This Week in State Tax

The Alabama Court of Civil Appeals held that a bank holding company (Parent) and its indirect banking subsidiary (Bank) could not file a consolidated Financial Institution Excise Tax (FEIT) return because the two were connected through an intermediary bank holding company (Intermediary) that could not be included in the group (Parent owned Intermediary; Intermediary owned Bank). For the tax years at issue, Parent filed consolidated FEIT returns for 2012–2018 that included Parent and Bank but not Intermediary; for 2019–2020, Parent filed consolidated returns that included Intermediary.

Alabama generally requires each financial institution to file a separate FIET return, but a “qualified corporate group” may elect to file a consolidated return, allowing one member’s losses to offset other members’ income. To be eligible for inclusion in a consolidated FIET return, each financial institution must meet both the statutory ownership test and the filing test. Consolidated filing also requires specified forms, including Form ET‑1C for each member, Form ET‑C by the common parent, and a pro forma Form ET‑1 for each participating entity.

For the years at issue, the ownership test required direct common-parent ownership: at least 80 percent of the voting power and 80 percent of each class of nonvoting stock of each subsidiary had to be owned directly by one or more includable corporations, and the common parent had to directly own at least 80 percent of at least one includable member. The filing test required that each member be a financial institution, which is defined as “any person . . . doing business in this state as a . . . bank” or a registered bank holding company that is the common parent corporation of a controlled group eligible to file a consolidated FEIT return.

Although the case involved extensive audit activity, multiple tax years, assessments, refund claims, and layered administrative and judicial appeals, the dispositive issue before the Court of Civil Appeals was whether the taxpayer satisfied the statutory requirements to file consolidated FIET returns. Both the Alabama Tax Tribunal and the circuit court concluded that the proposed consolidated groups failed to meet either the ownership or the filing test under Alabama law for each year at issue—first because exclusion of Intermediary (for tax years 2012-2018) resulted in failing to meet the ownership requirement, and later because Intermediary was not itself required to file an FIET return, thus failing to meet the filing test. As a result, the Department properly recalculated FIET liabilities on a separate‑entity basis and denied the taxpayers’ refund claims, according to the court.

For the 2012-2018 tax years, the court first held that because a Form ET-1 for Intermediary was not attached to the consolidated FIET return, Intermediary must be excluded from the consolidated group. The court further determined that the proposed consolidated group failed the FIET ownership test because Intermediary—the entity that directly owned Bank—was omitted from the consolidated filings. As a result, the only entities included were Parent and Bank, and Parent did not directly own at least 80 percent of Bank’s stock. The court rejected the taxpayer’s argument that mutual or indirect ownership among group members was sufficient, concluding that such a reading would improperly eliminate the statutory requirement of direct ownership.

For the 2019 and 2020 tax years, the court first noted that Intermediary filed the appropriate forms to be included in the consolidated FEIT return, making the issue for these tax years, whether Intermediary was a “financial institution” under Alabama law. The court determined that Intermediary was not a financial institution under either prong of the statutory definition of financial institution. First, Intermediary did not do business in Alabama, meaning it could not meet the definition of financial institution under the “doing business in this state as a bank” prong. Second, although Intermediary was a bank holding company and was Bank’s parent, it was not a financial institution under the “common parent corporation” prong because it was not the common parent of the entire consolidated group. The court rejected the taxpayer’s argument that Intermediary qualified as the common parent of a controlled group consisting of itself and Bank (which would be a controlled group that was eligible to file a consolidated FEIT return) because the statute references “the” common parent of a controlled group (not “a” common parent), indicating that it encompasses only a single common parent of the entire proposed consolidated group. Contact Trent Kool with questions about Ally Financial v. Alabama Department of Revenue.

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The New York Office of Unclaimed Funds recently made extensive revisions to the property type codes that businesses must use when reporting unclaimed property. While most state unclaimed property agencies rely on codes modeled primarily on the National Association of Unclaimed Property Administrators (NAUPA) Property Type Codes, New York has used a modified version of those codes. With these latest changes, New York’s codes diverge even further from the NAUPA standard.

