This Week in State Tax

A Florida circuit court recently granted summary judgment to a taxpayer who claimed that its sales of services should be sourced outside of Florida based on the costs to perform the services. The taxpayer, headquartered in Wisconsin, provided online bill payment services to banks and similar financial institutions by acting as an agent for its clients and processing transactions initiated by their customers.  Typically, the clients’ customers would submit a bill payment online using their bank account as the payment method. The requests were submitted through the taxpayer’s system for payment through ACH, a third-party bank, or a paper check mailed to the payee. During the relevant period, the taxpayer maintained only 0.1 percent of its real and tangible property in Florida and had no Florida payroll. Nearly all operational activities were conducted from various hubs outside the state, with customer data processed at out‑of‑state datacenters and employees located outside Florida performing functions such as fraud monitoring, system maintenance, and ongoing development of the service platform.

Florida requires taxpayers to apportion income to the state for corporate tax purposes using three-factor, double-weighted sales apportionment. For the sales factor, Florida regulations identify eleven specific categories of income and how such sales should be sourced. For sales falling outside these categories, there is a “catch-all” category, which provides that gross receipts from other sales shall be attributed to Florida “if the income producing activity which gave rise to the receipts is performed wholly within Florida,” or  “if the income producing activity is performed within and without Florida but the greater proportion of the income producing activity is performed in Florida, based on costs of performance.” Further, the regulation indicates that “income producing activity” is defined with reference to the “activities directly engaged in by the taxpayer ….” 

The Department argued that the income producing activity occurred wholly in Florida by focusing on the activities of Florida customers of the taxpayer’s clients, i.e., the individuals initiating the payment transactions. The taxpayer instead relied on the language of the rule which looks to the activities directly engaged in by the taxpayer and contended that, because its services were performed outside Florida based on costs of performance, none of the receipts should be included in the Florida sales factor numerator. The court, in agreeing with the taxpayer, first determined that the taxpayer’s income producing activity was the online payment services it provided to its Florida clients (banks and financial institutions). It further determined, based on testimony, that the income producing activities were not performed wholly in Florida, and thus the court must determine where the taxpayer incurred the greater cost to perform the online payment services. The court ultimately determined the evidence was clear that the “location of [the taxpayer’s] costs to perform [its services] is almost entirely – if not entirely – incurred outside Florida,” and thus none of the taxpayer’s receipts from online payment services should be sourced to Florida. Please contact Greg Aughenbaugh and Danielle Fynn with questions about CheckFree Services Corp. v. Department of Revenue (No. 2024 СA 1026) (Leon County).

The South Carolina Supreme Court recently held that an online marketplace facilitator was liable for sales and use tax on third‑party marketplace sales made to South Carolina customers during the first quarter of 2016. The decision analyzes statutory language in existence prior to the U.S. Supreme Court decision in South Dakota v. Wayfair and the subsequent enactment of South Carolina’s law requiring marketplace operators to collect tax on sales they facilitate. The Department of Revenue had previously assessed the taxpayer additional tax, penalties, and interest for uncollected tax on sales made by third‑party merchants through its platform. A state administrative law court and the court of appeals had earlier affirmed the assessment.

Under South Carolina law, sales tax is imposed on persons “engaged in the business of selling” tangible personal property at retail. The taxpayer argued on appeal that it was not a “seller” with respect to third‑party transactions made on the marketplace and therefore had no obligation to collect tax on those sales. The supreme court focused instead on whether the taxpayer was “engaged in the business of selling.” It concluded it was, finding that the taxpayer had an integral role in facilitating every third‑party sale conducted on the marketplace. The court cited the taxpayer’s control over marketplace activities such as the regulation of listings, pricing parameters, customer communications, payment processing, returns, and disbursements of funds to third‑party merchants. The court distinguished the taxpayer’s level of control in the marketplace sales from those of service providers such as payment processors or delivery companies, which the court characterized as incidental services and not required for a particular sale to occur. The court also rejected the taxpayer’s argument that the statute required the taxpayer to receive consideration “for” the sale itself and found no due process violation in applying the statute to the periods at issue.

Because the court found the tax imposition statute to be unambiguous, it affirmed the decision of the court of appeals and held that the taxpayer was liable for collecting and remitting tax on all taxable third‑party marketplace sales made during the audit period.  Two justices dissented stating that both the state and the taxpayer had provided reasonable interpretations of the statutes involved and that South Carolina precedent required such ambiguity to be resolved in favor of the taxpayer. For questions regarding the South Carolina Supreme Court decision in Amazon Service, LLC v. South Carolina Department of Revenue, please reach out to Nicole Umpleby and Scott Jackson.

Governor Rhoden recently signed a bill updating South Dakota’s fixed date of Internal Revenue Code (IRC) conformity to the Code, “as amended and in effect, on January 1, 2026.” The new conformity applies to the South Dakota franchise tax imposed on banks and financial institutions, refund provisions applicable to sales and use taxes, and several areas of state property tax law. The new law will go into effect on July 1, 2026. Please contact Jodie Scott and Shean Gerdes with questions on Senate Bill 19. 

