The states covered in this issue of our monthly tax advisor include:
California
Personal income tax: Partnership interest sales didn’t generate California source income
Nonresident taxpayers didn’t generate California source income from sales of partnership interests for amounts attributable to unrealized receivables and inventory items (also known as “hot assets”).
Background and taxpayers’ position
The taxpayers owned direct membership interests in an investment company that was classified as a partnership for federal and California income tax purposes. The partnership sold portions of its interests in a multistate unitary business, which was also classified as a partnership for tax purposes, and reported the net gains from the sale as nonbusiness income that was not derived from a California source. The taxpayers reported their respective shares of the gains on their California nonresident tax returns as nontaxable, non-California source income, relying on California law under which nonresident income from the sale of intangible personal property can’t be taxed by California unless the property has acquired a business situs in the state.
FTB’s position
The Franchise Tax Board (FTB) audited the taxpayers’ returns and took the position that portions of the gains should be treated instead as the taxpayers’ distributive shares of the multistate unitary business’s apportionable business income resulting from a deemed sale of its unrealized receivables and inventory items. The FTB sought to source those gains to California using the multistate unitary business’s apportionment factors.
OTA’s conclusion
The Office of Tax Appeals (OTA) disagreed with the FTB’s approach, finding the U.S. Court of Appeals for the D.C. Circuit’s analysis and reasoning in Rawat v. Commissioner of Internal Revenue, No. 23-1142 (D.C. Cir. July 23, 2024), while not binding, highly persuasive. In Rawat, the D.C. Circuit held that a foreign (non-U.S.) individual’s gain from the sale of a partnership interest attributable to the partnership’s inventory was not U.S.-source income. Following this reasoning, the OTA declined to follow FTB Legal Ruling 2022-02 and concluded that the nonresidents sold partnership interests that should simply be sourced pursuant to California’s nonresident income sourcing laws.
Burch et al., California Office of Tax Appeals, 2026-OTA-527P, July 24, 2026 (released October 2026).
Corporate income tax: Intercompany dividend elimination allowed, but no deduction for same dividends
A real estate investment trust (REIT) and its wholly owned subsidiary, who were engaged in a unitary business, were entitled to an intercompany dividend elimination on their California water’s-edge group return for qualified dividends paid to the REIT from earnings and profits generated by the subsidiary’s activities. However, they couldn’t, for California tax purposes, simultaneously take a dividends paid deduction for those same dividends. Doing so would grant an impermissible double tax benefit.
Because the REIT had distributed its entire federal taxable income, which included the qualified dividends, to its shareholders during the relevant tax years, it took a dividends paid deduction on its federal returns. California’s computation of the REIT’s taxable income began with its federal income after accounting for the dividends paid deduction. To arrive at the correct amount of California tax due, according to the Office of Tax Appeals, intercompany dividend elimination would be allowed. However, to avoid a double tax benefit, the dividends paid deduction claimed with respect to the same dividends on the REIT’s federal returns had to be added back in the computation of California taxable income.
Kimco Realty Corporation and Subsidiaries, California Office of Tax Appeals, 2026-OTA-482P, Jan. 27, 2026, petition for rehearing denied, 2026-OTA-483P, July 22, 2026 (released October 2026).
Corporate income tax: Apportionment regulation updated
A California regulation on the apportionment of business income has been updated to reflect changes made by Ch. 17 (S.B. 132), Laws 2025, which revised how banks and other financial institutions apportion business income for California tax purposes. The legislation removed “savings and loan activity” and “banking or financial business activity” from the definition of “qualified business activity,” which requires banks and other financial institutions to utilize a single sales factor apportionment formula instead of an equally weighted three-factor apportionment formula for taxable years beginning on or after Jan. 1, 2025. The updates to the regulation make the regulation consistent with the current statutory language.
Reg. 25128, California Franchise Tax Board, effective Sept. 16, 2026.
Corporate, personal income taxes: “Tax liability” redefined for purposes of statute of limitations on collections
California has redefined the term “tax liability” for purposes of the 20-year statute of limitations for Franchise Tax Board collection activities. Under the revised definition, “tax liability” doesn’t include interest, penalties, costs, or fees (except the limited liability company fee) relating to the assessment of tax. Thus, the imposition of any of these items will no longer have an impact on the determination of the 20-year statute of limitations on the underlying tax liability. The collection period for interest, penalties, costs, or fees that may accrue with a particular tax liability will lapse at the same time as the collection period for the related tax liability.
A.B. 1519, Laws 2026, effective Jan. 1, 2027.
