This Week in State Tax

The Texas Fifteenth Court of Appeals recently issued a ruling regarding the taxation of reusable containers used to transport chemicals. The taxpayer, a chemical manufacturer, shipped its finished product in returnable porta-feed containers, which were retrieved from the customer and cleaned by a third party before being returned to the taxpayer for reuse. The taxpayer initially paid sales and use tax on both the containers and cleaning services, but later sought refunds, claiming the containers and associated services were exempt under Texas law. The Comptroller of Public Accounts denied the refund requests, but a trial court found in favor of the taxpayer, holding that the taxpayer’s containers qualified as being used in the manufacturing process. The state (Comptroller and Attorney General) appealed and raised three arguments.

First, the state argued the taxpayer did not qualify for a specific exemption in Texas law related to containers used in distributing products and that the specific container exemption controlled over the manufacturing exemption. Consequently, the taxpayer was precluded from claiming a refund based on the manufacturing exemption. The appeals court disagreed, finding that the container exemption and the manufacturing exemption are not mutually exclusive. Although the container exemption is more specific, the two exemptions are not irreconcilable, and the manufacturing exemption is not overridden by the container exemption.

Second, the state asserted that the taxpayer’s containers did not qualify as being used in the manufacturing process. The appeals court noted that the specific exemption subsection cited by the state was not one of the three manufacturing exemption subsections on which the taxpayer relied for claiming the exemption. As such, the appeals court was unable to reverse the summary judgment granted by the trial court when the taxpayer’s independent grounds for exemption remained unchallenged by the state.

Third, the state contended that the taxpayer’s purchases of cleaning, delivery and pickup services performed on the containers did not qualify as services performed on exempt property. The state argued that once the containers were delivered and emptied for the taxpayer’s customer, the manufacturing process was complete, making the containers ineligible for the exemption. The appeals court disagreed, stating that the exemption statute does not indicate that property loses or regains its exempt status depending on whether it is being used in manufacturing at a particular moment. Even if the containers were empty at the time of service, they would still be exempt manufacturing equipment, and any services performed on them would also qualify for exemption. For any questions regarding  Hancock v. ChampionX, LLC, please contact Karey Barton or Sarah Vergel de Dios.

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As spring compliance season approaches, Arizona, Idaho, Oregon, and West Virginia recently took significant legislative steps related to their conformity with the Internal Revenue Code (IRC) and the provisions of the One Big Beautiful Bill Act (OB3).

Arizona: Governor Hobbs has for the second time this year vetoed a measure, HB 2785 in this instance, that would update Arizona’s static conformity date to January 1, 2026 for tax year 2026, including adoption of those provisions of OB3 that were made retroactive to tax year 2025. For tax year 2025, the bill would incorporate those provisions of OB3 that are retroactively effective during tax year 2025. The Governor stated in her veto message that she wants the legislature to consider bills she has proposed that would incorporate many of the individual income tax provisions of OB3 (including the enhanced deduction for seniors and deductions for tip and overtime income) but not the business provisions. Contact Alexander Townsend or Ashley De Rada with questions about ongoing conformity developments in Arizona.

Idaho: Governor Little has signed legislation to update the state’s conformity to incorporate most of the provisions of OB3, by amending its reference to the IRC to mean the IRC as amended and in effect on January 1, 2026. While the state as a general matter broadly adopts the various provisions of the IRC, it continues to require a modification for bonus depreciation under Section 168(k) as well as IRC section 168(n) (qualified production property). In addition, amounts of research and experimentation expenses deducted or amortized under IRC section 174 and 174A are not eligible for a state research credit. For more information on House Bill 559, please contact Chris Hoge.

Oregon: The Oregon Senate has approved SB 1507 that would decouple Oregon from the federal bonus depreciation allowance under IRC section 168(k) and require that assets placed in service in tax years beginning on or after January 1, 2026 be depreciated as allowed under IRC section 168(k) as it existed on December 1, 2017. Recall that Oregon is a rolling conformity state in which changes to the IRC become effective unless the legislature passes measures to provide otherwise. SB 1507 would also decouple from the deduction for certain personal automobile loan interest and the qualified small-business stock exclusion for Oregon personal income tax purposes. The bill has been transmitted to the state House of Representatives for consideration. For more information on Senate Bill 1507, please contact Nisha Mathew.

West Virginia: The West Virginia Senate recently approved a bill that would update the state’s date of conformity to the IRC. Recall that West Virigina is a static conformity state and is currently tied to the IRC, as amended and in effect on December 31, 2024. If approved by the West Virginia House and Governor Morrisey, the bill would update West Virginia’s IRC conformity date to December 31, 2025, including the incorporation of all amendments to the IRC enacted after December 31, 2024, but prior to January 1, 2026. As such, if enacted, West Virginia would effectively conform to all OB3 changes made to the IRC unless state law provides otherwise. For more information on Senate Bill 393, please contact James Kaczorowski.

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Legislative sessions in most states are underway, and some governors have proposed adoption of novel taxes on certain digital activities to address expected budget deficits. In Michigan, Governor Gretchen Whitmer has recommended a gross receipts tax on digital advertising services. In Illinois, Governor JB Pritzker has proposed a statewide social media platform fee that would be modeled in part on the Social Media Amusement Tax recently implemented in Chicago. 

In Michigan, Governor Whitmer’s executive budget for Fiscal Year 2027 includes a recommendation to implement a 4.7 percent tax on digital advertising gross receipts generated from Michigan activity. The tax would provide exclusions for broadcast and news media and is expected to raise about $282 million in its first year. The revenue would be dedicated to health and wellness programs.

Governor Pritzker’s budget proposal for FY 2027 includes a tiered, monthly fee on “social media companies that collect consumer data and sell to third-party buyers.”  The fee would be based on the number of monthly active Illinois users whose data is collected by the platform; at the highest tier, companies with over one million active Illinois users per month would be assessed a $165,000 fee, plus an additional $0.50 per user each month. The proposed fee is estimated to raise $200 million that would be allocated to support K-12 education.

These proposals still face legislative approval, but they signal a growing interest among state governments in expanding the tax base to include the digital economy. Legislators in other states, such as Nebraska and Utah, have also proposed bills that would impose taxes on social media or targeted advertising. KPMG will continue to monitor these developments and provide updates as the legislative season continues. For questions regarding Michigan or Illinois, please reach out to Dave Perry or Drew Olson, respectively. For any other general questions on state legislative updates, please contact Jeff Cook.

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