The Washington State Legislature adjourned on March 12 and sent several measures aiming to restructure the state tax code to Governor Bob Ferguson’s desk. With Engrossed Substitute Senate Bill 6346, the legislature would impose a new income tax on certain high‑income individuals in the state. In addition, the bill would remove from the retail sales tax base and retailing business and occupation (B&O) tax base certain services that were made taxable as of October 2025 under Engrossed Substitute Senate Bill 5814. The legislature would make further technical and administrative changes with regard to those taxable services under Engrossed Substitute Senate Bill 6113. Finally, with Engrossed Substitute Senate Bill 6231, the legislature would remove a sales tax exemption provided for replacement equipment for data centers.

ESSB 6346 would impose a 9.9 percent tax on individuals with Washington taxable income (as defined) over $1 million beginning January 1, 2028. The bill is designed to avoid duplicative taxation with the state’s tax on certain capital gains and provides either a deduction or a credit for certain charitable contributions, income taxes paid to other states, and certain Washington business and occupation and public utility taxes. The bill includes a pass-through entity tax election which allows the income tax to be paid at the entity level, thus enabling the pass-through owners to claim a credit against their income tax liability for the tax paid at the entity level.

 In addition, ESSB 6346 phases in several sales and B&O tax changes beginning January 1, 2029, including sales and use tax exemptions for grooming and hygiene products, diapers, and over‑the‑counter drugs, and exemptions from the high grossing business surcharge for certain hospital, prescription drug warehousing, and health‑care‑provider income. On the same effective date, the bill removes several items from the definition of “retail sale,” including information technology training services, custom website development services, investigation services, temporary staffing services, live presentations, and custom software and customization of prewritten software. As a result, of the various services that were newly defined as “retail sales” beginning October 1, 2025, under ESSB 5814, only certain digital advertising services would remain subject to tax as of January 1, 2029. The bill would also reinstate key exclusions from the definition of “digital automated services” (DAS) for primarily human‑effort services, live interactive presentations, and certain data processing services.

In addition to financing the changes in the sales tax outlined above, proceeds from the bill are directed to the general fund and will be used in part to substantially expand an existing working families tax credit, as well as reducing the business and occupation tax on certain type of small businesses. The income tax bill also includes a “null and void” provision under which, if the income tax provision is invalidated by a court of final jurisdiction, the act is void in its entirety. A legal challenge is expected. A state supreme court precedent from the 1930s effectively prohibits a progressive income tax in the state.

A second bill, ESSB 6113, codifies much of the Department of Revenue’s Interim Guidance on the scope and sourcing of the services newly defined as “retail sales” under ESSB 5814. Effective retroactive to October 1, 2025, the bill clarifies the types of activities that qualify as information technology services and investigation services for retail sales tax purposes; confirms that “temporary staffing services” do not include direct hires, paymaster arrangements, or independent contractors; and narrows what constitutes a taxable “live presentation” by excluding, among other things, accredited preschool through higher‑education classes, musical and similar performances, one‑on‑one instruction (such as tutoring and music lessons), certain religious presentations, and certain youth camps. The bill specifically addresses advertising services by (1) clarifying that, when a seller cannot source advertising to a local jurisdiction due to lack of information, the seller must source the services statewide as prescribed by the Department; (2) authorizing use of a multiple points of use (MPU) exemption certificate for purchases of advertising concurrently used within and outside Washington; (3) confirming that a DAS incidental to an underlying service is not subject to retail sales tax if the underlying service is taxed under a non‑retailing B&O classification; and (4) applying use tax to all newly enacted retail services except live presentations. The bill also authorizes exclusions for customized software and customization of prewritten software and for certain DAS and services when sold to another member within an affiliated group, provides a transaction grace period for specified existing contracts, and offers penalty relief for taxpayers that inadvertently failed to collect tax on new retail services if they meet stated conditions and apply by the statutory deadline.

Finally, ESSB 6231 would provide that the sales tax exemption for data centers that qualify through refurbishment expires on July 1, 2026, and no new exemption certificates for such data centers may be granted on or after that date. The bill would remove replacement server equipment from the definition of equipment eligible for exemption.

If you have any questions regarding these measures or other Washington retail sales tax or B&O tax matters, please reach out to Michele Baisler or Alex Low.

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.

State	Guidance
Arizona	House Bill 2938 (enacted)
Florida	Tax Information Publication 25A01-18
Georgia	Policy Bulletin SUT 2025-02
Iowa	Sales Tax Rounding
Kentucky	Penny Shortage
Michigan	Sales and Use Tax Notice Regarding Federal Phase Out of the Penny
New Jersey	Cash Transaction Rounding Guidance Due to Penny Supply Changes
New Mexico	House Bill 291 (enacted)
North Carolina	Sales and Use Tax Directive 26-1
South Carolina	End of Penny Production
Tennessee	HB 1744 (enacted)
Tennessee	End of Penny Production
Texas	End of Penny Production
Washington	Interim guidance statement regarding the elimination of the penny
Wisconsin	DOR Penny Shortages and the Impact on Wisconsin Sales and Use Tax