The states covered in this issue of our monthly tax advisor include:
Illinois
Corporate income tax: Combined group member improperly excluded under 80/20 test
An Illinois appellate court affirmed an administrative ruling finding a combined unitary reporting group liable for almost $2.5 billion in additional income tax liability and $2.1 million in late payment penalties, plus interest, because the group improperly excluded a subsidiary member’s income based on the state’s 80/20 business activity test.
Under the test, a combined reporting group can exclude the income of a member that has 80% or more of its property or payroll outside the United States. The dispute centered on the creation of a Delaware single-member limited liability company (LLC) that served as an employment company for the unitary group’s global workforce. The LLC was set up as a division of the excluded subsidiary. The parent company then treated the compensation paid to employees working at locations outside the United States as the subsidiary’s payroll so that it met the 80% threshold.
The court concluded that no employee-employer relationship existed between the foreign employees and the LLC, because the foreign host companies had actual control and supervision over the daily activities of those employees, not the LLC. Therefore, they weren’t employees of the excluded subsidiary through the LLC and the compensation paid to those employees didn’t count as the subsidiary’s foreign payroll to meet the 80% threshold.
Pepsico, Inc. v. Illinois Department of Revenue, Appellate Court of Illinois, First District, No. 1-23-0913, March 19, 2025.
Sales and use tax: Taxation of entertainment services and rentals discussed
Illinois issued a general information letter discussing the taxation of entertainment services and equipment rentals provided inside and outside the state. Sales tax applies if the true object of the transaction is a service and the tangible personal property transferred by lease is part of the sale of the service. The service provider must calculate and pay sales tax based on the separately stated lease price of the property, 50% of the customer’s entire bill, or the cost price if the annual cost price of the property is less than 35%. If the service provider is not registered to collect and pay sales tax in Illinois, they must register, self-assess, and pay use tax to the state.
If the true object of the transaction is the lease or rental of tangible personal property, any service charges inseparably linked to the lease or rental are subject to sales tax, even if those charges are separately stated on the customer’s rental agreement or bill. If the lease requires recurring periodic payments, the service provider must source the receipts to the primary property location for each period covered by the payment. For all other leases, the service provider must source the receipts based on the location of its primary or secondary selling activities.
A lease that doesn’t require recurring periodic payments is taxable even if a lessee immediately transports the leased property outside Illinois. But, a service provider is exempt from sales tax liability if the lease agreement requires physical delivery of the property outside the state and the service provider must retrieve the property at the end of the lease. The interstate commerce exemption doesn’t apply unless the bill of lading shows that the service provider was the shipper of the leased property. The service provider must keep documentation that supports any claimed exemption.
General Information Letter ST 25-0012-GIL, Illinois Department of Revenue, March 14, 2025.
Michigan
Corporate income tax: New research and development credit explained
The Michigan Department of Treasury has provided guidance on the new tax credit for corporate income tax (CIT) taxpayers and certain flow-through entities for qualifying research and development R&D expenses.
Eligibility
The credit is available to CIT taxpayers, and flow-through entities that are employers subject to Michigan withholding tax but not the CIT or Michigan Business Tax, that have increased their R&D expenses relative to a base amount and filed a timely tentative claim. A “base amount” is the average annual amount of qualifying R&D expenses incurred during the three calendar years preceding the calendar year ending with or within the tax year for which a credit is being claimed. Both fiscal year and calendar year claimants must compute the base amount using R&D expenses reported on a calendar year basis.
Unadjusted credit amount
For a claimant with fewer than 250 employees, the credit is computed as follows:
- 3% of R&D expenses up to the base amount.
- 15% of R&D expenses above the base amount.
For a claimant with 250 or more employees, the credit is computed as follows:
- 3% of R&D expenses up to the base amount.
- 10% of R&D expenses above the base amount.
Claimants may claim an additional credit equal to 5% of the R&D expenses that were incurred in collaboration with a Michigan research university pursuant to a written agreement.
