This Week in State Tax

The Arkansas Supreme Court recently addressed whether gain realized from the liquidation of a line of business was business or nonbusiness income for Arkansas corporate income tax purposes. The court held that under the state’s pre-2026 provisions for classifying income, which are modeled after provisions of the Uniform Division of Income for Tax Purposes Act (UDITPA), the gain from the sale of the taxpayer’s intangible assets did not satisfy the statutory definition of “business income” and therefore constituted nonbusiness income allocable to the taxpayer’s commercial domicile in Oklahoma. 

The taxpayer was an Oklahoma corporation headquartered in Tulsa that operated numerous quick-service franchise restaurants in nine states, including Arkansas, mostly through franchise locations. The taxpayer used restaurant-related intangible assets in the operation of its business, including locations, franchise rights, trademarks, goodwill, and other intangibles. In two separate but related transactions, the taxpayer sold the entirety of the tangible property and intangible property used in this business, and the sales collectively constituted the complete liquidation and termination of the business. On its 2018 Arkansas corporate income tax return, the taxpayer treated gains from the sale as nonbusiness income and allocated them under the appropriate provisions. The taxpayer then claimed a refund for estimated tax overpaid to Arkansas. The Department of Finance and Administration (DFA) denied the refund, classifying gain from the sale as apportionable business income (some of which would be apportioned to Arkansas). The taxpayer appealed to the DFA Office of Hearings & Appeals, which upheld the denial. The taxpayer then sought relief from the circuit court, which held the gain from intangible assets did not meet the statutory definition of business income and was properly allocable to Oklahoma. DFA then sought review by the state supreme court. 

Before the Arkansas Supreme Court, the parties agreed that the transactional test for classifying the income was not at issue, and the decision turned on the court’s interpretation of the functional test and application of Arkansas case law interpreting what constitutes business income. The court focused on the statutory requirement that the “acquisition, management, and disposition” of tangible and intangible property must “constitute integral parts of the taxpayer’s regular trade or business” to be considered business income. The court found that the phrase “acquisition, management, and disposition” operated as a unified sequence, and concluded that while the assets were used in regular operations, a complete liquidation terminating a business line was not a recurring part of the taxpayer’s regular trade or business. The taxpayer’s business was operating restaurants, not buying and selling entire enterprises. Thus, the functional test was not satisfied, and the intangible gain was nonbusiness income allocable to the commercial domicile. The court declined to give controlling weight to DFA’s broader regulatory interpretation, stating that unambiguous statutory language governs, and administrative rules cannot override or expand it. The court also contrasted the statute in the applicable tax years with the version effective beginning in tax year 2026, which specifies that income from property “related to the operation of the taxpayer’s trade or business” be treated as business income. Please contact Asad Markatia and Sai Gorugantula with questions on Hudson v. United States Beef Corp., Ark., No. CV-25-395. 

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The New Mexico Administrative Hearing Office (AHO) recently addressed whether a taxpayer may, through a timely amended return for an open year, revise prior year net operating loss (NOL) attributes and apportionment factors for years that were closed by the statute of limitations. The taxpayer in this case became subject to New Mexico corporate income tax through its ownership interest in a pass-through entity which held New Mexico real property and reported New Mexico net losses on its original 2016, 2017, 2018, and 2020 returns. Due to complications in determining the amount of income and loss that should have passed through to the taxpayer, combined with errors by the original return preparer, the taxpayer reported incorrect apportionment of income and related NOL computations to New Mexico. The taxpayer did not file amended returns for 2016–2018 or 2020, and those years became closed under the New Mexico statute of limitations. For 2021, the taxpayer originally claimed an NOL deduction based on those prior-year losses, then timely filed an amended 2021 return that recomputed the New Mexico apportionment factors (effectively recalculating the NOLs for 2016–2018 and 2020 as if the apportionment had been correctly determined) and used the recomputed amounts to increase the 2021 NOL deduction. The Department of Taxation and Revenue did not accept the revised NOL computations and issued an assessment for additional 2021 tax plus statutory interest, using the NOL amounts as originally reported. The taxpayer protested.

