This Week in State Tax

The Arkansas Supreme Court rejected a refund claim for sales tax paid on the rental of pallets used in delivering a taxpayer’s products. The taxpayer, a meat products producer, rented reusable wooden pallets that it used when shipping its product (in this case chicken) to distributors and others in the supply chain. After delivery, the pallets were returned to the pallet supplier and placed back in its rental inventory. The taxpayer paid Arkansas sales tax to the supplier, which was subsequently remitted to the state. The taxpayer later sought sales tax refunds, arguing that the pallet rentals were tax exempt sales for resale. The Department of Finance and Administration denied the refund, and a circuit court upheld that denial. The taxpayer appealed to the state high court.

The court framed the issue as resolving what the taxpayer sold – “is chicken just chicken (as the circuit court concluded)? Or is it chicken on a pallet (as [the taxpayer] argues)?” Under Arkansas law, “proceeds derived from sales for resale to persons regularly engaged in the business of reselling the articles purchased” are exempt from the sales tax. An item “sold for use in manufacturing, printing, compounding, processing, assembling, or preparing for sale” only qualifies for this exemption if the item “becomes a recognizable integral part of the manufactured, printed, compounded, processed, assembled, or prepared products.” “[G]oods, wares, merchandise, and property” that are not made part of the product are treated as goods consumed by the purchaser rather than purchased for resale. Applying this provision, the court contrasted its previous rulings on Coca-Cola bottles (which were deemed to be an integral part of the product being sold) with boxes in which the bottles were shipped (which were not). Here, the court held that the pallets were, like the shipping boxes, merely a convenient way to market and deliver the product, not an integral part of the product itself. Accordingly, the Department’s denial of the refund was upheld. Contact Sadie Cuevas with questions about Tyson Chicken, Inc. v. Dep’t of Fin. and Admin.

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Governor Polis recently signed two tax bills that were adopted by the Colorado legislature shortly before the close of its 2026 regular session.

H.B. 26-1223 narrows the state sales tax exemption for sales of computer software, effective January 1, 2027. Under the updated provisions, “computer software” is tangible personal property and is redefined to include software delivered by any means, including tangible medium, download, or remote access through the internet, as well as applications installed on phones, tablets, and mobile devices. Prior to the law change, Colorado effectively taxed prewritten software only when packaged for repeated sale and delivered to the customer in a tangible medium, thus excluding electronically downloaded and remotely accessed software. The new law retains an exemption for computer software if it is governed by a negotiable license agreement, as defined, or is developed for use by a specific user.

H.B. 26-1289 changes combined reporting rules for the Colorado corporate income tax for years beginning on or after January 1, 2027. The bill removes the state exception of 80/20 companies from inclusion in the combined group. This effectively means all taxpayers will default to a worldwide reporting method (i.e., including overseas members of the combined group on the group’s return) unless the taxpayer makes the following election. The bill adds an option for taxpayers to make a water’s edge election, which must be made on a timely filed original return for an income tax year, and the election is binding for that year and the following nine income tax years. An election made on the first return after that ten-year period has passed will be binding for an additional ten years. In addition to the combined reporting changes, for tax years beginning on and after January 1, 2027, the bill also removes the Colorado deduction for wages disallowed by Internal Revenue Code (IRC) section 280C (relating to wages used to determine certain employment credits) and requires an addition for certain capital gains from opportunity zones outside Colorado excluded from federal taxable income by IRC section 1400Z.

For questions about H.B. 26-1223 and the taxation of computer software in Colorado, please contact Steve Metz. Please contact Amanda Bennett with questions about the combined reporting and corporate provisions of H.B. 26-1289.

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Rhode Island has joined the growing list of states to implement a new tax on high earners. The Fiscal Year 2027 budget legislation, which passed the legislature on June 5 and was signed by Gov. McKee on June 12, will phase in a new 8.99 percent individual income tax rate applicable to those with taxable income above $1 million. The current highest rate is 5.99 percent; the new law imposes a 1 percent tax on incomes more than $1 million in 2027, and additional 1 percent in 2028, and an additional 1 percent for 2029 and future years, for the total of 8.99 percent.