Tentative claim requirement
A claimant must submit a tentative claim identifying the unadjusted credit amount. For R&D expenses incurred during the 2025 calendar year, claimants with tax years beginning in 2025 must submit tentative claims by April 1, 2026. For R&D expenses incurred in calendar years after 2025, all claimants must submit their tentative claims no later than March 15 of the following year (e.g., for R&D expenses incurred in 2026, the tentative claims are due March 15, 2027). Tentative claims should use actual, not estimated expenses.
Claiming the credit
A CIT taxpayer claims the credit with its annual return for the tax year for which the credit is claimed. A flow-through entity filing a withholding tax return must claim the credit with its annual return for the tax year in which its tentative claim was filed.
Notice Regarding New Research and Development Credit, Michigan Department of Treasury, April 2, 2025.
Sales and use tax: Guidance on successor liability updated
The Michigan Department of Treasury has updated its guidance on successor tax liability. The department is required to assess successors before assessing corporate officers as responsible persons if it can identify the successor. However, if the successor is not identified until an informal conference is held regarding a responsible person’s liability, the department may maintain the assessment against the responsible person.
The designation of a person acting on behalf of the purchaser doesn’t count as valid notice to the department of the successor’s identity for purposes of prioritizing a successor assessment over a responsible person. If a person purchases less than an entire business, they may only be liable up to the fair market value of the purchased property.
Revenue Administrative Bulletin 2025-5, Michigan Department of Treasury, April 3, 2025.
New Jersey
Multiple taxes: Pilot mediation program announced
New Jersey is piloting a mediation program aimed at resolving state tax controversies concerning the corporate business tax and sales and use tax. The program will run for 24 months from Oct. 1, 2025, to Sept. 30, 2027. New Jersey will then review the program and decide if it should be made permanent.
How will the program work?
The program will offer taxpayers an alternative solution to state tax disputes, reducing the cases proceeding to the Conference and Appeals Branch and New Jersey Tax Court. The program will be handled by a mediation administrator, who will report to the director of the Division of Taxation. Mediation will involve an informal meeting with taxation representatives and a taxpayer or their representative, facilitated by a trained mediation professional. The mediator will serve as an unbiased and impartial facilitator working to enable the opposing parties to reach a fair and equitable settlement that both parties can voluntarily accept.
What are the eligibility requirements?
Taxpayers will be notified of having an option to apply for mediation before a final audit determination is made and communicated. Applications for mediation will be approved only when the tax amount in controversy equals or exceeds $5,000, not including penalties or interest. Generally, if the dispute has not been resolved within 180 days from the filing of the Application for Mediation, the mediation will be terminated by the assigned mediator — unless the parties and mediator agree to extend the mediation beyond the 180-day period. Taxpayers/representatives seeking to apply for mediation will submit: (a) Form NJMED (Application for Mediation); (b) a signed consent extending the statute of limitations for assessment by 210 days — if the statute of limitations is within 210 days of expiring; and (c) a contract for mediation to the Mediation Administrator.
TB-115, New Jersey Division of Taxation, April 15, 2025.
Oregon
Corporate income tax: Broadcaster had nexus with Oregon, despite no physical presence
The Oregon Tax Court found that an interstate broadcaster had substantial nexus with Oregon for tax years 2006 through 2010. The taxpayer created programming content which it provided to affiliate stations nationwide, including Oregon. The taxpayer provided its broadcasts in exchange for airtime, synergistic branding, and deductions of stations’ payment obligations owed to the taxpayer.
The taxpayer argued it had no physical presence or direct contact with customers in Oregon, so lacked substantial nexus. Oregon argued that the taxpayer’s agreements with Oregon affiliates, which generated advertising revenue for the taxpayer, established a substantial economic connection to Oregon. Substantial nexus existed with Oregon when a taxpayer “regularly takes advantage of Oregon’s economy to produce income for the taxpayer and may be established through the significant economic presence in the state.”
