The states covered in this issue of our monthly tax advisor include:
- Delaware
- District of Columbia
- Illinois
- New Jersey
- New York
- North Carolina
- Ohio
- Pennsylvania
- Rhode Island
- Texas
- Washington
Delaware
Corporate, personal income taxes: Guidance issued on OBBB decoupling
Delaware issued guidance on corporate and personal income tax changes decoupling from parts of the federal One, Big, Beautiful Bill (OBBB). For businesses taxed as corporations, the state decoupled from the OBBB provision that allows taxpayers to accelerate remaining deductions under IRC Section 174 for domestic research and experimental expenses in tax years 2022 through 2024. It also decoupled from OBBB provisions that allow 100% bonus depreciation under IRC Sections 168(k) and (n).
Corporate and personal income taxpayers can claim bonus depreciation under IRC Section 168(k) equal to 40% for the 2025 tax year, 20% for the 2026, and 0% for tax years after 2027. Depreciation for qualified production property will follow IRC provisions in effect before the addition of IRC Section 168(n). The bonus depreciation provisions sunset for property placed in service after Dec. 31, 2030.
Technical Information Memorandum 2025-2, Delaware Division of Revenue, Dec. 23, 2025.
District of Columbia
Corporate, personal income taxes: District continues to decouple from federal provisions
The District of Columbia has passed temporary legislation to decouple income and franchise tax provisions from federal provisions. The temporary act is the same as emergency legislation passed earlier in December.
Act 217 (D.C.B. 458), Laws 2025, approved Dec. 20, 2025, effective after a 30-day congressional review period, expires 225 days after taking effect.
Illinois
Sales and use tax: Guidance issued on 2026 tax changes for service providers
Illinois issued guidance on changes to the taxation of service providers, effective Jan. 1, 2026, that:
- Eliminate the 200-transaction nexus threshold for determining if out-of-state service providers who maintain a place of business in the state and make sales to purchasers in the state or to marketplace facilitators are subject to destination-based sales tax liability.
- Impose a 15% sales tax rate for taxpayers who fail to provide the information, schedules, or supporting documents necessary to determine the destination-based sourcing location of their sales in the state.
The guidance provides information on:
- The definition of “service person,” “marketplace facilitator,” and “marketplace serviceperson.”
- The $100,000 gross receipts nexus threshold and the quarterly review cycle for determining if the threshold is met.
- Actions service providers must take if they previously met 200-transaction threshold but not the gross receipts threshold.
- Destination-based sourcing rules and recordkeeping requirements to support sourcing locations.
- Resources for additional guidance.
The only part of a sale of services that’s taxable in Illinois is the transfer of tangible personal property as part of that sale. Service providers can calculate their Illinois sales tax liability using one of four methods.
Informational Bulletin FY 2026-13, Illinois Department of Revenue, December 2025.
Sales and use, miscellaneous taxes: Chicago imposes social media and sports wagering taxes, rate increases
The Chicago City Council passed a revenue ordinance that imposes new taxes, effective Jan. 1, 2026, on:
- Social media businesses that collect consumer data on more than 100,000 consumers in the city each calendar year.
- The wagering receipts of primary sports licensees operating in the city.
- Retail sales of alcoholic beverages and liquor for consumption off the premises.
The social media amusement tax rate is $0.50 for each Chicago consumer over the 100,000 threshold. The internet and mobile sports wagering amusement tax applies at the rate of 10.75% to adjusted gross receipts from sports wagers placed in Chicago:
- At, or within a five-block radius of, a casino, racetrack, or sports wagering facility.
- Over the internet or through a mobile application.
The rate for the alcohol beverages tax is 1.5% of the purchase price.
The taxes are payable monthly by the 15th of the month following taxable transactions or activities. The first annual returns covering the period from Jan. 1, 2026, to June 30, 2026, are due by Aug. 17, 2026.
Tax rates are increasing, effective Jan. 1, 2026, from:
- 11% to 15% for the personal property lease transaction tax on the lease or rental price for all leases, including the non-possessory lease of a computer to input, modify, or retrieve data supplied by the customer (“cloud tax”).
- 7% to 23.25% for the boat mooring tax, except the increase does not apply to nonprofit corporations.
- $0.10 to $0.15 for the checkout bag tax.
The motor vehicle lessor tax is decreasing from $2.75 to $0.50 on each vehicle for the daily or weekly rental period.