In addition, the budget makes permanent certain changes to the state’s conformity to the Internal Revenue Code (IRC) that had previously been adopted on a temporary basis in response to the federal One Big Beautiful Bill Act (OB3) (P.L. 119-21). Rhode Island had previously decoupled from all OB3 provisions for tax years beginning on or before January 1, 2025. Under the budget bill, for tax years beginning on or after January 1, 2026 both corporate and individual taxpayers will be required to capitalize and amortize domestic research and experimental expenditures under IRC section 174 as it existed immediately prior to OB3, rather than using the new IRC section 174A. The bill also appears to require taxpayers to apply the IRC section 163(j) limitation without regard to depreciation, amortization or depletion (i.e., applying the limitation as it existed prior to OB3). [Note that the legislative language is not entirely clear in this regard.] Finally, the budget requires the Department of Revenue to administer a 75-day tax amnesty to be concluded before February 15, 2027. Further information on the amnesty will be provided in a subsequent TWIST. Contact Jamie Posterro with questions about H. 7127.

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Illinois: The Illinois Remote Retailer Tax Amnesty Program will run from August 1, 2026 through October 31, 2026. The program is open to remote retailers (including marketplace facilitators) with no physical presence in Illinois if they have unpaid sales tax on transactions completed between January 1, 2021 and June 30, 2026. For January 1, 2021 through December 31, 2025, a remote retailer was obligated by law to collect sales tax on taxable products with a destination in Illinois if the retailer had more than $100,000 in gross receipts (or 200 transactions) during the preceding four calendar quarters. Effective January 1, 2026, the 200-transaction threshold was repealed. Under Illinois law, remote retailers making sales into the Land of Lincoln are required to collect state and local Retailers’ Occupation Taxes (ROTs) at the rate in effect in the destination locality.

The amnesty applies to the state ROT and all locally imposed ROTs, including the Chicago Soft Drink ROT. Taxpayers participating in the program will be able to pay outstanding liabilities using a simplified return and rate structure. Most sales will be eligible for a single 9 percent rate to cover both state and local ROTs (without itemizing individual locations), and items taxed at the 1 percent state rate (food for home consumption and certain medical and drug items) will be eligible for a single 1.75 percent tax rate covering both state and local ROT. All eligible liabilities paid during the program or an agreed-upon payment plan will also receive a waiver of related penalties and interest. Beginning January 1, 2026, the Department is authorized to assess a 15 percent gross receipts tax on sales for which insufficient information is provided to determine the appropriate local destination, and tax periods that are eligible for amnesty may be subject to assessment of the 15 percent tax if the taxpayer does not participate in amnesty. For further information on the Remote Retailer Amnesty Program, please contact Drew Olson.

Indiana: The Indiana tax amnesty will run from July 15, 2026 through September 9, 2026. The amnesty, authorized by the legislature in 2025, will provide relief from all penalties, interest, and collection fees applicable to outstanding liabilities for tax periods ending before January 1, 2024, provided the liability is paid by the end of the amnesty period or under an agreed-upon payment plan established as part of the amnesty. Most taxes administered by the Department of Revenue are included in the amnesty, but taxpayers who participated in the Hoosier’s 2005 or 2015 amnesty are not eligible for this amnesty. Liabilities that are currently being protested or appealed may receive the benefits of the amnesty if the amounts are paid during the amnesty, but the taxpayer will be required to waive the right to appeal or protest the liability. 

Businesses with outstanding liabilities eligible for amnesty should receive a letter from the Department or a contractor assisting with the amnesty. Information is also available via the Department’s INTIME system. Taxpayers who choose not to participate may be subject to additional penalties on the outstanding amounts, but the additional penalty will not be applied to amounts currently under protest or appeal should the taxpayer continue to pursue the matter. Please contact David Perry for questions and further information on the Indiana tax amnesty.

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