The court determined that the taxpayer’s systematic contracts with affiliate stations to broadcast content to viewers in Oregon represented a substantial economic connection, or nexus. Additionally, the court found that the taxpayers failed to demonstrate that Oregon’s interstate broadcaster formula unfairly apportioned income relative to their business activities in the state.
NBC Universal Enterprise, Inc. v. Department of Revenue, State of Oregon; NBC Universal, Inc. v. Department of Revenue, State of Oregon, Oregon Tax Court - ORTaxCt, No. TC-MD 170037R (Control); No. TC-MD 170278R, March 25, 2025.
South Carolina
Sales and use tax: Guidance issued on withdrawals of inventory for business use
South Carolina has provided guidance on the sales tax implications for retail businesses that withdraw items from their own inventory for use. The ruling advises that if a retailer withdraws tangible personal property previously purchased at wholesale from the retailer’s inventory for its own use or consumption, South Carolina law defines the withdrawal as a retail sale subject to sales tax. The ruling discusses various exclusions and also addresses special provisions for specific industries, including businesses that rent or lease, airport fixed-base operators, sellers of ice, hotels, railroads, and ophthalmologists, oculists, and optometrists.
Revenue Ruling 25-3, South Carolina Department of Revenue, March 20, 2025.
Plante Moran note: South Carolina’s sales tax treatment of inventory purchased tax-free, but later used in its business, is typical of many states. Thus, resellers of tangible personal property should consider implementing processes to track and self-assess use tax on taxable items used in its own business.
Texas
Corporate income and sales and use taxes: Federal intragroup regulations don’t apply to Texas R&D tax calculations
The Texas Comptroller issued a policy memorandum stating that federal intragroup transaction regulations don’t apply to the state’s sales tax R&D exemption or franchise tax R&D credit. The memo states that for the purposes of Texas franchise tax and sales tax, a federal “group under common control” isn’t considered a single taxpayer. This factor rules out the application of these federal regulations when figuring out the Texas R&D tax credit or exemptions. The memo also notes that the current Texas R&D credit and exemption are set to expire at the end of 2026, and any significant changes to the statutes when renewing the R&D credit or exemption may not align with the interpretations put forth in this memo.
Comptroller Letter No. 202503004M, Texas Comptroller of Public Accounts, March 24, 2025.
Sales and use tax: Texas comptroller revises rules on data processing services
The Texas Comptroller of Public Accounts has adopted amendments to its rules regarding data processing services. The rule change, which incorporates provisions from Senate Bill 153 (87th Legislature, 2021), clarifies taxable and exempt services, updates local tax collection guidelines, and introduces a new framework for determining whether a service is taxable.
A key point of contention is the “ancillary” test, which determines whether a data processing service is taxable when bundled with other services. The rule specifies that if a data processing service is sold with another service for a single charge, its taxability depends on whether it has a “separate value” and is incidental to the primary service. This approach departs from the “essence of the transaction” test previously used in Texas tax law.
Several business and industry representatives — including the Texas Taxpayers and Research Association, the Council on State Taxation, and TechNet — expressed concerns that the revisions, particularly the use of the “ancillary” test, expand taxable services beyond legislative intent. Critics also argue that the changes could disproportionately affect business-to-business transactions, potentially increasing costs for Texas companies.
The rule also reinforces the exclusion of internet access services from taxation and upholds existing tax exemptions for certain payment processing services under SB 153. However, the Comptroller declined requests to expand these exemptions further.
34 TAC § 3.330, Texas Comptroller of Public Accounts, March 13, 2025.
Utah
Sales and use tax: Transaction-based prong of economic nexus threshold repealed
The transaction-based prong of the Utah sales and use tax economic nexus threshold is repealed.