A key theme of the revisions is the elimination of “miscellaneous” codes that allow holders to report property without a clear, specific description. Codes such as “ZZZZ,” codes ending in “99,” and the commonly used miscellaneous code MS17 are being phased out. Other notable changes include:

• Introducing IN05 for insurance premium refunds (replacing IN01A).
• Introducing MS21 for product credits – rebates (previously reported as MS10 or MS10A for discounts due to rebates / rebate checks).
• Eliminating CK11 for pension checks, CK15 for other outstanding official checks (e.g., cashier or teller checks), and CK16 for certificate of deposit interest checks.
• Replacing SD01 with SD03 for other tangible property (cash only) in safe deposit boxes, along with a dormancy period reduction from three years to two years.
• Replacing AC99 with AC02 for aggregate account balances related to savings accounts.

Overall, the revisions introduce numerous code replacements and eliminations, as well as modifications to existing code descriptions. They may require holders to update their reporting processes and systems accordingly. For more information about these reporting code changes, please contact Will King or another member of KPMG’s Unclaimed Property practice.

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A Texas Court of Appeals has upheld the determination of a lower court in holding that the Texas franchise tax is preempted by the federal Anti-Head Tax Act (AHTA) as applied to the taxpayer, a Texas-based air carrier. Congress enacted the AHTA in 1973; the U.S. Supreme Court has interpreted it to prohibit states and localities from levying or collecting a tax, fee, head charge, or other on charge “on or measured by gross receipts” from air commerce or transportation. The Texas franchise tax is imposed on the “taxable margin” of Texas taxpayers. The calculation of taxable margin begins with a taxpayer’s total revenue computed by adding certain entries from the federal income tax return and deducting certain types of receipts specified in law. A taxpayer’s “taxable margin” is computed by taking one of four specified deductions (30 percent of total revenue in this instance) and apportioning the remaining amount among all jurisdictions by an apportionment factor of Texas receipts over total receipts of the taxpayer. The question in this matter was whether the structure of the franchise tax was such that it impermissibly taxed the gross receipts the taxpayer derived from air commerce.

This matter began when the taxpayer filed its 2014 franchise tax report under protest, claiming that the inclusion of receipts from passenger tickets and air freight services in the franchise tax base violated AHTA. Following receipt of a U.S. Department of Transportation (administrator of AHTA) opinion, the Comptroller refunded amounts attributable to inclusion of the ticket and freight receipts in the tax calculation. The taxpayer filed its 2015 report in the same manner but later sought a refund of franchise tax attributable to inclusion of baggage fees in total revenue, contending they also constituted receipts from air transportation. The Comptroller denied the refund and counterclaimed that receipts from ticket sales and air freight services should also be included in the franchise tax calculation. A trial court granted the refund related to baggage fees and denied the Comptroller’s counterclaim. The Comptroller appealed.

Before the Court of Appeals, the Comptroller argued the franchise tax did not run afoul of AHTA because it is a “composite tax” based on the entirety of a taxpayer’s business and levied on the taxable margin apportioned to Texas. It is not, as the taxpayer claimed, a tax on individual streams of revenue, including those from air commerce and transportation. After reviewing both AHTA case law and the franchise tax mechanics, the court determined the that the various deductions and exclusions “do not save [the tax] from AHTA preemption insofar as taxable margin ultimately contains the gross receipts from [the taxpayer’s] transportation revenues.” While the franchise tax is not a “straight-forward gross receipts tax,” it is preempted by AHTA “insofar as taxable margin is measured by gross receipts” from transportation revenues. The appellate court agreed with the trial court that the franchise tax as applied to the taxpayer was an impermissible tax on gross receipts from air commerce or air transportation and the refund related to baggage fees to the taxpayer was correct. For questions on Kelly Hancock, Acting Comptroller of Public Accounts v. American Airlines, Fifteenth Court of Appeals, please contact Jeffrey Benson or Karey Barton.