District of Columbia
Multiple taxes: Sales tax increase delayed, decoupling provision readopted
Recent District of Columbia budget legislation, both temporary and permanent, makes several tax changes:
- Delaying a sales tax increase from 6 to 7% from Oct. 1, 2026, to Oct. 1, 2027.
- Decoupling from One, Big, Beautiful Bill Act provisions (IRC Sec. 174A, IRC Section 163, and IRC Section 168(n)) as previously done in temporary and emergency legislation.
- Increasing the tax rate on rental cars and utility trailers from 9.25% to 11% beginning on Oct. 1, 2026.
- Making the increased hotel tax rate permanent.
- Continues the previous changes to the standard deduction made in previous temporary and emergency legislation.
- For amounts invested in a qualified opportunity fund (QOF) after Dec. 31, 2026, the reduction of capital gains tax liability through a 10% step-up basis, if invested in a QOF for five years, under IRC Section 1400-Z-2(b), is realized only if the taxpayer invests in a QOF that meets certain criteria.
- After 2025, taxpayers must add back the taxpayer’s distributive or pro rata share of any tax imposed on and paid by a pass-through entity to another state, territory or possession of the United States to the extent the tax was deducted from the pass-through entity’s gross income in determining the pass-through entity’s federal taxable income.
- For unincorporated business franchise taxpayers (partnership, sole proprietorship, and S corporations) the law repeals exclusions that allow residents to exclude certain business income from computation of adjusted district gross income.
- The law includes a provision directing the chief financial officer to study the implementation of a business activity tax.
Act 26-418 (D.C.B. 26-661), Laws 2026, approved Aug. 14, 2026, effective after a 30-day congressional review period; Act 26-416 (D.C.B. 26-724), Laws 2026, effective Aug. 13, 2026, for a 90-day period that expires Nov. 11, 2026.
Georgia
Property tax: Freeport exemption prorated because signed oath filed late
A manufacturer wasn’t entitled to the full Georgia ad valorem freeport tax exemption because its complete application, including the signed oath, was untimely. The taxpayer mailed its personal property tax return and freeport exemption application before the deadline, but the county didn’t accept the application because a representative had not signed the oath; the representative later signed it, and the board granted only 66.67% of the exemption. The court rejected the taxpayer’s argument that the board imposed a tax penalty, explaining that the law requires a prorated reduction when a completed application is untimely filed. The court also held that the missing signature wasn’t a clerical error, immaterial omission, or optional requirement because an oath confirming the accuracy and substance of the application and attesting that the taxpayer isn’t attempting to evade state tax laws goes to the integrity and legitimacy of the process. Additionally, the signed oath on the separate personal property tax return didn’t make the application’s unsigned oath immaterial.
YKK (U.S.A.), Inc. v. Macon-Bibb County Board of Tax Assessors, Court of Appeals of Georgia, No. A26A1522, Sept. 29, 2026.
Illinois
Corporate income tax: Alternative apportionment request for gain from asset sale denied
Illinois issued a general information letter denying a taxpayer’s petition for alternative apportionment of gain from the sale of substantially all of its assets, including goodwill and other intangible assets. The taxpayer argued that applying the statutory, single-sales-factor apportionment formula to the entire gain overstated Illinois’ share of the income from the sale because the business had only recently commenced operations in Illinois and that most of the value of the goodwill and intangible assets developed over many years and across numerous states before Illinois became part of the taxpayer’s market. Instead, the taxpayer asked to use a historical averaging apportionment method based on sales over the life of the business.
The general information letter first noted that Illinois’ rules provide sales factor relief to prevent distortion that would otherwise occur where assets used to conduct a business are removed from the business by sale to a third-party purchaser. If sales of business assets involve a partial or complete withdrawal from the Illinois market, a taxpayer must exclude those sales, including the amount attributable to goodwill, from the sales factor because the gross receipts from the sale don’t reflect the market for the taxpayer’s ordinary sources of business income. In addition, the taxpayer’s petition for alternative apportionment didn’t show clear and convincing evidence that both the statutory method failed to reflect the market for the taxpayer’s goods, services, or other sources of business income, and that the requested alternative method better reflected that market. The petition proposing to apply a historical average percentage of sales in Illinois to the entire capital gain failed to indicate the amount of goodwill attributed to the sale, and the amounts attributed to other assets, with the relative percentage of the goodwill to the taxpayer’s entire gain.