New economic nexus threshold
Effective July 1, 2025, a voluntary seller or marketplace facilitator is required to pay or collect and remit sales and use tax if, in either the previous or current calendar year:
- The seller receives gross revenue from the sale of tangible personal property, products transferred electronically, or services for storage, use, or consumption in Utah of more than $100,000.
- The marketplace facilitator makes sales of tangible personal property, products transferred electronically, or services on the marketplace facilitator's own behalf or facilitates sales on behalf of one or more marketplace sellers that exceed $100,000.
Former economic nexus threshold
Formerly, the economic nexus threshold for voluntary sellers and marketplace facilitators was either more than $100,000 of sales in Utah or 200 or more separate transactions. Effective July 1, 2025, the 200 or more separate transactions prong of the economic nexus threshold is eliminated for voluntary sellers and marketplace facilitators.
(S.B. 47), Laws 2025, effective July 1, 2025.
Washington
Sales and use tax: Application of multiple points of use exemption to software maintenance agreements explained
The Washington Department of Revenue has provided guidance on the application of the multiple points of use sales tax exemption (MPU exemption) to software maintenance agreements. The MPU exemption provides an exemption for purchases of specific products when the product will concurrently be available for use inside and outside Washington. The buyer claiming the exemption pays use tax, which is apportioned based on users of the eligible products in Washington compared to users of the products everywhere.
A mixed element software maintenance agreement (MESMA) is one where both retail-taxable products, such as prewritten computer software, and nonretail-taxable products (e.g., help desk services) are sold. A MESMA that qualifies as a bundled transaction is eligible for the MPU exemption if it meets the following conditions:
- The MESMA includes at least one MPU-eligible product, and each MPU-eligible product is concurrently available for use inside and outside Washington.
- The nonretail-taxable products relate to the MPU-eligible products.
- The MESMA doesn’t contain any retail-taxable product other than the MPU-eligible products that are concurrently available for use inside and outside of Washington.
The nonretail-taxable products in a MESMA are considered related to an MPU-eligible product only if they provide support, maintenance, or improvements to the MPU-eligible product.
For a retail sale of a MESMA that qualifies for the MPU exemption, the buyer must apportion and pay use tax based on the users of the MPU-eligible products in Washington compared to users everywhere. The users of the nonretail-taxable products aren’t part of the apportionment calculation.
Excise Tax Advisory No. 3242.2025, Washington Department of Revenue, March 27, 2025.
Plante Moran note: Sales taxation of taxable software licenses and related products, such as maintenance agreements, can be complicated when users are located in multiple states. It may be further challenging if sales tax is charged to a single state, such as the state of the customer’s billing address. A number of states follow an apportioned approach that’s the same or similar to Washington’s. It’s important to establish policies and procedures to ensure the business is paying the appropriate amount of sales tax and taking advantage of and substantiating exemptions.
Unclaimed property: Unclaimed property reporting procedures, abandonment periods, revised
Washington has amended provisions relating to unclaimed property administrative procedures and abandonment periods. Beginning Jan. 1, 2026, the aggregate reporting amount is lowered to $5, and the due diligence notification amount is decreased to $50 for holders of unclaimed property. Also, effective Jan. 1, 2026, the due date for the annual report filed with the department is changed to October 31.
Other changes include: clarification of the abandonment period for municipal bonds held by a government entity; changing the abandonment period for employee reimbursements to three years; and changing the abandonment period for excess proceeds from the sale of self-service storage facility property to one year.
Ch. 29 (S.B. 5316), Laws 2025, effective July 27, 2025, and applicable retroactive to Jan. 1, 2023, and as noted above.
Plante Moran note: State tax nexus standards, such as having a physical presence, generally doesn’t apply to unclaimed property. In fact, businesses are often required to turn over unclaimed property and file reports in the state(s) of the last known address of the owner, regardless if the business has nexus for state tax returns. It’s important for businesses to establish policies and procedures to comply with unclaimed property to avoid or mitigate exposure.
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