This Week in State Tax

As part of the Arizona Fiscal Year 2027 budget, Governor Hobbs recently signed a bill implementing a three-year moratorium on new data center tax incentives. The state’s Computer Data Center (CDC) tax incentive program currently provides up to ten years of state and local sales and use tax exemptions on qualifying equipment purchases, subject to capital investment thresholds. The growing use and annual revenue impact of the program drew scrutiny from state lawmakers concerned about the revenue impact and infrastructure strain.

Specifically, the bill provides that no new CDC certification applications will be accepted by the Arizona Commerce Authority from July 1, 2026, through June 30, 2029. The moratorium applies retroactively “from and after June 30, 2026,” meaning any new CDC application must be completed and submitted by June 30, 2026, to be considered under current law. Computer data centers that had completed state certification requirements and qualified for Arizona incentives prior to the moratorium implementation will retain their tax preferences, as the freeze applies only to new applications. The moratorium will sunset on June 30, 2029, after which the CDC program application window is scheduled to reopen barring further legislative changes. For questions regarding Arizona H.B. 4168, please contact Eric Gee and Brian Phillips.

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The highest local court in D.C. has ruled that the transfer of an office building as part of a transaction between two related parties was subject to deed recordation and real estate transfer taxes. The court also held that the transfer should be valued at the market value as of the date the deed was recorded, rather than when the transaction was completed some years prior to recordation. D.C. law imposes a 1.1 percent tax on the recordation of a deed or other document transferring real estate in the city as well as an additional 1.1 percent transfer tax on such transactions. The tax is based on the consideration paid for the real estate, and the taxes are payable upon recordation or other transfer document with the Recorder of Deeds. Real estate transferred as part of a merger is subject to tax, but transfers as part of a conversion are not.

In the instant case, a partnership and an LLC, related parties, engaged in a transaction in which an office building was transferred to the LLC and the partnership ceased to exist after the transaction under documents entitled “Articles of Merger”. The transaction and transfer took place in 2002, but no deed or other transfer document was filed with the Recorder. In 2019, as the LLC prepared to sell the building to an unrelated party, it filed a “no consideration” deed with the Recorder, describing the transaction as a conversion of the partnership to an LLC and the transfer of the building to the LLC for no consideration. The Recorder considered the transaction to have been a merger and assessed transfer and recordation taxes based on the 2019 value of the building. The taxpayer paid the tax under protest and filed for review of the assessment in D.C. Superior Court, which upheld the actions of the Recorder. The taxpayer then sought review by the Court of Appeals.

The taxpayer raised two arguments. First, it argued that transaction was a conversion, and not a merger, and was thus not subject to the transfer and recordation taxes. It noted that the owners of the partnership were the same as the members of the LLC and their relative share of ownership was the same both before and after the transaction. It also argued that, if tax was due, the amount should have been based on the value when transferred, rather than the date of recordation as used by the Recorder.

As to the nature of the transaction, the appellate court noted that all the relevant documents identified the transaction as a merger with the LLC being the surviving entity. Further, it said that while taxpayers are free to structure their affairs with distinct entities, they “must operate consistently and not seek treatment as individuals when that would better suit their interests….” As to the proper valuation date, the court characterized the question as “a close one,” but it found that valuing the property as of the date of deed recordation was the better argument. Specifically, it noted that under D.C. law, the duty to pay the recordation and transfer taxes arises at the time of recordation, and not at the time of transfer. Further, basing the valuation on the date of transfer could lead to manipulation. The taxpayer also raised an issue that D.C. law granted deference to actions of administrative agencies which was improper under the U.S. Supreme Court Loper Bright decision. The Court of Appeals determined it was not necessary to address that question as it agreed with the Recorder without regard to any deference. For questions on LHL Realty Company DC LLC v. District of Columbia (22-TX-0820, June 11, 2026) or assistance with real estate transfer tax matters, please contact Michelle Dohra.

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As state legislative sessions wind down, three additional states have enacted bills responding to the federal tax changes in the One Big Beautiful Bill Act (P.L. 119-21) (OB3).

