This Week in State Tax

The Indiana Tax Court recently addressed whether certain cell phone handsets qualify for Indiana’s telecommunications equipment sales and use tax exemption. The taxpayer, a wireless provider, purchased the phones using resale exemption certificates. It then withdrew some devices from inventory to provide “free” or discounted phones conditioned on entering into service agreements and to furnish replacement phones under insurance or protection plans. For 2018 and 2019, the taxpayer self‑assessed and paid use tax on the inventory withdrawals but later sought refunds, citing the exemption for purchases of certain telecommunications equipment under certain conditions. The Indiana Department of State Revenue denied the refunds, and the taxpayer appealed.

Indiana law exempts a specified list of telecommunications equipment, including “radio or microwave transmitting or receiving equipment” from sales and use tax when acquired by a person who sells telecommunication service at retail. The central dispute concerned whether the cell phone handsets are “radio or microwave transmitting or receiving equipment” within the meaning of the statute and whether the taxpayer was the qualifying “person acquiring the property.” The Department argued that the statute as a whole was intended to exempt only network infrastructure such as towers and switches, not customer devices. It further argued that customers, not the taxpayer, were the true acquirers and users of the phones in question here. The taxpayer countered that cell phones plainly transmit and receive radio or microwave signals and are essential endpoints in the telecommunications system. It further asserted that the relevant taxable acquisition is its own purchase of phones from suppliers for use in providing telecommunications services, regardless of whether phones are later transferred to customers via promotions or insurance obligations.

The Tax Court agreed with the taxpayer. Looking to the plain and ordinary meaning of the statutory language, the court held that “radio or microwave transmitting or receiving equipment” encompasses cell phones and that there is no textual basis to confine the exemption to infrastructure under the provider’s direct control. The court also concluded that the taxpayer qualifies as the “person acquiring the property” for purposes of the exemption because, in this instance, the taxpayer was the purchaser in the transactions at issue (i.e., the purchaser of the handsets on which a use tax refund is now sought). The onward transfer of the handset to its customer did not negate the availability of the exemption to the taxpayer.

Accordingly, the court granted partial summary judgment in favor of the taxpayer on the legal issue, holding that the phones withdrawn from resale inventory and used in promotional offers and insurance replacements are exempt from Indiana use tax. However, the court declined to order a refund as it found that additional factual and computational issues remained regarding which specific phones and transactions qualified for the exemption. For questions regarding New Cingular Wireless PCS, LLC v. Department Of State Revenue please contact Audra Mitchell or Dave Perry.

Download PDF >

The Kentucky General Assembly recently approved a bill with a number of revenue measures; it now awaits signature by Governor Andy Beshear. The bill includes the imposition of new taxes on prediction markets and fantasy sports contests; it also addresses state conformity to various aspects of the One Big Beautiful Bill Act (P.L. 119-21) (OB3).

On the indirect tax side, Kentucky is proposing a new excise tax on prediction markets involved in the purchase, sale, or exchange of event contracts to consumers in Kentucky. The tax would be imposed on prediction market operators at a rate of 14.25 and would take effect on January 1, 2027. An “event contract” is defined as an “agreement, contract, transaction or swap in an excluded commodity based on the occurrence, extent of an occurrence, or contingency, other than on changes in the price, rate, value, or level of a commodity” described in federal law. It does not include specified transactions involving commodity futures, swaps, or derivatives under certain federal laws. A “prediction market operator” includes any board of trade or other person that operates a physical or electronic platform through which consumers can buy, sell, or exchange event contracts, or otherwise open speculative positions on future events, regardless of whether the platform is located inside or outside Kentucky. Consumer is defined as a Kentucky resident purchasing an event contract through a prediction market or a person who is not a Kentucky resident purchasing an event contract while in Kentucky. 

The 14.25 percent tax would be imposed on the operator’s “transaction fees,” defined as both (1) any fee the operator charges to complete a sale, purchase, or trade of an event contract for a consumer, and (2) the amount a consumer pays to purchase an event contract from the operator. Operators would be required to file and remit the tax on a monthly basis. This proposed excise tax would be in parity with the excise tax currently imposed on the adjusted gross revenue from wagers placed online via websites or mobile applications.

Alongside this, the bill would impose a tax on online fantasy sports contests. The tax would be imposed at a rate of 12 percent on the “adjusted gross fantasy contest receipts” which are the total fantasy entry fees collected from all fantasy contest participants less the winnings paid out to players. The tax is imposed on the operator of the online fantasy sports contest and monthly returns and remittances are required. The term fantasy contest participant is defined as a person who is age 21 or over and a Kentucky resident participating in a fantasy contest or a nonresident participating in a fantasy contest while in Kentucky.