The ordinance is replacing the transportation tax surcharge on transportation network providers, effective beginning Jan. 1, 2026, with a congestion zone surcharge equal to:
- $1.50 for single rides that include a pickup or drop-off in the zones seven days a week from 6:00 a.m. and 10:00 p.m.
- $0.60 for shared rides that include a pickup or drop-off in the zones on weekdays from 6:00 a.m. and 10:00 p.m.
News Release, Chicago Department of Finance, Dec. 29, 2025.
New Jersey
Corporate income tax: U.S. Supreme Court asked to review royalty payment taxation
A corporation business taxpayer has asked the U.S. Supreme Court to review a New Jersey decision disallowing otherwise deductible royalty expenses paid to a related party with the amount of the disallowance determined by the extent of the related party royalty recipient’s New Jersey activity.
The taxpayer has asked whether New Jersey’s scheme for taxing royalty payments, that conditions the deductibility of related-party royalty payments on the extent of the royalty recipient’s in-state activity, burdens and discriminates against interstate commerce in violation of the Commerce Clause. Also, whether New Jersey’s scheme for taxing related-party royalty payments, that limits the deductibility of the royalty expense to the extent the royalty recipient pays tax in the state on the royalty income, indirectly taxes out-of-state activity with no connection to New Jersey in violation of the Commerce or Due Process Clauses.
Dkt. 25-769, Lorillard Tobacco Company v. Director, Division of Taxation, petition for certiorari, filed Dec. 24, 2025.
New York
Corporate income tax: Group not eligible for special QETC rates
A New York appellate court affirmed a decision holding that an affiliated group of companies didn’t meet the definition of a qualified emerging technology company (QETC) and accordingly couldn’t compute its corporate franchise tax using the special rates applicable to QETCs. The Division of Taxation had determined that the group didn’t qualify because certain members of the group weren’t located in New York during the years at issue.
The court agreed, noting that under the plain language of the law, a combined group could only be a qualified New York manufacturer under the QETC definition if each member qualified. In addition, the group’s interpretation was not consistent with the intent of the relevant act, which sought to incentivize investment in the emerging technology industry in New York. The court also rejected the group’s dormant Commerce Clause claim and its alternative argument that those members that were QETCs should be permitted to compute their tax at the reduced rate on an individual basis.
Charter Communications, Inc. v. New York State Tax Appeals Tribunal, Appellate Division of the Supreme Court of New York, Third Department, No. CV-24-0971, Dec. 24, 2025.
North Carolina
Corporate, personal income taxes: Department provides guidance on impact of FDTRA and OBBB on income tax returns for tax year 2025
The North Carolina Department of Revenue provides guidance to taxpayers on how differences in the Internal Revenue Code (IRC) in effect for tax year 2025 and the Revenue Laws of North Carolina (i.e., the Revenue Act) may impact the filing of the 2025 North Carolina personal and corporate income tax returns.
Differences in federal income tax law and North Carolina income tax law
The starting point for determining North Carolina income tax for individuals and corporations is adjusted gross income (AGI) and federal taxable income (FTI), respectively, as determined under the Code as of Jan. 1, 2023. The Revenue Act didn’t automatically update to follow the IRC in effect for tax year 2025. Instead, the North Carolina General Assembly must enact legislation to adopt federal tax changes made to the IRC.
As of Jan. 8, 2026, the North Carolina General Assembly has not enacted legislation to reference the IRC after Jan. 1, 2023. As such, for tax year 2025, an individual can’t include in AGI, and a corporation can’t include in FTI the federal tax changes included in:
- The Federal Disaster Tax Relief Act of 2023 (FDTRA).
- The One, Big, Beautiful Bill (OBBB).
Federal tax changes included in the federal legislation include, but aren’t limited to, changes made to domestic research and experimentation (R&E) expenditures and changes made to bonus depreciation.
Next action
The General Assembly is scheduled to convene after April 15, 2026, the due date to file a North Carolina income tax return for tax year 2025 if the taxpayer reports on a calendar year basis. During the session, the General Assembly may enact legislation to reference the Code in effect for tax year 2025. However, even if the General Assembly updates the Revenue Act to reference the most recent version of the IRC, it may choose to decouple from certain provisions of the federal legislation.
