This Week in State Tax

The Arkansas Supreme Court recently held that a resident couple could not claim federal bonus depreciation attributable to income from a non-Arkansas partnership because Arkansas has not adopted Internal Revenue Code (IRC) section 168(k) (the federal provision permitting bonus depreciation of qualified property). The taxpayers, Arkansas residents, owned an interest in a Texas limited liability company that was treated as a partnership for federal income tax purposes. The partnership conducted all its business in Texas and did not file Arkansas returns. In calculating their Arkansas income for tax years 2016 through 2018, the taxpayers included their share of income or loss reported on the partnership’s federal returns, which included deductions for federal bonus depreciation. The Arkansas Department of Finance and Administration disallowed the deductions on audit, and the taxpayers appealed. After the taxpayers exhausted administrative remedies, a circuit court ruled in their favor, concluding that they properly calculated their Arkansas liability using the partnership’s federal returns, and that the Department lacked jurisdiction over the foreign partnership.

The Arkansas Supreme Court reversed the circuit court decision, explaining that Arkansas taxes residents on their entire income and that the use of federal tax forms does not mean Arkansas has adopted federal income tax law in its entirety. Arkansas law expressly adopts certain federal depreciation provisions but does not adopt IRC section 168(k). Therefore, the taxpayers could not take the deduction for bonus depreciation in calculating their Arkansas taxable income merely because the deduction was reflected on the partnership’s federal return. The court also rejected the circuit court conclusion that the Department lacked jurisdiction over the foreign partnership, explaining that to do so conflates jurisdiction over the partnership with Arkansas's authority to tax its residents on all their income. Arkansas was not taxing the partnership; it was taxing the income of residents, and the relevant inquiry is where the taxpayer resides, not where the LLC operates. Accordingly, the partnership’s status as a Texas entity and its lack of Arkansas business activity did not prevent Department from adjusting the taxpayers’ income to remove a deduction not authorized under Arkansas law. Contact Asad Markatia with questions on Department of Finance and Administration v. Risor.

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The California Office of Tax Appeals (OTA) held that a taxpayer could use research credits to fully offset its corporate alternative minimum tax (AMT) liability. The taxpayer filed a worldwide unitary combined report for 2015 on which the group’s regular tax consisted solely of the minimum franchise tax owed by its taxpayer members. The group’s tentative minimum tax was attributable entirely to one member, which applied research credits it had generated to fully offset the resulting AMT liability. The group continued to report the minimum franchise tax as its regular tax liability. The California Franchise Tax Board (FTB) disallowed the offset, asserting that the statutory definition of “tax” unambiguously excludes the AMT and includes it only for specified administrative purposes. The taxpayer argued that the term “tax” was ambiguous and that legislative history supported applying research credits against AMT. California law generally prohibits credits from reducing “tax” below the tentative minimum tax, but expressly excepts certain credits, including the research credit. In a 2010 precedential decision, Appeal of NASSCO Holdings, Inc., the California Board of Equalization (BOE) found that the term “tax” was ambiguous and, relying on legislative history, allowed enterprise zone hiring credits and manufacturer’s investment credits to offset corporate AMT. The dispute before the OTA therefore concerned whether that interpretation also applied to research credits or, as the FTB urged, the prior BOE decision should be overturned.

The OTA declined to overturn NASSCO, explaining that stare decisis carries added force in matters of statutory interpretation because the legislature can amend the law if it disagrees with a decision. The legislature had amended the credit limitation provision eight times since NASSCO without rejecting the BOE interpretation, and committee analyses of later bills described credits on the exception list as available to reduce the AMT, which suggested legislative reliance on NASSCO that was not limited to the credits at issue there. The OTA further examined a 1993 Senate committee analysis of the bill that added the enterprise zone hiring credit (the credit addressed in NASSCO) to the exception list. That analysis explained that certain tax benefits were sufficiently important to permit their use against either regular tax or AMT and expressly identified the research credit among the exceptions.

The OTA found that in this case the FTB largely repeated arguments rejected in NASSCO and did not provide sufficient grounds to overturn that decision. It also rejected the FTB contention that the prior interpretation made the statute inoperable, noting that the FTB had issued guidance implementing the decision. The OTA also rejected the FTB's alternative arguments that the research credit statute itself controlled and that NASSCO was distinguishable because it involved different credits. Concluding that NASSCO remained binding precedent, the OTA reversed the FTB assessment and allowed the taxpayer's research credits to fully offset its AMT liability.