It wasn’t clear why equal weight would be given to years in which the taxpayer had no Illinois market at all. Unless the taxpayer provided evidence that the goodwill being sold was actually developed through Illinois activity, the proposed historical average was arbitrary and imputed Illinois market activity to periods in which the taxpayer didn’t have an Illinois market. The fact that taxable income is greater in a taxable year under the statutory method and results in a sales factor that increases from the previous year due to an isolated or extraordinary transaction isn’t by itself evidence of a grossly distortive result or unfair representation of the taxpayer’s market in Illinois.
General Information Letter IT 26-0012-GIL, Illinois Department of Revenue, Sept. 4, 2026.
Sales and use tax: Rolling stock exemption does not apply to automobile repair services
Illinois issued a general information letter stating that the rolling stock exemption doesn’t apply to transactions between automobile parts suppliers and repair shops to determine sales and use tax liability on the purchase of repair parts. The taxability of sales of tangible personal property to automobile repair or body shops will depend on the use of the items being sold. Automobile repair or body shops can buy tangible personal property tax-free for resale when they physically incorporate or transfer the property into a product sold to a customer. An automobile repair or body shop must provide proper certificates of resale to their suppliers if they are purchasing tangible personal property for resale to their customers. Purchases of tangible personal property that a repair or body shop doesn’t transfer to customers but instead use or consume for their services are not purchases for resale and are taxable. Examples of taxable items include paint thinners and paint reducers, masking tape, paintbrushes, sandpaper, towels, abrasives, paint guns, wrenches, shop tools, and other items used or consumed during repair jobs.
General Information Letter ST 26-0028-GIL, Illinois Department of Revenue, July 20, 2026, released Sept. 8, 2026.
New Jersey
Corporate income tax: Live online support exceeds P.L. 86-272 protections
New Jersey may subject out-of-state internet sellers of tangible goods to corporate income tax when they provide synchronous interactive technical support to in-state buyers because that support constitutes in-state business activity beyond the protections of P.L. 86-272.
The trade association argued that the federal P.L. 86-272 preempted regulations deeming interactive technical support and placing internet cookies in-state business activities. The trade association argued its members’ internet activities were analogous to those of a traveling salesperson. New Jersey contends interactive technical support constitutes an in-state business activity because the buyers receiving support are in-state.
The court noted that P.L. 86-272 did not establish a physical presence standard for the sale of tangible goods but did codify the common law exception prohibiting taxation when out-of-state sellers limit activities to the solicitation of tangible goods. The court noted that asynchronous frequently asked questions posted on a website were not business activity conducted in the state. However, a synchronous electronic chat and an internet help desk for technical support occur both where the seller provides the support and where the buyer receives it, so some of the support occurs in New Jersey. Because there’s an in-state component, taxation was permissible.
The court declined to decide issues involving delayed email, machine-generated responses, chatbots, de minimis emergency support, and the validity of the internet cookie regulation because the record did not show sellers gathered and assembled cookie data for sale as the regulation described.
American Catalog Mailers Association v. Director, Division of Taxation, Tax Court of New Jersey, No. 010021-2025, Oct. 1, 2026.
New York City
Property tax: Judge orders NYC to withdraw pied-à-terre tax property list, reissue notices, and comply with additional requirements
A New York supreme court judge sided with New York City homeowners in a case regarding New York City’s implementation of the new nonprimary residence surcharge (pied-à-terre tax) by concluding that the city improperly identified properties potentially subject to the tax and failed to provide property owners with adequate procedural protections. Specifically, the judge ordered the city to remove a list of thousands of properties that it said are potentially subject to the tax (the current supplemental roll), but may replace it with a limited supplemental roll reflecting those properties actually subject to the surcharge. In addition, the judge found the notices mailed to homeowners were arbitrary and capricious, affected by errors of law, and in violation of the recipients’ due process rights. The city failed to properly make individualized initial determinations with regard to primary residences. The judge ordered the city to use the most recent available tax (and other available) information in arriving at their initial determinations with regards to primary residences. Such analysis must apply to the current fiscal year, as well as ensuing fiscal years.
Further, the judge ordered the following:
- All previously mailed notices are to be canceled.
- New notices may be mailed that specifically identify the nonprimary residence claimed to be subject to the surcharge.
- New notices will be mailed only after an individualized initial determination, utilizing any and all resources and information available to the New York City Department of Finance, and other factors identified by its rules.
- The notice will disclose the records or documents claimed to support its initial determination of nonprimary residence.
- The notice will indicate the threshold amount claimed for the target property ($5 million for one, two, and three family homes, $1 million for co-ops and condos).
