The states covered in this issue of our monthly tax advisor include:
California
Multiple taxes: OTA can evaluate whether application of regulation would conflict with governing statutes
The Office of Tax Appeals (OTA) has the authority, when adjudicating a taxpayer appeal, to conclude that the application of a particular tax regulation, promulgated by a different state agency and approved by the Office of Administrative Law, to that taxpayer’s circumstances would conflict with governing statutes and decline to apply the regulation to the taxpayer on that basis. In making such a determination, the OTA must afford appropriate deference to the agency that promulgated the regulation.
However, the OTA has no authority to remove a regulation from the California Code of Regulations or to enforce its view of a regulation’s validity or applicability outside the context of adjudicating a particular taxpayer appeal. The legislature authorized OTA panels to adjudicate challenges to tax regulations. Moreover, the California Constitution, as well as the Administrative Procedure Act, doesn’t bar OTA panels from adjudicating challenges to regulations.
Opinion No. 23-701, Office of the California Attorney General, July 31, 2025.
Corporate income tax: Guidance provided for IRC Sec. 355 transactions when DISA balance is attributable to distributed stock
The California Franchise Tax Board has issued guidance on how a Deferred Intercompany Stock Account (DISA) balance affects basis and income recognition when stock is distributed to shareholders in a nonrecognition transaction under IRC Sec. 355. DISA income will remain deferred when stock is transferred between members of the same combined reporting group. If the member to whom stock is transferred already possesses similar stock with a positive basis, any basis in the stock already possessed can be used to reduce or eliminate the DISA. If the DISA is eliminated, then the subsequent distribution of the stock to shareholders won’t result in the recognition of income to the distributing corporation.
Legal Ruling 2025-01, California Franchise Tax Board, July 30, 2025.
Colorado
Multiple taxes: Governor calls special session to address budget
Colorado Governor Jared Polis has called the General Assembly back into session beginning on Aug. 21, 2025, to work on rebalancing the state budget. Recently enacted federal legislation has had a significant impact on the state budget, such that the state budget is no longer balanced. Colorado no longer has a surplus under the Taxpayer’s Bill of Rights (TABOR), and instead faces a significant shortfall. Among the items the governor has asked the General Assembly to consider in special session are the following tax proposals:
- Allowing the state to sell tax credits, including insurance premium tax credits, to certain taxpayers.
- Extending decoupling from the qualified business income deduction.
- Decoupling through an addback of the federal foreign-derived intangible income (FDII) deduction.
- Adjusting the home office and regional home office insurance premium tax rate reduction.
- Adjusting sales tax vendor fees.
- Updating state law around foreign tax havens to ensure companies are paying appropriate taxes in Colorado.
News Release, Office of Colorado Gov. Jared Polis, Aug. 6, 2025.
Georgia
Corporate, personal income taxes: Quality jobs credit regulation updated
Georgia has adopted several changes to the Quality Jobs Tax Credit Program aimed at refining eligibility criteria and clarifying administrative procedures. Some of the more notable changes are discussed below.
One of the most notable changes is the increase in the wage threshold required for a job to qualify as a “quality job.” Under the amended rule, the threshold is raised to 125% of the county average wage. Previously, the threshold was set at 110% of the county average wage.
The amendment also extends the job creation timeline. Previously, businesses had 24 months from the start of their taxable year to create the minimum number of new quality jobs required to qualify for the credit. The 2025 revision extends this period to 36 months.
Another key update is the inclusion of remote jobs. The amended rule now allows remote positions to qualify for the credit, provided that the employee is assigned to a Georgia-based facility and the company maintains substantial operations in the state.
The rule also tightens restrictions on credit stacking. It now explicitly prohibits taxpayers from claiming the quality jobs tax credit in conjunction with other job creation credits, such as those under O.C.G.A. Sections 48-7-40 and 48-7-40.1, for the same job positions.
Finally, the amendment enhances compliance and documentation requirements. Businesses must now submit more detailed records demonstrating that each claimed job meets the wage and location criteria. This includes payroll documentation, job descriptions, and proof of assignment to a Georgia facility for remote workers.