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Maine and Oregon have recently taken legislative action to adjust their conformity to the Internal Revenue Code (IRC) in the wake of the One Big Beautiful Bill Act (OB3) (P.L. 119-21).

Maine: Governor Mills has recently signed Legislative Document 2212, a bill making appropriations and allocations for Fiscal Years 2026 and 2027; the bill also includes updates to the state’s conformity to the IRC. Recall, Maine is a fixed conformity state, and with the passage of this bill, the state will now conform to the IRC, as amended, as of December 31, 2025, with somcertain exceptions. For purposes of individual and corporate income taxes, the bill decouples Maine from the treatment of IRC section 174A (research and experimental expense deductions) under OB3. Instead, for taxable years beginning on or after January 1, 2025 and before January 1, 2030, taxpayers will be required to make an addition modification for an amount equal to the deduction taken under IRC 174A (i.e., full expensing of domestic research and experimental (R&E) expenditures) or P.L. 119-21,section 70302(f)(2) (i.e., the transitional rules applicable to small businesses and the election to accelerate unamortized domestic R&E expense for tax years 2022-2024) multiplied by an applicable percentage. The applicable percentages are: 100 percent for tax years beginning in 2025; 70 percent for tax years beginning in 2026 (except that 100 percent applies for amounts claimed pursuant to P.L. 119-21, section 70302(f)(2)); 50 percent for tax years beginning in 2027; 30 percent for tax years beginning in 2028; and 10 percent for tax years beginning in 2029. Maine then allows taxpayers an amortization deduction for amounts added back. For R&E expenditures paid or incurred in tax years beginning after December 31, 2021 and before January 1, 2026, taxpayers are allowed to amortize the amounts added back under the rules of IRC section 174 in effect prior to the enactment of OB3 (i.e., the Tax Cuts and Jobs Act version of IRC section 174). For R&E expenditures incurred after December 31, 2025, the amortization deduction is equal to the amount of the addition modification deducted ratably over a period beginning in the tax year immediately after the addition modification and ending in the tax year beginning in 2030. Additionally, Maine will require an addback for amounts deducted federally pursuant to IRC section 168(n) (bonus depreciation for qualified production property) and a subtraction modification for the amount depreciation allowable under federal law but for IRC section 168(n). The bill also decouples through state modifications from the federal gain exclusion related to amounts invested in a qualified opportunity zone after December 31, 2026. Finally, for corporate taxpayers, the bill updates the state’s statutory references to global intangible low-taxed income (GILTI) to “net controlled foreign corporation tested income” (NCTI), per the change in OB3. The changes included in this bill are effective for tax years beginning on or after January 1, 2025. For more information on Legislative Document 2212, please contact Melissa DelleMonache and Alex Lupo.

Oregon: Governor Kotek has recently signed into law SB 1507, which decouples Oregon from the OB3 amendments to the federal bonus depreciation allowance under IRC section 168(k) and requires 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 also decouples the state from the deduction for certain personal automobile loan interest and the qualified small-business stock exclusion for Oregon personal income tax purposes. Separately, Governor Kotek signed SB 1510, a bill that changes the state’s statutory references to global intangible low-taxed income (GILTI) to “net controlled foreign corporation tested income” (NCTI), per the change in OB3. Thus, the Oregon dividends received deduction will apply to NCTI amounts included in taxable income. Additionally, the bill extends the state pass-through entity (PTE) elective entity-level tax regime for two additional tax years, through tax year 2027. PTEs electing into the Oregon PTE tax regime are permitted to apply overpayments of PTE elective tax as estimated tax payments for the following year. For more information on Senate Bill 1507 or Senate Bill 1510, please contact Nisha Mathew and Robert Passmore.

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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 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.

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