- The notice will advise the property owner of the right to challenge the department’s final determinations, and the procedure thereof (but not the “exemption” process, which is eliminated as it improperly shifts the burden).
- The notice will advise of the possibility of a 50% penalty if the department, after a hearing, determines that any documentation provided by the property owner was submitted negligently or in bad faith.
O'Brien v. City of New York, Index No. 85217/2026, New York Supreme Court, Richmond County, Sept. 29, 2026.
Ohio
Corporate income tax: Gross receipts limited to amount realized from drug sales
An Ohio prescription drug manufacturer’s commercial activity tax gross receipts included only the amount the taxpayer actually received from distributors, not the higher list price invoiced to them, because the CAT applies to the “amount realized” from a transaction.
The taxpayer invoiced wholesale distributors at a list price but separately negotiated pricing agreements with retailers. The distributors paid the taxpayer the retailer’s price by deducting a chargeback from the list price before sending payment. Ohio argued the CAT tax should be calculated based on the list price without considering the chargebacks.
The court concluded that the chargebacks weren’t the cost of goods sold, other expenses, cash discounts, returns, or allowances; they were accounting entries that reflected the amount the taxpayer actually realized. The court rejected the tax commissioner’s statutory and factual arguments because the taxpayer never received the list price and consistently reported the list price less than the chargeback on its federal tax returns. The Board of Tax Appeals’ determination that the taxpayer’s gross receipts consisted of the amount received from the sale of prescription drugs to retailers was upheld.
Perrigo Sales Corp. v. Harris, Supreme Court of Ohio, No. 2025-1477, Sept. 22, 2026.
Corporate income tax: Corporate dissolution, consolidation, merger, or conversion requirement changes discussed
Ohio issued corporate income tax guidance clarifying dissolution, consolidation, merger, and conversion requirements for corporations. Ohio no longer requires a dissolving or converting corporation to obtain a certificate of tax clearance. Businesses can notify the Ohio Department of Taxation (ODT) through the certificate of tax clearance method or the affidavit method. Both methods require a corporation to complete a form and submit it to the ODT. Corporations submit Form D5 for dissolutions, consolidations, or mergers, or Form TR-RQC for conversions.
Tax Release TR 2026-01, Ohio Department of Taxation, September 2026.
Washington
Sales and use tax: Classification of affiliate income was genuine issue of material fact preventing conclusion regarding taxpayer’s nexus
A summary judgment in favor of the Washington Department of Revenue was reversed in a case relating to the business and occupation (B&O) tax liability of a Colorado corporation with affiliates involved in franchising dental practices in Washington. Regarding the issue of substantial nexus, the nature of the income received by the Colorado corporation from its affiliates is a disputed issue of fact. In its complaint, the taxpayer characterizes these funds as management fees; yet during discovery, it testified that these payments represented profit distributions. The department argued that this income should be classified as royalties. If the taxpayer can prove that funds received from its affiliates was for profit distribution and that receipt of profit is not an apportionable activity attributable to Washington, it can challenge the nexus finding.
Furthermore, whether and to what extent payments can be apportioned to Washington relies on the classification of the payments, and consequently, there remains a genuine issue of material fact as to whether affiliate payments represented profit distributions, payment for services, or royalties.
M'Knib Company v. Department of Revenue, The Court of Appeals of Washington, Division Three, No. 41068-4-III, Sept. 22, 2026.
Wisconsin
Sales and use tax: Taxpayer leases subject to sales tax
The petitioners created leases for assets (airplanes and software) which petitioners intended to serve simultaneously as sale-leasebacks for insurance regulatory purposes and untaxed refinancing agreements for tax purposes for the assets. The Wisconsin Department of Revenue (DOR) assessed sales tax on the asset sales. The petitioners appealed to the Tax Appeals Commission, which held that the leases were subject to Wisconsin sales tax. According to the commission, the tax law is clear: If petitioners’ payments are made pursuant to a valid lease, a sales tax applies. The question is whether the contracts create a valid sale-leaseback or whether they do not. The DOR argued the form of the leases is controlling and that “they do what they say they do.” The petitioners argued that the form of the leases should be ignored and part of what the leases achieve — the substance — should be determinative. The petitioners asserted the leases were, in reality, refinancing agreements and not leases. The commission determined that the leases were, indeed, leases. Accordingly, the state tax assessed by the DOR is due from petitioners.
CMFG Life Insurance Co. v. Wisconsin Department of Revenue, Wisconsin Tax Appeals Commission, No. 24-S-180, Oct. 1, 2026.
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