Regulation 560-7-8-.51, Georgia Department of Revenue, effective June 24, 2025, applicable to taxable years beginning on or after Jan. 1, 2025.
Corporate, personal income taxes: Qualified investor tax credit amended
The amendment to Georgia’s qualified investor tax credit includes several targeted updates that refine eligibility, streamline compliance, and align the rule more closely with legislative intent.
One of the most significant changes is the increase in the annual cap on the total amount of credits available statewide. Previously, the cap was set at $5 million per calendar year. The amended rule raises this cap to $7.5 million.
The amendment also narrows the definition of a “qualified business.” Under the prior version, a business could qualify if it had fewer than 100 employees and was primarily engaged in manufacturing, processing, or technology. The 2025 revision adds a requirement that the business must be headquartered in Georgia and must not have received more than $10 million in aggregate private equity funding prior to the investment for which the credit is claimed.
For investors, the amendment clarifies the holding period requirement. While the previous rule required investors to hold their equity for at least two years, the new version extends this to three years.
The rule also introduces a new preapproval process. Investors must now submit Form IT-QI-AP and receive approval from the Georgia Department of Revenue before making the investment, rather than after.
Finally, the amendment tightens compliance by requiring more detailed documentation with tax filings. Investors must now include both the preapproval form and a certification from the qualified business confirming that the investment was received and used for eligible purposes.
Regulation 560-7-8-.52, Georgia Department of Revenue, effective June 24, 2025.
Illinois
Corporate income tax: Treatment of gain from sale of sole partnership asset discussed
Illinois issued a general information letter discussing the allocation and apportionment of gain from the sale of a partnership’s real property located in the state that’s the partnership’s sole asset. The allocation or apportionment of gain from the sale of a partnership asset depends on whether it’s treated as business income or nonbusiness income. If the gain is business income, a partnership must include the gain in income subject to apportionment. A partnership’s business income flows through to nonresident partners as business income.
If the gain is nonbusiness income, a partnership must include the gain in income subject to allocation. A partnership’s nonbusiness income is taxed to the partner as if that partner had received the income directly, rather than through the entity. Regardless of the business income or nonbusiness income classification, the gain is the partnership’s gain and is subject to Illinois personal property replacement tax. A partnership must report the gain from the sale of its sole asset located in Illinois on its Illinois partnership return. The partnership can’t ignore its own structure and treat the gain as that of the partnership’s owner.
General Information Letter IT 25-0005-GIL, Illinois Department of Revenue, July 28, 2025.
Unclaimed property: Licenses required for finders, other changes enacted
Illinois enacted unclaimed property legislation that:
- Reduces the dormancy period for income tax deferred savings accounts, like health savings accounts, presumed abandoned by the owner.
- Requires notification of the apparent owner of an income tax deferred savings account that’s not presumed abandoned.
- Establishes a one-year period for payment of outstanding funds to the heirs of deceased state employees; adds a requirement that holders of abandoned property, other than property held by insurance companies or property covered by depository insurance, create trust accounts or otherwise segregate the property.
- Imposes licensing requirements, effective beginning Jan. 1, 2026, on finders engaged in the location, recovery, purchase, or assignment of property held by the state treasurer.
P.A. 104-0116 (S.B. 1667), Laws 2025, effective Aug. 1, 2025, as noted.
Maryland
Miscellaneous tax: Digital advertising gross revenues tax guidance issued
The Maryland Comptroller’s Office has released updated guidance on the state’s digital advertising gross revenues (DAGR) tax, providing further clarity on how the tax applies to digital advertising services. The guidance provides key definitions, outlines compliance requirements, and explains the conditions under which digital advertising revenues are taxable.
What’s the DAGR tax?
Maryland’s DAGR tax applies to companies with over $1 million in annual gross revenues from digital advertising services within the state. The tax, first implemented for the 2022 tax year, targets large digital advertisers and is calculated based on a taxpayer’s global annual gross revenues and Maryland-specific digital ad revenue (called the “assessable base”).
Tax rates
The tax rate depends on global annual gross revenue:
- 2.5% for $100 million–$1 billion.
- 5% for $1–$5 billion.
- 7.5% for $5–$15 billion.