Please contact Candace Axline and Geoffrey Way with questions about Appeal of Medivation, Inc., 2026-OTA-532P.

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The Delaware Secretary of State sent letters to companies inviting them to join the state’s Unclaimed Property Voluntary Disclosure Agreement (VDA) Program on or around August 14th, 2026. Companies receiving those letters that do not respond and enroll in the VDA Program within 90 days of the date of the letter (i.e., around November 12, 2026) will be referred to Delaware Department of Finance and may be selected for audit.

Delaware’s unclaimed property VDA invitations are typically sent to a company’s CFO or Tax Director. Recipients range from middle market to Fortune 100 companies—public and private—in industries such as oil and gas, retail, banking, utilities, technology, media, healthcare, manufacturing, pharmaceuticals, and consumer products.

For Delaware audits and VDAs, the lookback period is 15 years (10 report years plus a five-year dormancy period). Many companies cannot produce complete records for this full period. When that occurs and the company is incorporated or formed in Delaware, state law requires Delaware to estimate unclaimed property liabilities for years in which records are incomplete.

The VDA program offers significant advantages over a Delaware unclaimed property audit. First, the VDA program completely waives statutory penalties and interest, whereas standard audits impose a non-waivable 20 percent interest charge on past-due property. Second, it utilizes a favorable 90-day aging period for voided checks rather than the strict 30-day audit standard, which can significantly reduce unclaimed property exposure. Finally, the VDA program grants the company control to conduct a self-review and propose remediation, avoiding the burdensome, third-party auditor-driven information demands and liability assessments of a formal audit.

For more information and assistance regarding the Delaware VDA process or other unclaimed property matters, please contact Will King, Karen Anderson, or another member of the KPMG Unclaimed Property practice. Additional information on the Delaware VDA program is also available in KPMG SALT Alert 2026-01, issued in January 2026.

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The Illinois Department of Revenue has issued draft proposed rules on the state’s new targeted advertising services tax, enacted as part of the Fiscal Year 2027 budget. Effective January 1, 2027, the tax is imposed at 10 percent of a provider’s gross receipts from targeted advertising services provided in Illinois once those receipts exceed $1 million over a 12-month period. Providers may pass the tax on as a separately stated charge, but that charge is also taxable.

Under the draft rules, an advertisement is taxable only if it is programmatic (meaning it can be automated by machines, computers, or data processing units with little human involvement), consists of a written, oral, or graphic statement, is conveyed through a digital interface or other method of delivery, and uses personal information about the recipient. Delivery of the advertisement need not occur over the internet. Additional covered methods include cable and satellite advertising, text messaging, automated calls, and direct mail. Print advertisements, static billboards, linear advertisements (advertisements distributed to all consumers of a program at a set time), and contextual advertisements are excluded, as are advertisements on interfaces owned or operated by news media entities. To qualify as a news media entity, an entity must obtain more than 50 percent of its business from newsgathering, reporting, or publishing. Aggregating or re-publishing the content of others does not qualify.

The publisher that delivers the advertisement to the user-consumer is considered the taxable provider. Agencies, advertising platforms, exchanges, and networks that only facilitate transactions are not taxable providers under the proposed rules. While publishers cannot deduct fees paid to intermediaries or amounts shared under revenue-sharing agreements, if intermediaries are paid separately from the provider, only the money ultimately received by the provider is included in the gross receipts calculation.

Receipts are sourced to the location of the user-consumer. A user-consumer is presumed to be in Illinois based on an Illinois residential or mailing address, IP address, or place of primary use. Providers can rebut that presumption with credible evidence, such as GPS data or proof that tax was paid to another state. Providers that cannot determine user-consumer locations must use a population-based apportionment formula.

The Department is accepting comments on the draft rules through November 30, 2026. Please contact Drew Olson with questions about the proposed rules for the Targeted Advertising Services Tax Act.

