This Week in State Tax

The Indiana Supreme Court recently addressed whether a multistate gaming company was required to add back wagering taxes paid to other states in computing its Indiana corporate adjusted gross income tax base. The taxpayer, a casino operator with gambling operations spanning several jurisdictions, deducted both state income taxes and wagering excise taxes on its federal returns. Under Indiana law, a taxpayer must add back “any deduction or deductions allowed or allowable pursuant to Section 63 of the Internal Revenue Code for taxes based on or measured by income and levied at the state level by any state of the United States.” The taxpayer added back the state apportioned income tax deductions on its Indiana return, but not the unapportioned wagering taxes. On audit, the Department of State Revenue required the taxpayer to add back the wagering taxes under the addback statute and issued additional assessments. After the taxpayer’s administrative protest was denied, the Indiana Tax Court agreed with the Department that the wagering taxes fall within the scope of the addback provision. The taxpayer appealed.

Before the Indiana Supreme Court, the taxpayer argued that the addback statute applies only to apportioned net income taxes. Under this approach, wagering taxes, which are measured by gross income and imposed on the privilege of conducting gaming activity, are properly deductible as ordinary and necessary business expenses. The Department argued that the addback statute covers gross income taxes, excise taxes, and unapportioned taxes, if those taxes are calculated with some reference to revenue. The court rejected both arguments. Instead, it interpreted the statute as covering two categories of levies: direct income taxes that are “based on” income; and taxes that function as the equivalent of income taxes (i.e., “measured by income”). In the court’s view, this includes gross income taxes, net income taxes, and some excise taxes that are calculated like income taxes. The court contrasted those levies with unapportioned excise taxes (including the wagering taxes at issue), which are imposed on discrete intrastate transactions or privileges, are not subject to constitutional apportionment, and do not operate as substitutes for a net income tax. Those wagering taxes, the court concluded, are properly classified as ordinary business expenses rather than taxes based on or measured by income for Indiana addback purposes.

Please contact Gianluca Pitetti or Ryan Dahlkamp with questions about PENN Entertainment Inc. v. Department of State Revenue.

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A bill signed by Governor Mikie Sherrill imposes a temporary $1 million annual cap on net operating losses claimed for purposes of the corporation business tax. Any deduction reduced or disallowed under this provision may be carried forward for up to six additional years past the year in which it would have otherwise expired. This limitation will apply to any tax year ending on or after July 31, 2026, and before July 31, 2030. For tax years ending on or after July 31, 2030, through July 31, 2032, a taxpayer may claim any deductions that were disallowed by the cap (up to 75 percent of the taxpayer’s allocated net income); any deduction disallowed will be similarly entitled to a carryforward of up to six years beyond the standard expiration date. Interest and penalties will not be assessed against a taxpayer for an underpayment of estimated tax due prior to January 1, 2027, resulting from the new limitation. Contact Andrew Eskola with questions about Assembly Bill 5322.

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Two recent Empire State rulings reinforce that wages earned for COVID-era work performed remotely for New York-based employers will still be sourced to New York for income tax purposes under the state’s “convenience of the employer” rule (the convenience rule). Unlike most states which source nonresident wages based on where the service is performed, New York requires that for work by an employee based in New York to be sourced to another state, the services must “of necessity, as distinguished from convenience, obligate the employee to out-of-state duties in the service of his employer.” Taken together, the two rulings seem to establish firmly that working outside New York because of COVID-related office closings in New York, absent other factors, will be insufficient to support sourcing wages outside the state.

In the first matter, the taxpayer was a Connecticut resident employed as a professor at Cardozo law School in New York City. The dispute centered on his earnings in 2020 during which time he worked 24 days in New York and performed his duties for the rest of the year from his residence in Connecticut because Cardozo ceased on-campus classes in response to a gubernatorial executive order addressing the COVID pandemic. The taxpayer claimed a refund for withheld taxes related to the work performed in Connecticut, contending it was not possible to perform his duties at his normal workplace. The Department of Taxation and Finance denied the refund based on the convenience rule, a determination that was upheld on appeal by both Division of Tax Appeals and the Tax Appeals Tribunal. The taxpayer then pursued review by the Appellate Division of the New York courts.