- 10% for over $15 billion.
Who must file?
Any company with at least $1 million in Maryland digital ad revenues must:
- File an annual return (Form 600) by April 15.
- File quarterly estimated returns (Form 600D) if they expect to meet the threshold.
- File electronically starting in 2027.
Refunds may be requested via amended returns, but claims must be made within three years.
What advertising services are taxed?
Not all digital advertising is taxable. The DAGR tax applies only to advertising that’s both:
- Programmatic — ads placed using automated systems or algorithms that target specific users based on data.
- Visual — ads displayed visually (with or without audio), such as banners, pop-ups, search engine ads, and video ads.
Taxable examples include:
- Programmatic banner ads.
- Search engine ads.
- Interstitial (in-between content) ads.
- Programmatic ads on social media, video platforms, and TV over cable or satellite (MVPDs).
Non-taxable examples include:
- Audio-only ads (e.g., podcasts or streaming radio).
- Nonprogrammatic or manually placed ads.
- Ads placed on digital platforms owned by news media or broadcast entities.
Calculating Maryland-based revenue
The portion of revenue subject to Maryland tax is calculated using an apportionment formula.
- Numerator: Number of user devices in Maryland accessing digital ads.
- Denominator: Total number of devices accessing the ads.
Data sources include IP address, geolocation, cookies, and contract information. Devices with unknown locations are excluded from both sides of the ratio.
Other key rules
- Providers can’t pass the tax directly to customers through line-items or surcharges.
- Companies must maintain records supporting revenue calculations and apportionment.
- Only digital interfaces (websites, apps, etc.) are included.
Technical Bulletin No. 59, Maryland Comptroller, July 11, 2025.
New Jersey
Corporate income tax: Manufacturing investment tax credit enacted
New Jersey has established the Next New Jersey Manufacturing Program. The program provides tax credits to attract manufacturing investments and create new jobs.
What taxes can the credits be used against?
The credits can be used against the:
- Corporation business tax.
- Insurance company’s taxes.
- Retaliatory insurance tax.
The program provides credits to eligible businesses in manufacturing industries, including advanced manufacturing, nonretail food and beverage, defense, clean energy, and life sciences.
What is the credit amount?
Businesses can receive a tax credit equal to the lesser of:
- 0.1% of the eligible business’s total capital investment multiplied by the number of new full-time jobs.
- 25% of the eligible business’s total qualified investment.
- $150,000,000.
The New Jersey Economic Development Authority may establish one or more bonuses, not to exceed a total of 5% of the award above. The bonus criteria can include, but are not limited to:
- The eligible business’s qualified business facility is located in an opportunity zone-eligible census tract.
- The eligible business is certified as part of the Business Certification Program administered by the Division of Revenue and Enterprise Services in the Department of the Treasury.
- The eligible business has at least one active and executed collective bargaining agreement.
- The eligible business operates in a targeted industry or part of the supply chain for a targeted industry.
- Any other criteria as determined by the authority.
$100 million in tax credits in the first two fiscal years (2026-27) are reserved for clean energy product manufacturers in industries such as solar, geothermal, and green hydrogen. After the first two years of the program, any unused proceeds will roll over into the general manufacturing allocation. Credits can be transferred.
Ch. 123 (A.B. 5687), Laws 2025, effective Aug. 13, 2025; Governor Murphy Signs Bipartisan Legislation to Strengthen New Jersey’s Manufacturing Industry, State of New Jersey Governor, Aug. 13, 2025.
New York
Sales and use tax: Additional guidance provided on tax requirements for marketplace providers and marketplace sellers
The New York Department of Taxation and Finance has provided additional guidance regarding sales tax requirements for marketplace providers and marketplace sellers, including liability relief. Marketplace providers are responsible for collecting New York state and local sales tax for taxable sales of tangible personal property they facilitate for marketplace sellers that:
- Take place in New York.
- Are delivered to a New York address.
A “marketplace provider” is a person who agrees to facilitate sales for a marketplace seller by:
- Providing a forum for third parties to make a sale or accept an offer of sale, including a website, catalog, shop, store, booth, or similar forum.
