This Week in State Tax

In a recent decision, the California Office of Tax Appeals (OTA) addressed whether a taxpayer’s operation of an appliance exchange program resulted in nontaxable sales for resale or taxable retail sales. In the program at issue, a collective of utility companies contracted with the taxpayer to purchase, deliver and install certain new, energy efficient appliances (refrigerators and washing machines) to customers. The taxpayer was also responsible for removing, recycling and disposing of the older appliances.  The utilities compensated the taxpayer based on the number of appliances installed. On its returns, the taxpayer reported the entirety of its gross receipts from the utilities as nontaxable sales for resale.

On audit, the California Department of Tax and Fee Administration (CDTFA) assessed the taxpayer, finding that the transfer of the appliances to the end customers constituted taxable retail sales and not sales for resale. On appeal, the taxpayer argued that two sales occurred in each transaction: 1) a sale for resale by the taxpayer to the utility companies, and 2) a sale from the utility companies to the end customers. The OTA ultimately rejected this argument and determined that only one sale of tangible personal property occurred – from the taxpayer to the end customer. As the transaction involved certain services, the OTA also applied the true object test and determined the true object was the tangible personal property (i.e., the appliance). As a result, the OTA upheld the CDTFA assessment and found the taxpayer responsible for sales tax.

In reaching its decision, the OTA explained that because the taxpayer did not obtain resale certificates from the utility companies, it bore the burden of demonstrating that the transactions qualified as sales for resale. The contracts between the taxpayer and the utility companies were silent as to whether title to the appliances was transferred. The agreements described various services performed by the taxpayer, (e.g., procurement, delivery, installation, and recycling of the appliances), but did not establish that the utility companies ever purchased the appliances or held them for resale. Instead, the taxpayer retained ownership and possession of the appliances from the time of purchase through installation. Viewed from the true object perspective, the OTA found that the true object of the transactions was to provide energy efficient appliances to end customers, and that the installation and removal services were part of that transaction. For questions regarding 2026-OTA-097, or other questions relating to indirect tax matters in California, please contact Jim Kuhl.  

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The New York City Tax Appeals Tribunal, Administrative Law Judge (ALJ) Division, recently determined that a New York partnership is not permitted to include its distributive share of tax attributes (i.e., income, gain, loss and deduction) or factors from its interest in partnerships with no connection to the city for unincorporated business income tax (UBT) purposes.

The taxpayer is a New York partnership operating as a broker-dealer in the city. It owned interests in several partnerships, including partnerships that did not engage in business in the city (Non-city Subsidiaries). On its UBT return, the taxpayer calculated its unincorporated business income (UBI) and allocated it to the city by including its distributive share of tax attributes and factors from its Non-city Subsidiaries as well as those within the city. The Department of Finance disallowed the inclusion, and instead calculated and allocated UBI separately for each entity doing business in the city before aggregating them, effectively removing the Non-city Subsidiaries from the UBT calculation and increasing the taxpayer’s UBI allocated to the city. The key issues on appeal were whether the taxpayer’s methods for calculating and allocating UBI were correct, and whether the Partnership Allocation Rule was valid.

The City imposes the UBT on every unincorporated business wholly or partly carried on within the city.  If an unincorporated entity conducts two or more unincorporated businesses, then it must report all its unincorporated business activity on an aggregate basis. A business conducted by an unincorporated entity must be considered an unincorporated business subject to UBT before it is attributed to an upper tier unincorporated business for UBT purposes. In addition, the City ordinance allocates UBI to the city using a three-factor formula based on property, payroll, and gross income, determined at the unincorporated entity level.

The ALJ determined that the Non-city Subsidiaries did not conduct an unincorporated business in the city and thus, their tax attributes cannot be included in calculating taxpayer’s UBI. Unlike the “unitary business” principle applicable for corporation income tax, the business of the Non-city Subsidiaries did not constitute an unincorporated business merely because the taxpayer owned an interest in them. In addition, the City administrative rules do not allow for attribution of factors for an unincorporated entity that did not conduct unincorporated business in the city. Thus, the Non-city Subsidiaries’ factors could not be included in allocating the taxpayer’s UBI to the city.

