varied from sale to sale, depending partially on the method of ticket delivery.  No evidence was presented that the ticket buyer or the taxpayer paid Wisconsin sales tax on the transactions, but the parties stipulated that it was “highly likely” that taxes were paid on the original ticket sales.

In 2014, the Wisconsin Department of Revenue audited the taxpayer and assessed taxes, interest, and penalties. The assessment included a 25 percent negligence penalty based on the Department’s determination the taxpayer ignored guidance published in two tax bulletins from which the taxpayer should have understood its sales tax responsibility.

The taxpayer appealed to the Wisconsin Tax Appeals Commission, which ruled that the taxpayer was subject to Wisconsin tax for sales conducted through its website. The commission, however, found the taxpayer was not liable for the 25 percent penalty as it did not have notice of its tax obligation. The Commission disagreed with the taxpayer’s argument that it was a “passive online marketplace,” simply facilitating a sale and found it was more akin to a seller transferring tickets between ticketholders and buyers. In rejecting the penalty, the Commission stated that the taxpayer would not have understood itself to be a “ticket broker” as described in the published guidance. Both parties sought review in circuit court.  After the circuit court ruled that the taxpayer was not subject to sales tax, the Department further appealed.

Under Wisconsin procedure, the Court of Appeals reviewed the decision of the Commission, both as to whether the taxpayer was responsible for sales tax on tickets sold through its website and was subject to the 25 percent penalty. On the first question, the court held the taxpayer was a seller within the meaning of Wisconsin law because it “…effected the sale [of tickets] by transferring the tickets in exchange for payment.” The taxpayer was the only entity with which the buyer interacted, and it processed the transaction and payment, deducted its fees, and issued payment to the ticketholder. As such, the taxpayer was the seller in transactions occurring through its website.

The taxpayer also argued that because the state Marketplace Provider law was not enacted until 2019, the taxpayer was not subject to sales tax requirements during the tax years at issue here (2008 to 2013). The appellate court agreed with the Department that the Marketplace Provider law was not a substantive change in law but was intended to clarify that businesses like the taxpayer were subject to sales tax to reduce administrative burden and the potential for litigation. The appellate court noted that when an amendment is made to a statute, the meaning of which has been the subject of recent controversy, the amendment is more likely intended as a clarification of the law rather than a substantive change.

Finally, the appellate court agreed with the propriety of the 25 percent penalty assessment.  The guidance at issue described the application of sales tax to admissions to live events, with an example referring to sales involving ticket brokers that did not have possession of the tickets. The appellate court determined the bulletin specifically described a transaction similar to the one conducted by the taxpayer and concluded that the taxpayer was a “ticket broker” within the meaning of the guidance. Please contact John Vann with questions on StubHub Inc. v. Department of Revenue (No. 2024AP455).

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Several states rang in the New Year by issuing updates on their conformity to the One Big, Beautiful Bill Act (OB3).

•       Idaho: In his January 12 State of the State and budget address, Idaho Governor Brad Little announced his intention to prioritize OB3 conformity during the coming legislative session. Idaho currently conforms to the IRC as amended on January 1, 2025 (i.e., before the adoption of OB3). Contact Chris Hoge for updates on Idaho’s legislative session.

•       Maryland: The Maryland Comptroller recently issued a Tax Alert following a report issued by the Maryland Bureau of Revenue Estimates (BRE) on the impact of OB3 on state revenue. Under Maryland law, conformity to federal amendments is delayed one year if the amendment has an estimated annual revenue impact of $5 million or more. The BRE concluded that three OB3 provisions met this threshold – the full expensing of domestic research and experimental expenditures under IRC § 174A, the modification of the limitation on business interest under IRC § 163(j), and the special depreciation allowance for qualified production property under IRC § 168(n). The tax alert confirms that Maryland will decouple from these provisions for tax years beginning in 2025 and provides instructions on accounting for this decoupling on 2025 Maryland returns. With the decoupling from IRC § 174A, all domestic research and experimental expenses for 2025 and prior years will be capitalized and amortized over 60 months under the rules of the 2017 Tax Cuts and Jobs Act.  Maryland will not allow amended returns for small businesses under the retroactive provisions of IRC § 174A. Contact Diana Smith  for more information on Tax Alert: Maryland Impacts of the One Big, Beautiful Bill Act.

•       North Carolina: The North Carolina Department of Revenue issued a notice addressing the practical implications of North Carolina’s static conformity. The Tar Heel State conforms to the Internal Revenue Code as enacted on January 1, 2023. The notice reminds taxpayers that OB3 changes will not be taken into account when computing North Carolina income unless the North Carolina General Assembly acts to update the state conformity statute. The General Assembly will not convene until April 15 – the day North Carolina taxes are due, and the notice reminds taxpayers wishing to delay filing a return until the legislature makes a determination on conformity must file an extension prior to that date. Contact Emily Burns for more information about Impact of Federal Law on North Carolina Individual and Corporate Income Tax Returns for Tax Year 2025.

•       South Carolina: The South Carolina Department of Revenue issued guidance regarding the state’s static conformity date. South Carolina Information Letter 26-4 reminds Palmetto State taxpayers that South Carolina conforms to the Internal Revenue Code as amended through December 31, 2024. As that date does not include the OB3 changes, taxpayers will need to make conformity adjustments on their South Carolina income tax returns to the extent their federal income is affected by OB3 changes. Contact Jeana Parker for more information on SC Information Letter #26-4, South Carolina Internal Revenue Code Conformity Update.

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In response to the federal phase-out of the penny, states are continuing to provide guidance for taxpayers on handling the applications 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.

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