In its decision, the appellate court upheld the application of the convenience rule to the taxpayer. The law school employer did not require the taxpayer to perform his duties from Connecticut. It was indifferent to where he worked, and the only requirement was that the work not be performed on campus. The taxpayer also argued that sourcing his COVID period wages to New York violated the Due Process and Commerce Clause of the U.S. Constitution. As to the Due Process argument, the court held the taxpayer had sufficient connections with New York and continued to derive tangible and intangible benefits from his New York employment. “The pandemic temporarily altered the location from which [the taxpayer] performed his duties … but it did not diminish his connections to New York.” As to the Commerce Clause, the appellate court found that the taxpayer’s remote work did not necessarily implicate the Commerce Clause, and even if it did, the allocation of wages to New York under the convenience rule met the fair apportionment requirements of the Commerce Clause.

In the second matter, an executive of a financial services company that maintained a required “work from home” policy due to COVID restrictions relocated from New York to Florida in 2021. On her 2021 return, the taxpayer claimed the days she worked from Florida as non-New York days and sought a refund of withheld taxes. After gathering information, the Department denied the bulk of the refund, and the taxpayer appealed.

An Administrative Law Judge (ALJ) for the Division of Tax Appeals upheld the refund denial and determined that the convenience rule was applicable. While the taxpayer was required to work from home, information from the employer indicated she was not required to work from Florida and that it was indifferent as to where she worked. The taxpayer also contended she had established a home office dedicated to the work of the employer, and that the employer had provided or financed equipment for that office. The ALJ determined that dedicated space did not meet the requirements for a bona fide office of the employer as the employer did not pay rent, store records or inventory there, or provide business insurance for the location. As such, the wages paid to the executive in Florida constituted New York income for tax purposes.

While these two cases do not necessarily break new ground, they do demonstrate that overcoming the convenience rule requires demonstrable evidence that the services are being performed due to the business necessity of the employer to qualify for non-New York sourcing. For further information on Zelinsky v. Commissioner of Taxation and Finance, CV-25-1156 (July 2, 2026) and Matter of Snyder, Determination No. 831118 (June 25, 2026), contact Aaron Balken or Alec Schwartz. 

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North Carolina Governor Josh Stein recently signed the state fiscal year 2027 budget which repeals a sales tax exemption for electricity used in data centers and enacts new taxes on sports wagering and prediction markets. A separate tax bill signed by the governor updates state conformity to the Internal Revenue Code.

For income tax purposes, North Carolina will now conform to the Internal Revenue Code as enacted as of July 5, 2025, including changes made by the One Big Beautiful Bill Act (P.L. 119-21) (OB3). However, the bill specifically decouples from the domestic research and experimental (R&E) expenditures provisions of IRC section 174A. Instead, any taxpayer that deducts domestic R&E expenditures under IRC 174A(a) will be required to add-back 80 percent of the deduction and take a 25 percent deduction of the addback for the four subsequent years. According to the bill, the decoupling provisions are effective as follows: 1) Applicable to taxable years beginning on or after January 1, 2022, for taxpayers who make a federal election for retroactive application of IRC 174A for a taxable year beginning in 2022 through 2024; or (2) applicable to taxable years beginning on or after January 1, 2025, for taxpayers who do not make the election. This actual implementation of this language is not clear, and an update will be provided when the Department of Revenue issues further guidance. In addition, North Carolina will maintain its longstanding decoupling from bonus depreciation of certain assets under IRC sections 168 and 179.

For sales tax purposes, the bill repeals the state sales and use tax exemption for electricity used at an eligible data center, but preserves the exemption for eligible business property, such as capitalized equipment used for the generation of electricity and equipment cooling systems. This provision is effective as of July 7, 2026.