Notwithstanding the above, a calendar year-end taxpayer required to file a return for tax year 2025, and whose AGI or FTI is impacted by the federal legislation, must by April 15, 2026, either get an extension to file the return or file the return. A taxpayer that files a return prior to any action by the General Assembly must exclude from AGI or FTI the federal tax changes included in the federal legislation. A taxpayer must complete and attach a schedule to the return that reconciles AGI or FTI as calculated under the IRC in effect for tax year 2025 with the IRC as of Jan. 1, 2023. Moreover, a taxpayer may be required to amend the return if the General Assembly makes changes to the Revenue Act after the return is filed.
The department also reminds taxpayers that a taxpayer that doesn’t timely file a return must be granted an extension to avoid the penalty for failure to file. In addition, an extension to file the return isn’t an extension to pay the tax due. To avoid interest and penalty for failure to pay a tax when due, a taxpayer that’s granted an extension must pay any tax due by the due date of the return, not including the extension.
Taxpayers with questions may contact the department
Taxpayers with questions about this notice may call the department at 1-877-252-3052 (7:00 a.m. through 4:30 p.m. ET, Monday through Friday), or write to customer service, P.O. Box 1168, Raleigh, North Carolina 27602-1168.
Important Notice: Impact of Federal Law on North Carolina Individual and Corporate Income Tax Returns for Tax Year 2025, North Carolina Department of Revenue, Jan. 8, 2026.
Ohio
Corporate income tax: Sales sent to Ohio distribution center taxable
The Ohio Supreme Court ruled that a commercial-activity taxpayer wasn’t entitled to a refund of tax because the gross receipts from the sale of tangible personal property to a purchaser who directed transportation of the goods to Ohio were situsable to Ohio. The taxpayer paid commercial activity tax (CAT) on the gross receipts it earned from selling its products from 2010 through 2014. The taxpayer then filed for a refund claiming it shouldn’t have paid the tax because the receipts lacked an Ohio situs.
The taxpayer was a contract manufacturer making soap in Kansas for another corporation, the soap brand owners. That soap was transported to a third-party distribution center in Ohio. The soap eventually left Ohio for placement with out-of-state retailers. The taxpayer argued the situs of its gross receipts fell outside Ohio.
The court determined that subsequent resale and shipment of the goods outside Ohio by the purchaser didn’t affect the situsing of the taxpayer’s receipts. Post delivery movement of the good doesn’t alter where the purchaser received the goods from the seller. The court’s statutory analysis doesn’t follow the goods indefinitely; it stops when the seller’s delivery obligation is fulfilled, and the purchaser receives the property. Further, the taxpayer didn’t deliver its products to a qualified distribution center (QDC). A supplier that ships property to a QDC isn’t subject to tax on qualifying distribution center receipts. The taxpayer read the QDC as signaling Ohio’s intent to treat products passing through an Ohio distribution center solely for further shipment as not situsable to the distribution center’s location. However, the court reasoned that if Ohio wanted to achieve this result, it wouldn’t have imposed conditions on who can qualify as a QDC.
Constitutional challenges under the Due Process and Commerce Clauses of the U.S. Constitution were also rejected.
VVF Intervest, LLC v. Harris, Supreme Court of Ohio, No. 2023-1296, Dec. 24, 2025.
Corporate income tax: Refund claim denied for failure to provide adequate documentary evidence
The Supreme Court of Ohio found that a CAT taxpayer failed to provide documentary evidence establishing the amount of gross receipts attributable to merchandise transported outside Ohio, and so it denied a requested refund.
The taxpayer argued that it was owed a refund because a portion of the merchandise that it had sold into Ohio was eventually shipped out of Ohio. Shipping the items out of Ohio meant the merchandise lacked Ohio situs and removed Ohio’s authority to tax the gross receipts the taxpayer earned from the sale of that merchandise.
The court analyzed the statutory requirements used to determine taxable gross receipts based on the situs of the property’s ultimate receipt after all transportation is completed. The taxpayer provided testimony and secondary evidence but didn’t demonstrate with adequate documentation the amount of gross receipts for the merchandise that was actually transported out of Ohio. The court emphasized that taxpayers bear the burden to provide precise and quantitative evidence to support CAT refund claims, which wasn’t met in this case.
Jones Apparel Group/Nine West Holdings v. Harris, Supreme Court of Ohio, No. 2023-1288, Jan. 14, 2026.