- Collecting (or an affiliate collecting) the receipts paid by a customer to a marketplace seller for a sale of tangible personal property or contracting with a third party to collect the receipts.
Generally, websites that offer third-party sellers a platform to list items for sale are marketplace providers if they collect payment from customers for the sellers.
A “marketplace seller” is any person who has an agreement with a marketplace provider under which the marketplace provider will facilitate sales of tangible personal property for the marketplace seller.
A marketplace provider’s obligation to collect New York state and local sales tax applies regardless of whether the marketplace seller is required to register for sales tax purposes.
In addition, the department providers frequently asked questions (FAQs) for marketplace providers and marketplace sellers.
Sales tax requirements for marketplace providers, New York Department of Taxation and Finance, Aug. 7, 2025.
Oregon
Corporate income tax: Gross receipts from hedging transactions excluded from sales factor
The Oregon Tax Court ruled that the taxpayer’s gross receipts from hedging transactions weren’t includible in the sales factor for apportioning corporate income tax because they were classified as sales of intangible property and weren’t “derived from” the taxpayer’s primary business activity.
The court determined that the receipts from hedging transactions had to be treated separately from gross receipts arising from the taxpayer’s sales of tangible petroleum commodities, even though the transactions were conducted simultaneously and supported the taxpayer’s broader operations. The court rejected the taxpayer’s argument that federal case law under the “Corn Products” doctrine governed this classification, concluding it wasn’t binding or persuasive for Oregon’s apportionment purposes.
Chevron U.S.A., Inc. v. Department of Revenue, ORTaxCt, No. TC 5461, July 21, 2025.
Rhode Island
Multiple taxes: Budget contains OBBB provision, credit sunsets, tax on non-owned occupied property
Rhode Island’s budget for fiscal year 2026 went into effect without Governor Dan McKee’s signature.
Significant changes are noted below.
Income tax changes: For corporate and personal income taxes, a provision that adds to Rhode Island taxable income, beginning Jan. 1, 2025, the amount of any income, deduction, or allowance that would be subject to federal income tax but for the enactment of the federal One, Big, Beautiful Bill (OBBB). In addition, the enactment of OBBB and any IRS forms and regulations, which go into effect during the current tax year or within six months of the beginning of the next tax year, are grounds for Rhode Island emergency rules and regulations to preserve the Rhode Island tax base.
Effective for tax years beginning in 2026, the tax credit for qualified research expenses can’t reduce tax liability for that year by more than 50%. Unused credit may be carried forward for 15 years.
Finally, the following sunset effective Jan. 1, 2026:
- Credit for research and development property acquired, constructed, or reconstructed or erected after July 1, 1994.
- Elective deduction for research and development facilities.
- Deduction for investment in small businesses.
Sales tax changes: Parking services are subject to sales and use tax effective July 1, 2025.
Further, hotel and short-term rental tax is raised to 2% beginning Jan. 1, 2026. An additional whole home short-term rental tax at the rate of 5% is imposed, in addition to all other taxes and fees, beginning July 1, 2025.
Property tax changes: For tax years beginning July 1, 2026, an additional property tax is imposed upon non-owner occupied residential properties. A “non-owner occupied” residential property is one that’s not the owner’s primary residence and isn’t occupied by the owner for a majority of days during a taxable year. The tax will be $2.50 for each $500 of the assessed value in excess of $1,000,000, adjusted beginning July 1, 2027.
Ch. 278 (H.B. 5076), Laws 2025, effective as noted.
Texas
Corporate income tax: Retailer’s rehandling, security, and janitorial costs not includible in COGS
The Texas Comptroller issued a decision denying a retailer’s Texas franchise tax refund claim in which the retailer argued that it should have been allowed to include certain labor, storage, janitorial, and security costs in its cost of goods sold (COGS) subtraction. The decision denied the inclusion of the following types of costs for the following reasons:
- Rehandling vs. handling. The retailer argued that labor costs such as go-backs, sales floor organizing, and managing sales floor recovery and markdowns, were handling costs includible in its COGS. In ruling against the retailer on this point, the decision cited Comptroller precedent and the Texas Supreme Court’s decision in Sunstate Equipment Co., L.L.C. v. Hegar concluded that costs related to goods that had already been displayed for sale couldn’t be included in COGS — such “rehandling” costs aren’t includible in COGS. The decision states that only labor directly related to the initial acquisition and shelving of goods qualifies as includible handling costs.