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Voters have now weighed in on a series of consequential state tax ballot measures. The proposals largely fell into three categories: (a) taxes on high-income individuals; (b) property tax relief through larger exemptions, lower assessment caps, and limits on local levies; and (c) restrictions on legislatures and localities raising future revenues, such as rate ceilings and supermajority voting requirements. Technically, the results in each state are unofficial pending final certification by state officials. The summaries below are based on the results provided thus far by the Secretary of State in each state, and updated vote totals are available on the website of those officials.

California: Reported vote totals show that Golden State voters have approved Proposition 42 and Proposition 3. Proposition 42 would prohibit new state taxes on the ownership of retirement assets, individually owned assets, and other personal property as well as prohibiting retroactive taxes based on a taxpayer’s past activities or conduct. It would also nullify conflicting taxes enacted after January 1, 2026. The proposition was structured to be a countermeasure to the proposed wealth tax initiative. (See below.) Proposition 3 would make permanent the temporary income tax rate increases on higher earners first enacted in 2012. For single filers, the rates range from 10.3 percent on income over $371,000 to 12.3 percent on income above $743,000, with thresholds adjusted for inflation (Rate brackets double for married filing joint taxpayers.)

On the other hand, voters appear to have given a thumbs down to Proposition 40, Proposition 41, and Proposition 43. Proposition 40 would have imposed a one-time 5 percent “wealth tax” on California taxpayers with more than $1 billion in covered assets, excluding real estate and qualified retirement accounts. Proposition 41 would have nullified state taxes enacted after January 1, 2026, that exempt revenues from voter-approved spending limits. Proposition 43 would have required, beginning January 1, 2027, that any voter-proposed local special tax receive a two-thirds majority vote to be adopted, rather than the simple majority currently required.

Colorado: Results show Amendment 87 narrowly passing. The citizen-led initiative would repeal a current constitutional requirement that personal and corporate income be taxed at a single rate and would replace it with graduated individual and corporate rate structure in tax year 2027. Those rates would top out at 8.4 percent on income above $1 million. The additional revenue would be exempt from the state’s TABOR revenue and spending limitations. Results also point to a narrow rejection of Proposition 136, which would have permanently capped individual and corporate income tax rates at 4.4 percent beginning January 1, 2027.

Florida: Floridians approved Amendment 3 by a substantial margin. The measure raises the homestead exemption for non-school property taxes to $150,000 in 2027 and $250,000 in 2028, lowers the annual cap on assessment increases for non-homestead property from 10 percent to 5 percent, and limits how counties and municipalities may use property tax revenue.

Iowa: Hawkeye voters have approved Amendment 1 which requires a two-thirds majority of both legislative chambers to increase state individual or corporate income tax rates or to enact a new tax on income. It does not apply to local taxes.

North Carolina: Voters are giving the nod to both constitutional amendments the legislature sent to the ballot. The first, H.B. 1089, requires the General Assembly to adopt laws limiting the amount by which locally levied property taxes may increase annually. It leaves the precise limits and any exceptions to be determined through future legislation. The second, S.B. 1080, lowers the constitutional cap on individual and corporate income tax rates from 7 percent to 3.5 percent for tax years beginning January 1, 2027. The individual income tax rate is already scheduled to drop to 3.49 percent in 2027, while the current corporate income tax rate is 2.0 percent.

Oklahoma: Oklahoma voters rejected State Question 847. The measure would have lowered the annual increase in the assessed value of any property from 3 percent to 1.75 percent for homestead and agricultural property, and from 5 percent to 4 percent for commercial and other real property.

Washington: Latest tallies show that 58 percent of Washington voters have rejected Initiative 645 which would have repealed the 9.9 percent tax on income exceeding $1 million that takes effect in 2028. It also would have prohibited future taxes on individual income. The tax faces a pending legal challenge under Washington law.

Wyoming: Tallies to this indicate that Equality State voters have rejected Proposition 1. The initiative would have exempted 50 percent of the assessed value of a primary residence from tax, beginning with the 2027 tax year. Property taxes in Wyoming are in a state of flux due to questions regarding whether earlier efforts to reduce the growth of property taxes violate “uniform and equal” clause of the state constitution.

For more information on the outcomes of these measures, please reach out to Diana Smith. Additionally, further information is available in our October 19 TWIST.

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