Pennsylvania
Corporate income tax: Nonconformity guidance issued
Pennsylvania issued guidance regarding changes to corporate net income tax (CNIT) provisions under Act 45 of 2025. The act decouples state CNIT from certain federal provisions approved in the federal One, Big, Beautiful Bill. The law requires adjustments for research and experimentation (R&E) expenditures, depreciation of qualified production property (QPP), and interest expenses.
Act 45 of 2025, Corporate Net Income Tax (CNIT) Provisions, Pennsylvania Department of Revenue, January 2026.
Corporate income tax: Challenge to NLC deduction cap denied
In a decision regarding the prior net loss carryover (NLC) deduction, the Pennsylvania Commonwealth Court held the Pennsylvania Supreme Court in Alcatel III definitively decided the issue of retroactivity of Nextel II and those precedents control whether the corporation was seeking a refund or challenging an assessment.
The taxpayer challenged the statutory NLC deduction cap, arguing that their situation differed from the taxpayers in Nextel II because they were challenging an assessment, not requesting a refund. The court stated the cap was constitutional when Pennsylvania issued the assessment before Nextel II. Thus, the assessment was valid because it relied on the percentage cap provision still in effect for the tax year. The court held that the prospective-only application of Nextel II applies uniformly, regardless of whether taxpayers request reassessment or refunds.
Dow Chemical Co. v. Commonwealth of Pennsylvania, Commonwealth Court of Pennsylvania, No. 892 F.R. 2018, Dec. 22, 2025.
Rhode Island
Corporate income tax: Regulation reflects decoupling from OBBB
The Rhode Island Division of Taxation has issued emergency corporation business tax regulations reflecting the state’s decoupling from federal H.R. 1 (One, Big, Beautiful Bill Act). The emergency rules are effective Dec. 15, 2025, and are in effect for 120 days (180 if extended).
The regulations address decoupling from the following:
- The modification of limitation on business interest (IRC Section 163(j)).
- Treatment of certain qualified sound recording productions (IRC Sections 168(k) and 181).
- Full expensing of domestic research and experimental expenditures (IRC Section 174A).
- Increased dollar limitations for expensing of certain depreciable assets (IRC Section 179(b)).
280-RICR-20-25-16, Rhode Island Division of Taxation, effective as noted.
Texas
Corporate income tax: Federal conformity policy change
Texas issued guidance on changes to the Texas Comptroller’s policy regarding franchise tax conformity with the Internal Revenue Code (IRC), effective for the 2026 franchise tax report. Taxable entities should now compute amounts taken from federal tax returns based on the federal tax law in effect for the relevant tax year, except where the IRC is specifically referenced, which remains tied to the 2007 IRC. The guidance includes details on total revenue calculation, cost of goods sold, and apportionment, and it allows a one-time net depreciation adjustment for qualifying assets on the 2026 franchise tax report.
Memorandum 202512012M, Texas Comptroller of Public Accounts, Dec. 19, 2025.
Corporate income tax: No tax due threshold and compensation deduction limit updated
Texas has updated its franchise tax guidance to specify the 2026 and 2027 inflation-adjusted amounts for the no tax due threshold and compensation deduction limit. The no tax due threshold for these years is $2,650,000, and the compensation deduction limit is $480,000.
Letter No. 202601008W, Texas Comptroller of Public Accounts, Jan. 16, 2026.
Washington
Sales and use tax: Localization sourcing refund claim rejected
The Washington Court of Appeals has affirmed a decision denying most of a B&O tax refund sought by Valente Solutions, LLC, a Bellevue-based IT consulting firm that provided localization services to Microsoft between 2011 and 2015.
Valente argued that income from adapting Microsoft websites and content for foreign markets should be sourced outside Washington because the benefit of the services was received in the countries where the localized websites were used. The Department of Revenue disagreed, attributing most receipts to Washington based on contract language showing the services were ordered and managed by Microsoft teams in the state.
Both the Board of Tax Appeals and the Court of Appeals held that Valente failed to provide sufficient, transaction-specific evidence tying its services to particular foreign jurisdictions. Where the benefit of the service couldn’t be clearly established, Washington law required sourcing the income to the state from which the services were ordered, which was Washington.
The court also upheld the department’s application of the throw-out rule, finding that Valente didn’t prove it was taxable in states other than Washington and California during the audit period. As a result, the company failed to establish an overpayment of B&O tax, and the board’s ruling was affirmed in full.
Valente Solutions, LLC v. Department of Revenue, The Court of Appeals of Washington, Division One, No. 87280-0-I, Aug. 12, 2024.
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