This Week in State Tax

The Illinois FY 2027 budget (S.B. 3019), as passed by the General Assembly, includes a potpourri of tax measures. The bill has been presented for signature to Governor JB Pritzker, who has generally spoken favorably of the measure. On the indirect tax front, the primary tax items, if signed, include enactment of a tax on targeted advertising services, a social media platform fee, a tax on certain digital asset transactions, expanding taxes on sports wagering, and imposing responsibility to collect certain accommodation taxes on hotel marketplace facilitators. On the income tax side, the budget would, if enacted, make changes to the limitations on the utilization of net operating loss carryovers in future years, as well as allowing an election with respect to the inclusion of resident partners in computing the Pass-through Entity Tax base. In a related item, Governor Pritzker on June 5 issued an executive order instructing the Illinois agency responsible to cease processing data center agreements on July 1, 2026. He also urged the legislature to continue consideration of his framework for data center regulation and development when it reconvenes in its veto session. For further information on the Illinois Budget bill, please see a KPMG SALT Alert released on Tuesday, June 9. You should also contact Drew Olson regarding indirect tax matters or Brad Wilehlmson regarding income tax measures.

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Governor Hochul signed the fiscal year 2027 New York State budget bill on May 28, 2026 – about two months beyond the beginning of the fiscal year. The headline-grabbing item was enactment of a New York City pied-a-terre property tax surcharge on certain second homes in the City. (See below.) The bill also includes several provisions of interest to businesses.

With regard to New York State personal and corporate taxes, the bill retroactively decouples from several provisions of the One Big Beautiful Bill Act (OB3) (P.L. 119-25) effective for taxable years starting on or after January 1, 2025, including IRC section 168(n) (bonus depreciation for qualified production property), and IRC sections 174 and 174A (full expensing of domestic research and experimental expenses), including from the IRC section 174A transitional rule (accelerated deduction for tax years 2022-2024 domestic R&E expenses). Instead, for domestic and foreign R&E expenses paid or incurred on or after January 1, 2025, such amounts must be amortized over 60 months as if the taxpayer made the election to amortize under IRC section 174A(c). For unamortized foreign and domestic R&E expenses paid or incurred prior to January 1, 2025, such amounts must be amortized under the Tax Cuts and Jobs Act (P.L. 115-97) version of IRC section 174 as in effect on January 1, 2022. In addition, the bill extends the top corporate tax rate of 7.25 percent and the capital tax rate of 0.1875 percent through taxable years before January 1, 2030.

The bill also decouples the New York City Business Corporation Tax from various OB3 provisions. For tax years beginning after December 31, 2024, New York City will decouple from IRC section 174A and would require amortization of domestic R&E expenses over a five-year period for domestic research expenditures beginning with the midpoint of the tax year in which the expenditures are paid or incurred. It should be noted, as distinguished from New York State, the City: (i) does not decouple from IRC section 174 and will still require foreign R&E expenditures to be amortized over 15 years; it also appears that it does not decouple from the IRC section 174A transitional rule. New York City will also decouple from IRC section 168(n), IRC section 179 (election to expense certain depreciable business assets) and from the addition of depreciation, amortization, or depletion to adjusted taxable income for purposes of determining the IRC section 163(j) limitation. Finally, for purposes of the New York City corporate tax, the bill updates previous references to GILTI to NCTI, to ensure factor representation of NCTI inclusion.

For purposes of the New York State and City decoupling provisions, the bill provides interest and penalty relief for returns with timely filed extensions and amended returns filed for taxable years beginning on or after January 1, 2025, and before January 1, 2026, if they solely report the modifications required by these provisions.

As to the pied-a-terre property tax surcharge for certain second homes in the City, the surcharge will apply to cooperatives and condominiums valued at greater than $1 million and to 1-3 family homes valued at over $5 million. The New York City Department of Finance is required to notify owners of covered properties that they believe the property is subject to the surcharge no later than August 30, 2026, with initial payments due in January 2027. In following years, the surcharge will be due, semi-annually, following the New York City property tax. The surcharge will be rolled out in two distinct phases: (1) Phase 1 applies graduated rates based on whether the property is a Class 1 Property (1–3 family homes) or a Class 2 Property (condos and co-ops); and (2) Phase 2 applies a single unified set of graduated rates to all covered properties.

On the sales tax side, the bill directs the Commissioner of Taxation and Finance to institute a “sales tax reregistration” program to be completed by December 31, 2030. This program will cause current certificates of authority to sunset; the Department of Taxation and Finance will inform each certificate holder of the date on which its certificate will expire and require the holder to reregister for a new certificate. As part of reregistering, a qualifying taxpayer will be invited to participate in a penalty and interest discount program that waives 100 percent of penalties and 50 percent of interest on past-due sales and use tax liabilities.

Please contact Aaron Balken and Alec Schwartz with questions about income tax matters in A. 10009 and S. 9009, and reach out to Judy Cheng and Jenn White about the sales tax reregistration effort.

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A Washington state appellate court determined that an oil and gas contractor was liable for use tax on goods and services it used in constructing an oil containment system, reversing a trial court decision in favor of the taxpayer. The taxpayer had contracted with a deepwater oil and gas producer to provide and operate a containment system—which included a floating barge, high pressure hoses, and a containment dome—intended to mitigate the impact of an oil well blowout. To fulfill the contract, the taxpayer leased a barge, and the oil producer paid the taxpayer $89 million to modify and outfit the vessel and $86 million to construct and outfit the containment system. Once the vessel and containment system were fully outfitted, the taxpayer leased the containment system (including the vessel) to the oil producer and towed the vessel to the Arctic near the drilling operation. During the subsequent drilling season, the taxpayer’s employees visited the vessel daily to ensure it was functioning properly and maintained a crew of employees on standby to operate the containment system if it was needed. After one oil drilling season, the oil producer decided to abandon its operation in the region and cancelled its contract with the taxpayer. The taxpayer purchased the vessel from the lessor and sold it to an unrelated thirty party. The Washington Department of Revenue subsequently audited the taxpayer and assessed unpaid use tax on the amounts spent to outfit the vessel and containment system plus penalties and interest. The Board of Tax Appeals upheld the assessment, but a trial court reversed. The Department brought the matter to the appellate court.

Before the appellate court, the taxpayer argued that its use of the property to build the containment system and modify the vessel was not subject to use tax because the taxpayer used the disputed goods and services to produce items that were leased to its customer. The use of a product is exempt from taxation when the use is for the production of a new article that will be sold or leased to a consumer. According to the taxpayer, because it leased the containment system and vessel to the oil producer, their use was exempt from tax. However, the appellate court noted that a transaction is not considered a lease when the lessor provides an operator that is necessary for the operation of the item. Department rules apply a true object test to determine whether the transaction is a lease of property or the rental of equipment with an operator. Applying this test, the court determined that the continual services of the operators provided by the taxpayer was a fundamental part of the contract, meaning the transaction was not a lease for purposes of the use tax exemption.

The taxpayer also argued, in the alternative, that the vessel was exempt from use tax because it was a watercraft used primarily in interstate and foreign transportation of property for hire. Here, the court determined that, although a portion of the taxpayer’s fee under its contract with the oil producer was to transport property, this was only a small part of the overall contract. Therefore, the vessel was not used primarily in interstate and foreign commerce. Because neither exemption applied, the assessment was upheld. Please contact Michele Baisler with questions about Superior Energy Services v. Department of Revenue.

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