The taxpayer had also contended that the City Partnership Allocation Rule was invalid. The ALJ determined the rule was consistent with the statute and within the Finance Commissioner’s rule promulgation authority. The taxpayer also argued that the U.S. Supreme Court decision in Loper Bright called for negating the rule. The ALJ found that argument was misplaced in that Loper Bright did not govern City ordinances and rules. Moreover, promulgation of the rule was within the authority of the Commissioner, and the rule was consistent with the statute. Finally, New York law gives deference to the technical expertise of promulgating authorities in certain instances. Please contact Aaron Balken or Alec Schwartz with questions on Cantor Fitzgerald Securities.

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Several states have issued warnings intended to help taxpayers avoid the late filing of tax returns and payments due to recent clarifications issued by the U.S. Postal Service (USPS) regarding postmarks. The recent update to the USPS Domestic Mail Manual clarifies that a postmark date reflects the date on which the mail is first processed at a postal facility, not when it is placed in a mailbox or collected by a carrier. The result of this policy is that an item may not be postmarked on the day it was mailed. Many states use postmarks to determine whether a return or payment was submitted timely, meaning this change may affect the date on which such items are deemed to have been received by a taxing authority. In response, some states have released guidance on steps taxpayers can take to avoid unanticipated late-filing or late-payment penalties. Generally, these states encourage taxpayers to use electronic filing options when available, mail paper returns and payments early, or use a USPS over-the-counter option (such as requesting a hand-stamped postmark, buying postage with a printed shipping label, obtaining a certificate of mailing, or sending by registered or certified mail.) States that have issued guidance of this nature include: Alabama, Florida, Illinois, Louisiana, Texas, and Wisconsin.

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As spring compliance season approaches, three additional states – Indiana, Michigan, and Minnesota – have released taxpayer guidance related the One Big Beautiful Bill Act (OB3).

Indiana: Governor Braun recently signed a bill that updates the state’s conformity to the Internal Revenue Code (IRC) to include a specific set of provisions set forth by OB3. Recall that Indiana ties to the IRC as amended and in effect on January 1, 2023, so the state did not automatically conform to the changes made by OB3. With the newly passed law, Indiana will now conform to the following provisions of the IRC as in effect on July 4, 2025: IRC § 23 [credit for child and dependent care expenses]; IRC § 168(e)(3)(B)(iv) [federal definition of what constitutes “5-year property” for depreciation]; and IRC § 223(c)(2)(E) [federal definition of a high deductible health plan as it relates to health savings accounts]. For corporate tax purposes, Indiana will now align itself with the current federal definition of “5-year property” for purposes of bonus depreciation, which OB3 altered to exclude certain solar or wind energy assets. It has not picked up other OB3 changes affecting corporate taxpayers.  Please contact Gianluca Pitetti or Ryan Dahlkamp with question about S.B. 212.

Michigan: In response to OB3, the Michigan Department of Treasury released taxpayer guidance providing for limited relief from penalties and interest related to underpayment of quarterly estimated payments in certain situations. Recall that Michigan updated its conformity to the IRC in October of 2025 to decouple from numerous provisions included in OB3. [For details on Public Act 24, see our TWIST of October 13, 2025.] The newly issued guidance acknowledges the complexity of computing state tax liability given the significant changes in law and permits a waiver of penalties and related interest for Michigan quarterly estimated payments made from July 2025 through January 2026 for tax year 2025. This relief applies solely to Michigan corporate income tax payments. Taxpayers who wish to request a waiver can do so only if they receive a notice of underpayment from the Department and must do so in writing according to the instructions on the notice. Taxpayers should not submit a request for relief prior to receiving a notice from the Department. Please contact Dan De Jong or Arthur Orzame with questions about Michigan’s Notice on Relief for 2025 CIT Estimated Payments in Light of OB3.

Minnesota: The Minnesota Department of Revenue recently circulated guidance to taxpayers that may wish to amend their federal return for tax years 2022 and 2023. The guidance addresses reporting these changes to  the Department. Recall that Minnesota conforms to the IRC as amended through May 1, 2023, and thus does not conform to changes in OB3. The new guidance states that if a taxpayer amends their 2022 or 2023 federal tax return solely due to OB3, and the Minnesota tax liability remains unchanged due to the state’s lack of conformity, the taxpayer must send a letter to the Department describing the impact. Specifically, the letter must contain the date the federal return was amended, the taxpayer’s name and FEIN, the affected tax years, the reason for amending, as well as the specific section of OB3 that affected the federal return and an explanation of why the federal adjustment does not impact Minnesota tax. Please contact Dale Busacker or Miriam Sahouani with questions about Minnesota’s 2022 and 2023 Nonconformity Guidance. 

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