This Week in State Tax

The California Franchise Tax Board (FTB) recently ruled that sales of tangible personal property that is received by third-party distributors outside California and undergoes certain “warehousing activities” before resale are assigned outside the state. The taxpayer hired third-party carriers to ship products, either directly or from an intermediate storage warehouse, after an order was placed, to “Hub Warehouses” established by third-party distributors. Title, possession, risk of loss, custody, and control of the products transferred from the taxpayer to the distributors at or before their arrival at the Hub Warehouses. Subsequently, the distributors unloaded, sorted, stored, created new pallets combining the taxpayer's products with other manufacturers' products, labeled the pallets, replaced damaged packages, and shipped the products to other distributors or retailers. The taxpayer was not involved in the handling or distribution of the products subsequent to shipment to the Hub Warehouse. Neither did it know their destinations upon resale.

The FTB concluded that, for taxable years beginning on or after January 1, 2024, sales delivered to Hub Warehouses outside California and subjected to the identified warehousing activities are sourced outside California, regardless of whether the products were subsequently shipped to distributors or retailers in California. In the FTB’s view, the sales terminate when the third-party distributors take possession at the Hub Warehouses outside California because the taxpayer has no further involvement in the warehousing, preparation for resale, or subsequent distribution of the product. The distributors’ warehousing activities were also “much more substantive than mere temporary storage” for further shipment. Further, the subsequent shipment of products to distributors or retailers in or outside California does not affect the taxpayer’s assignment of the sales.

Contact Candace Axline and Geoffrey Way with questions about Chief Counsel Ruling 2026-01.

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The Indiana Tax Court recently ruled on cross-motions for summary judgment regarding whether a water utility's purchases of pipes, pipe accessories, and related equipment qualify for Indiana's manufacturing equipment exemption or environmental quality exemption. The taxpayer treats raw water to make it suitable for drinking and pressurizes it before delivering it through pipes and booster stations to customers. The taxpayer sought a refund of sales and use tax on more than $14.5 million in equipment purchased from 2018 through 2020. The Department of Revenue denied the refund for much of the equipment, taking the position that only the purchases of equipment used at the treatment plant qualified for exemption and that subsequent piping and equipment to deliver the water to the customer is a distribution system not eligible for the exemption.

The manufacturing equipment exemption applies to equipment acquired “for direct use in the direct production … of other tangible personal property,” with production continuing until the most marketable product emerges. The Tax Court differed from the Department and found that the taxpayer's marketed product is potable, pressurized water usable at the customer's tap, not just potable water. Given that pressure and chlorine levels drop as water moves through the system, booster stations that adjust pressure or add chlorine produce – rather than merely preserve – a finished product. Relying on Indiana Supreme Court precedent, the court held that the "first mile" of piping, from the treatment plant through the last booster station, is essential and integral to production. The taxpayer's evidence on the "last mile" of piping beyond that point was too conclusory and insufficiently detailed to support the exemption. It was sufficient though to keep the Department from prevailing in its position that those pipes are merely passive conduits. The court also reserved judgment on whether the first-mile exemption is full or partial because the record did not show how often the booster stations are used.

The environmental quality exemption covers property predominantly used and acquired to comply with environmental quality laws. The court rejected the taxpayer's view that the regulatory mandate it faces to treat the water is by itself enough to satisfy the statute. It also rejected the Department's "but for" test which would say the machinery is used predominantly to meet an environmental requirement only if it served no other purpose. In the court’s view, environmental compliance must be the leading or prevailing purpose for such purchases to qualify for exemption. The record did not show which purpose prevailed items for items such as backfill, tracer wire, and meters that were also for engineering, asset-tracking, and revenue reasons. Consequently, the court denied summary judgment to both parties on this exemption.

Following the decision on the parties’ motions, the case will continue as to the remaining issues. For more information on Indiana American Water Co., Inc. v. Ind. Dep't of State Revenue, please contact Dave Perry. 

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On September 23, 2026, the Iowa Department of Revenue issued a declaratory order discussing the eligibility of a bitcoin mining operation for Iowa's sales and use tax exemption for data center businesses. The petitioner owns and operates more than 4,300 specialized servers performing cryptographic calculations at a facility in Iowa. A related entity under common ownership owns the underlying land and provides energy, hosting, and supporting infrastructure. The petitioner reported investing about $40 million in the facility to date, including about $29.6 million in servers and data processing equipment. The petitioner also expects future qualifying investment to exceed $200 million.

Iowa law provides a sales tax exemption for computers and equipment necessary for the maintenance and operation of a data center business. To qualify, the purchaser must meet five requirements, to wit: (1) be a data center business; (2) have an Iowa physical location of at least 5,000 square feet; (3) invest at least $200 million at that location within six years; (4) comply with the state's sustainable design and construction standards; and (5) register with the Department as a data center business. A data center is defined as a building constructed or rehabilitated to house networked server computers in one physical location to centralize the storage, management, and dissemination of data and information pertaining to a particular business, taxonomy, or body of knowledge. Here, the Department found that the term "particular business" is sufficiently broad to include a bitcoin mining business, because the petitioner stores, manages, and disseminates data related to that business. The Department concluded the operation qualifies as a data center business.

The petitioner did not, however, meet the remaining statutory requirements needed to qualify for exemption on its equipment purchases. Regarding the physical location in Iowa requirement, the Department pointed to a prior ruling indicating that a tenant leasing a property could meet the requirement. Here, however, the petitioner did not purport to lease the facility from its related entity. The Department concluded that common ownership alone does not pass ownership or possession to the related entity. On the investment requirement, the petitioner's $40 million expenditure fell well short of the $200 million requirement. The Department added that the six-year window within which to make the investment runs from when the claimant itself starts site preparation or begins its initial lease term. Here, the petitioner cannot meet this requirement because it was not involved in the initial site preparation and does not lease the property from the owner. The petitioner also provided no facts showing that it met the sustainability standards, and it had not registered with the Department as a data center business. The Department concluded that although the petitioner does not currently satisfy the requirements for the data center exemption, it would be possible for the petitioner to rectify these facts and possibly become eligible for the exemption.

The Department also rejected the petitioner's alternative claim under the sales and use tax exemption for machinery and equipment used directly and primarily in processing. "Processing" requires materials to be transformed into tangible personal property, and nothing showed that the petitioner produces tangible personal property.

For more information on the Iowa Department of Revenue's declaratory order, please contact Crystal Hildebrand.

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