Arizona: In an omnibus tax reform bill recently signed by Governor Hobbs, Arizona made several changes affecting its conformity to the Internal Revenue Code (IRC). Under the bill, applicable to taxable years beginning from or after December 31, 2024 through December 31, 2025, Arizona will continue to conform to the IRC as amended and in effect on January 1, 2025, and it will also conform to the OB3 provisions that were retroactively effective during taxable years beginning from and after December 31, 2024 through December 31, 2025. For taxable years beginning from and after December 31, 2025, Arizona will conform to the IRC as amended and in effect on January 1, 2026, specifically adopting all provisions that became effective during 2025 and any related retroactive effective dates. The bill does, however, decouple from IRC section 168(n) (bonus depreciation for qualified production property) for taxable years beginning from and after December 31, 2025. Please contact Alex Townsend and Ashley De Rada with questions about House Bill 4168.

Florida: Florida Governor DeSantis recently signed a bill updating Florida’s fixed conformity date for taxable years beginning on or after January 1, 2026, to the IRC as amended and in effect on January 1, 2026. The bill also requires that Florida adopt IRC sections 163(j) (business interest expense limitation), 168(k) (bonus depreciation), and 174(a) as they existed on January 1, 2025. Finally, Florida has decoupled entirely from IRC sections 168(n) and 174A (full expensing of domestic research and experimental (R&E) expenses). These decoupling provisions are effective for taxable years beginning on or after January 1, 2026. Please contact Greg Aughenbaugh and Danielle Fynn with questions about House Bill 7031.

Massachusetts: In a supplemental appropriations bill recently signed by Governor Healey, Massachusetts adopted several new provisions relating to conformity to the IRC. Massachusetts, a rolling conformity state, now requires that, for taxable years beginning on or after January 1, 2026, any individual amendment to the IRC which would affect the determination of Massachusetts gross income in the year the amendment is enacted or any year prior shall not apply unless the commissioner of revenue determines within 90 days of the enactment that the estimated impact to tax revenue is less than $20 million in reduced or increased revenue based on a rolling 3 year average. Massachusetts has also decoupled from several OB3 provisions. For tax years 2025 and 2026, the state disallows the deduction permitted under IRC section 163(j) to the extent that the definition of “adjusted taxable income” is modified under the provisions of OB3, effectively conforming the state to the provisions of section 163(j) as such provisions existed prior to the passage of OB3. Additionally, Massachusetts disallows the deduction permitted under IRC section 168(n) (qualified production property). Massachusetts will also disallow the deduction under IRC section 179 (election to expense certain depreciable business assets) to the extent that it was increased under the provisions of OB3, effectively conforming IRC section 179 as it existed prior to the passage of OB3. The decoupling from IRC sections 163(j), 168(n), and 179 are effective for tax years 2025 and 2026. Finally, applicable to tax years beginning on or after January 1, 2022 and before January 1, 2026, Massachusetts has decoupled from IRC section 174A, including the IRC section 174A transitional rules (elective accelerated expensing of previously unamortized amounts). Instead, Massachusetts taxpayers must continue to capitalize and amortize R&E expenditures under the provision of section 174 as such provisions existed on July 3, 2025 (i.e. prior to passage of OB3). Barring further legislative changes, Massachusetts will conform to IRC section 174A for expenses incurred in tax years beginning on or after January 1, 2026.

The recently enacted appropriations bill also contained language expanding the state’s Pass-Through Entity Tax (PTET) to incorporate the income subject to its “millionaire surtax”. Effective for tax years beginning on or after January 1, 2026, the new Chapter 63E allows eligible pass-through entities to elect to pay tax at the entity level on the entity’s qualified income taxable in Massachusetts that exceeds the surtax threshold at a rate of 4 percent. Qualified owners of electing entities receive a refundable credit equal to 90 percent of their share of the entity-level tax actually paid, thereby largely offsetting the surtax at the individual level. Please contact James Carregal and Laura Venegas with questions about House Bill 5470.

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