For excise tax purposes, the budget raises the tax imposed on sports wagering operators from eighteen to twenty-three percent. The rate change takes effect on July 7, 2026.

Finally, North Carolina joins Kentucky and Illinois in enacting a new tax on prediction market operators this year. Effective January 1, 2027, the state will impose tax at the rate of six percent on a prediction market operator’s net trading fee revenue apportionable to the state. Revenue is apportionable to the state if it involves the trading of an event contract by a resident of the state who is domiciled and present in the state at the time of the trade, and results in the payment of trading fees by the resident to the operator. The bill further states that the tax does not impose any other regulatory requirements or obligations on prediction markets.

Contact Nikki Emanuel Jarrell (OB3 conformity) or Nicole Umpleby (wagering and data centers) with questions about Senate Bill 257 and Senate Bill 595.

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In a recent decision, the Ohio Court of Appeals analyzed an insurer's obligation to include sales tax in total-loss cash settlements with its insureds. Following a vehicle accident, a policyholder filed a property-loss claim. The insurer declared the vehicle a total loss and issued a cash settlement that excluded sales tax. In 2022, the policyholder brought a class-action claiming breach of contract, citing policy language stating that payments would include, “where required by law, the applicable sales tax and fees for the damaged or stolen property." (emphasis added). Under Ohio regulations, however, sales tax reimbursement is required only if the claimant purchases a replacement vehicle within 30 days of receiving the settlement and provides the insurer with documentation of the purchase and the payment of sales tax within 33 days of receiving the cash settlement.

The policyholder argued that the policy required total-loss cash settlements to include sales tax payments regardless of whether the insured had substantiated the purchase of a replacement vehicle. According to the policyholder, the policy language “where required by law” simply required such payments in states that impose a sales tax on purchases of a vehicle. In contrast, the insurer argued that its policy obligation is triggered only when a specific law requires insurers to pay sales tax.

On appeal following summary judgment granted to the insurer, the appellate court noted that the policyholder did not argue that he met the Ohio regulatory requirements by purchasing and substantiating payment of sales tax within the required timeframe. Further, the court interpreted the policy’s "where required by law" language to mean that sales tax is included in a total-loss cash settlement only when mandated by a specific statute or regulation, rather than general sales tax laws. The court confirmed that the regulation is the sole legal framework dictating an insurer's sales tax obligations in total-loss claims. As such, the insurer is not required to include sales tax with the cash settlement to a policyholder who does not substantiate the purchase of a replacement vehicle and payment of sales tax within the timeframe required by state law and regulation.

For questions on Chambers v. Farmers Ins. of Columbus, Inc. or Ohio sales tax matters generally, please reach out to Dave Perry and Kenna Goodman.

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Virginia Governor Abigail Spanberger recently signed the state budget for the 2026-2028 biennium following negotiations with the General Assembly. One contentious aspect of the budget concerned the state sales and use tax incentives offered to qualifying data centers. In a compromise, the final budget preserves the current incentives but imposes a first-of-its-kind tax on data center operators.

Beginning on and after July 1, 2026, but before July 1, 2028, the electricity consumption tax is imposed upon every data center operator at the rate of $0.011/kWh of all electricity consumed at each data center per month. The tax applies in addition to all other taxes and fees now imposed by law, and regardless of whether the electricity is provided through an incumbent electric utility, an incumbent electric cooperative, a competitive service provider, or is self-supplied. Suppliers are required to list the applicable tax as a separate line item on the data center operator’s billing invoice. The first collection of the tax will be made in September 2026, covering the period of July 1 through September 1, 2026. Thereafter, the tax must be collected and remitted monthly. The Commonwealth Corporation Commission is responsible for administering the electricity consumption tax.

For questions regarding House Bill 30, please contact Jeff Cook, Nicole Umpleby or Scott Jackson.

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