Lastly for indirect taxes, the bill would codify the penny rounding rules adopted by Kentucky, eliminate the 200‑transaction threshold for establishing economic nexus, and add data brokering services to the list of taxable services. Data brokering is defined as collecting, aggregating and analyzing personal data for sale to a third party, regardless of whether the possession of the data is maintained by the data brokering service or the third party.

On the income tax side, the bill would update the state’s fixed conformity date to the Internal Revenue code in effect on December 31, 2025, effective for taxable years beginning on or after January 1, 2026. For both corporate and individual taxpayers, the bill would require a taxpayer to add-back any federal domestic research or experimental expenditures taken under IRC section 174A and instead subtract the amount that would be deductible under IRC section 174 as it existed on December 31, 2024. For corporate taxpayers, the bill would also apply the IRC section 163(j) (limitation of business interest) as it was in effect on December 31, 2024 in determining federal gross income. In addition, the bill would delay the effective date of the deduction allowed to publicly traded companies for an increase in its deferred tax liability as a result of the Kentucky shift to unitary combined reporting to the first tax year beginning on or after January 1, 2028. It had been set to kick in for tax year 2026. Contact Dave Perry (indirect tax) or Brandon Erwine (income tax) with questions on H.B. 757.

Download PDF >

The Maine Supreme Judicial Court recently affirmed a lower court decision holding that the taxpayer had sufficient nexus with the state of Maine, and was thus liable for withholding payments, penalties, and interest. The taxpayer was a Texas liquor manufacturer and supplier operating as an S corporation for tax purposes. During the audit period (tax years 2011–2017), the taxpayer sold an increasing volume of alcohol in Maine. No Maine pass-through entity (PTE) withholding return or Maine income tax return was filed for these tax years. The taxpayer owned no real property in Maine and did not hold itself out to the public as conducting business there during the audit period; two out-of-state employees made annual sales-related trips into the state during that time. On audit, Maine Revenue Services (MRS) assessed withholding, interest, and penalties. After MRS denied reconsideration, the taxpayer appealed to the Maine Board of Tax Appeals, which found no income tax nexus and cancelled the assessment. MRS obtained summary judgment on judicial review in Maine Superior Court, and the taxpayer appealed to the Supreme Judicial Court.

Maine distributes and sells alcoholic beverages through a statutorily mandated three‑tier system consisting of suppliers, a single state wholesaler (the Bureau of Alcoholic Beverage and Lottery Operations), and licensed retailers. During the audit period, the taxpayer was required to ship its products to a state‑operated bailment warehouse and to pay bailment fees. The spirits were sold from the bailment warehouse to the Bureau, which set prices and sold the product onward to retailers. Maine also required suppliers to use a licensed broker to interact with the Bureau; the taxpayer’s broker was broadly authorized to act on its behalf, received sales‑based incentives, and periodically accessed and withdrew inventory in connection with Bureau sales. Under the Maine regulatory framework, the Bureau’s purchases were subject to a delayed transfer of title—initially imposed by contract and later codified in law—such that spirits stored in the bailment warehouse remained the taxpayer’s property until removal for shipment to agency liquor stores.

Maine law requires a pass‑through entity with nexus in the state to withhold income tax on behalf of its owners, and nexus is established by doing business in Maine or owning property there, including property held by another person under a lease, consignment or similar arrangement. The Supreme Judicial Court held that the taxpayer had nexus because it retained title and the right to possession of its alcohol while it was stored in Maine bailment warehouses until removal or sale. The taxpayer argued that title transferred upon shipment from Texas under Maine’s commercial code default rules. The court rejected that position, concluding that those rules did not apply because the state regulatory scheme required delayed transfer of title, and the taxpayer’s contracts specified when title passed. The court also noted that the taxpayer and its agents retained access to the stored liquor.

The taxpayer also claimed P.L. 86-272 protection, arguing that compliance with the delayed title transfer requirements were merely ancillary to soliciting future orders. The court disagreed, concluding that the activities were undertaken to effectuate the sale of alcohol itself. Although the requirements may have indirectly related to future sales, they did not facilitate the requesting of sales and were a core selling activity. The court also relied on the Supreme Court decision in Heublein, Inc. v. S.C. Tax Comm’n, in holding that the regulatory requirements did not unlawfully evade limitations created by federal law. Please contact Melissa DelleMonache and Alex Lupo with questions on State Tax Assessor v. Fifth Generation Inc. (No. 2026 ME 30).

Download PDF >