- Storage allocation. The retailer argued that costs associated with certain parts of its retail space, such as fitting rooms and sales floors during closed hours, should be included in COGS as storage costs. The decision found the evidence showed these areas were used for rehandling or selling activities, not for inventory storage, and thus the associated costs shouldn’t be included in COGS.
- Security and janitorial costs. The retailer argued that security and janitorial costs should count as direct costs when tied to storage activities and not be subject to the statutory 4% cap on indirect costs. The decision rejected this position, citing both statutory language and Comptroller guidance that classifies such costs as mixed service costs subject to the cap even when partially related to storage.
Comptroller Hearing Nos. 120,051, 120,052, 120,053, 120,054, and 120,055, Texas Comptroller of Public Accounts, July 10, 2025.
Corporate income tax: Sales-type leases
In light of the Texas Supreme Court’s decision in Hegar v. Xerox Corp., the Texas Comptroller has issued new guidance outlining how businesses should treat sales-type leases for franchise tax purposes. The clarification addresses two areas: the applicable franchise tax rate and the cost of goods sold (COGS) deduction.
Under this updated policy, sales-type leases, as defined by Financial Accounting Standard (FAS) 13, are treated as “sales” when determining both eligibility for the reduced franchise tax rate for retailers and wholesalers and what’s includible in a business’s COGS deduction. This reflects the court’s opinion in the Xerox case that the terms sale, selling, and sold don’t require the legal transfer of title, but rather the transfer of the item itself.
The ruling in Xerox emphasized that Texas law doesn’t define “selling” in a narrow or technical sense. As such, the court recognized that sales-type leases are substantively equivalent to sales for tax purposes, particularly when revenue from those leases is associated with wholesale trade activity.
Regarding the retailer/wholesaler tax rate, the new guidance states that revenue from qualifying sales-type leases counts toward the revenue threshold for determining whether a business is “primarily engaged” in wholesale trade.
The new guidance also confirms that the transfer of tangible personal property under a sales-type lease qualifies as “goods sold” for the purposes of the COGS deduction, provided the lease meets the criteria set forth in FAS 13.
To be classified as a sales-type lease under FAS 13, a lease must satisfy at least one of the following conditions:
- Ownership transfers to the lessee by the end of the lease term.
- The lease includes a bargain purchase option.
- The lease term covers at least 75% of the asset’s estimated useful life.
- The present value of lease payments is 90% or more of the asset’s fair value.
In addition, it must satisfy both of the following:
- The lease payments must be reasonably collectible.
- There must be no major uncertainties about unreimbursable costs.
This guidance applies to all open tax periods within the statute of limitations.
Comptroller Letter No. 202507015M, Texas Comptroller of Public Accounts, July 31, 2025.
Washington
Sales and use tax: Guidance provided on service and other activities B&O tax rate
Beginning Oct. 1, 2025, Washington imposes three business and occupation (B&O) tax rates under the services and other activities classification. If a taxpayer (or an affiliated group) had taxable income subject to the service and other activities B&O tax in the prior calendar year, they’re taxed under the following rates:
- Taxable income of less than $1 million: 1.5%.
- Taxable income starting at $1 million but less than $5 million: 1.75%.
- Taxable income starting at $5 million: 2.1%.
Hospitals and select advanced computing businesses continue to be taxed at a rate of 1.5%.
Service and Other Activities Rate Changes, Washington Department of Revenue, July 25, 2025.
Sales and use tax: Taxability of information technology and software development explained
Beginning Oct. 1, 2025, information technology and website and software development services are subject to Washington retail sales tax and retailing business and occupation (B&O) tax. Taxpayers should collect tax on the following:
- Customization of prewritten software.
- Custom software sales and development.
- Custom website development.
- IT related services, including training, technical support, help desk services, network operation and support services, data entry services, data processing, and implementation services.
Special Notice, Washington Department of Revenue, July 30, 2025.