In its analysis, the AHO reasoned that the period described in the New Mexico statute of limitations applied equally to assessments, refunds, and amended returns. As a result, adjustments to tax years once the period has expired are foreclosed except in narrow, statutorily prescribed circumstances. In the eyes of the AHO, to permit recomputing closed-year apportionment factors and NOL amounts in a later-year filing would effectively nullify the statute of limitations by allowing permanent reopening of loss years whenever their attributes affected an open year. The AHO decision explains that, for carryforward purposes, the corporate income tax NOL is based on the New Mexico net loss determined under applicable statutes and regulations and must be “properly reported” on a legally effective return for the loss year as finally determined within the applicable time limits. As a result, once the limitation period expires, loss-year attributes (including apportionment factors and NOL amounts) are fixed, and subsequent years must use those fixed attributes absent explicit statutory authorization. The Department’s 2021 NOL deduction calculation relying on the original closed-year NOL amounts was sustained. In addition, the Department has no general equitable authority to waive or abate interest absent explicit statutory authorization. Please contact Nick Palmos, Sai Gorugantula, and Tia BuChans with questions on Columbia Assoc’s, Inc. v. N.M. Tax’n & Revenue Dep’t., N.M. Admin. Hearing Office Decision & Order No. 26-002

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Virginia has joined Kentucky in imposing a tax on fantasy sports contest operators doing business in the Commonwealth. Virgina House Bill 145 imposes a new 10 percent tax on an operator’s fantasy contest revenue, defined as the total entry fees collected from all players, less the sums paid out to all fantasy contest players, multiplied by the percentage of the entry fee that is attributable to players located in Virginia. The bulk of the revenue will go to the general fund. Additionally, a separate 2.6 percent fee is imposed on the same Virginia apportioned revenue to pay for administration of the tax, with any excess being deposited into the Virginia general fund. The Virginia Lottery Board will be responsible for administering the tax, and both the tax and the fee are to be remitted monthly to the Board. Anyone wishing to operate a fantasy contest, which generally includes online fantasy or simulated games offered for a fee, must apply for and obtain a permit from the Board. The tax is to go into effect on January 1, 2029, by which time the Board is required to adopt the regulations necessary to implement it.

This is tax is similar to that recently enacted in Kentucky which was covered in an April 13, 2026 TWIST. For any questions regarding Virgina indirect tax issues, please reach out to Jeremy Jester or Reem Abdelaal. 

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States continue to take action to update their income tax conformity to the Internal Revenue Code (IRC) to account for the enactment of the One Big Beautiful Bill Act (P.L. 119-21) (OB3). The most recent activity includes:

Kentucky: The Commonwealth legislature has overridden the line item veto of two provisions made by Governor Beshear to HB 757 which updated the state fixed conformity date with several modifications to the federal changes incorporated in OB3 as well as imposing new taxes on prediction market operators and fantasy sports operators. The items vetoed were unrelated to the tax changes. H.B. 757 is now law (Acts Ch. 161) as passed by the legislature. See our April 13 TWIST for a discussion of the details of the bill. 

Maine: Governor Mills has signed legislation to decouple Maine individual and corporate income tax laws from the changes to IRC section 168(k) (bonus depreciation of certain assets) as contained in OB3. The change is applicable to tax years beginning on or after January 1, 2025. Previously, Maine had separate conformity rules for property for which a Maine capital investment credit was claimed but will now decouple from bonus depreciation for all assets. Maine also enacted several conformity modifications to the provisions of OB3 in an earlier measure as discussed in April 20 TWIST. For questions on the bonus depreciation provisions contained in Legislative Document 2188, please contact Melissa Dellemonache and Alex Lupo.

Maryland: Governor Moore has signed legislation that revises the Old Line State individual and corporation income tax treatment of IRC section 168(k) (bonus depreciation of certain assets) for manufacturing entities which may only claim 20 percent of the additional depreciation allowance provided in IRC section 168(k). Previously, manufacturing entities did not have to addback bonus depreciation. Non-manufacturing taxpayers continue to be fully decoupled from IRC section 168(k). The measure also permanently decouples from the special depreciation provisions for qualified production property under IRC section 168(n). The measure is effective for tax years beginning after December 31, 2025. Recall Maryland is a rolling conformity state with the exception that it does not conform to a federal change if the state revenue impact exceeds $5 million in the current year. For that reason, the state has already decoupled from the OB3 bonus depreciation provisions of IRC section 168(k) and section 168(n) for tax year 2025, as noted in the September 22, 2025 TWIST. For questions on Senate Bill 284, please contact Diana Smith or Jasmine Desai.

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