Quarterly State Income Tax Roundup

Maryland – Automatic decoupling triggered

Guidance in “Maryland Impacts of the One Big Beautiful Bill Act (PL 119-21)” confirms automatic decoupling from changes to IRC Sections 174, 174A, 163(j), and 168(n) due to revenue thresholds. The state appears to continue conformity to NCTI and foreign-derived deduction eligible income (FDDEI) provisions. This creates a mixed conformity landscape for taxpayers.

Michigan – Broad decoupling and administrative relief

Michigan decouples from IRC Sections 163(j), 168(n), 174, and 174A while maintaining prior decoupling from IRC Section 168(k) following the Oct. 7, 2025, enactment of H.B. 4961. A Jan. 28, 2026, notice provides limited estimated tax penalty relief. Relief is conditional and requires compliance with specific procedures. Additionally, on Feb. 25, 2026, the Michigan Department of Treasury issued guidance regarding OBBBA conformity.

Minnesota – Bonus depreciation adjustments required

The Department of Revenue’s bonus depreciation guidance details the necessary computations using pre-OBBBA law and notes required addbacks. Taxpayers must track depreciation separately and apply detailed state-specific adjustments. The guidance includes multiple examples and compliance scenarios.

North Carolina – No conformity pending legislative action

On Jan. 8, 2026, the North Carolina Department of Revenue issued guidance stating that North Carolina has not updated its IRC conformity date beyond Jan. 1, 2023, preventing inclusion of the OBBBA changes for 2025. Legislative action later in 2026 might require amended returns. The state also might selectively decouple from certain provisions.

Pennsylvania – Decoupling with recovery mechanisms

The state issued general OBBBA conformity guidance. Pennsylvania requires addbacks for R&E and IRC Section 168(n) depreciation, with recovery over time. The state applies IRC Section 163(j) as of Dec. 31, 2024. Adjustments must be reflected through pro forma federal filings.

Rhode Island – Emergency regulations extended

Rhode Island renewed emergency regulations 280-RICR-20-25-16 and 280-RICR-20-55-16, requiring addbacks for OBBBA-related deductions. Additional guidance is available through the H.R. 1 guidance webpage. The regulations provide detailed reporting instructions.

Texas – Revised conformity and sourcing guidance

Guidance under Tax Memorandum 202512012M and revised Regulation 3.587 clarifies use of current federal law for franchise tax purposes. The state also addresses treatment of global intangible low-taxed income (GILTI), NCTI, and foreign dividends. Additional rulemaking is expected for depreciation adjustments.

Wisconsin – Continued decoupling from R&E changes

Wisconsin continues to follow IRC Section 174 as of Dec. 22, 2017, and does not adopt the OBBBA R&E changes. This results in ongoing divergence from federal treatment. The state provides examples illustrating the impact.

Minnesota – Foreign corporations subject to tax without ECI

Minnesota Revenue Notice #26-01 provides that foreign corporations might have a filing obligation even without effectively connected income (ECI) under IRC Section 882. The state bases jurisdiction on income allocable to Minnesota rather than federal ECI standards.

Oregon – Economic nexus upheld; penalties sustained

In NBCUniversal Enterprise Inc. v. Department of Revenue, State of Oregon, the Oregon Tax Court held that licensing television programming created substantial nexus through economic presence. The court rejected the taxpayer’s reliance on physical presence standards and upheld penalties, finding no reasonable basis for the taxpayer’s position. The decision reinforces the continued expansion of economic nexus standards beyond sales tax. On Jan. 7, 2026, the court denied the taxpayer’s appeal of the imposition of substantial understatement penalties.

Idaho – Foreign income classified as nonbusiness income

The Idaho Tax Commission ruled that GILTI and other foreign income qualified as nonbusiness income based on both transactional and functional tests. The decision emphasized lack of operational integration and absence of a unitary relationship. Although the decision is heavily redacted, the ruling provides insight into potential taxpayer arguments.

Idaho – Settlement proceeds treated as nonbusiness income

The Idaho State Tax Commission found that settlement proceeds related to shareholder litigation were held to be nonbusiness income. The commission found the activity was not part of the taxpayer’s regular business operations. Control of the litigation by shareholders was a key factor.

West Virginia – Nonbusiness income treatment clarified

West Virginia issued guidance distinguishing apportionable business income from allocable nonbusiness income. The publication outlines treatment for rents, royalties, capital gains, and other categories. It also confirms that partnership income remains apportionable.

California – Taxpayer wins alternative apportionment request

The California Superior Court in Smithfield Packaged Meats Corp. v. California Franchise Tax Bd., Cal. Superior Ct., No. 21STCV39637 (2/26/26) agreed with a taxpayer’s alternative apportionment request position that single-sales factor apportionment did not fairly represent its business activity because single sales “disregards all of [Taxpayer’s] substantial activities ... which occur almost entirely outside of California.” The Court found that the Uniform Division of Income for Tax Purposes Act three-factor formula is a reasonable alternative to the California single-sales factor.

Florida – Service revenue sourced based on performance location

A Florida trial court held in Checkfree Services Corp. v. State of Florida, Leon County Circuit Ct. that service revenue was not sourced to Florida because the taxpayer’s income-producing activities occurred outside the state. The decision focused on the taxpayer’s own activities rather than customer location. This reinforces the importance of the cost-of-performance standard.

Michigan – Electricity sales sourced to initial purchaser

In CMS Energy Corp. v. Michigan Department of Treasury, a Michigan appellate court upheld sourcing electricity sales to the wholesale purchaser at Michigan transmission points. The decision rejected arguments based on the ultimate consumption location. The court recognized that the statue required sourcing when a sale was made to “any purchaser,” which would include the wholesaler.

Ohio – Distribution center determines sourcing

In Jones Apparel/Nine West Holdings v. Harris, the Ohio Supreme Court held that sales delivered to an Ohio distribution center are sourced to Ohio, even if the goods are later shipped out of state. The taxpayer failed to provide sufficient evidence of out-of-state delivery. The ruling reinforces strict application of place-of-receipt rules.

Ohio – Transportation services sourced to customer benefit

The Board of Tax Appeals in CSX Transportation v. Harris determined that transportation receipts are sourced based on where the customer receives the benefit of the service and not where the taxpayer performed its services.

South Carolina – Forced combination

Under audit, the Department of Revenue used its alternative apportionment powers to require a taxpayer to file a combined return. While the audit was pending, the legislature amended the apportionment statute to provide procedures for notice and explanation to taxpayers in situations where the department proposes to apply an alternate apportionment method. In XXVI Holdings Inc. v. South Carolina Department of Revenue, No. 25-ALJ-17-0256-CC (2/27/26), the Administrative Law Court remanded the case back to the department to consider the new law’s requirements and to issue an amended decision consistent with the new law.

Texas – No ultimate destination sourcing

In NuStar Energy v. Hancock, the Texas Supreme Court held that Texas sourcing statute unambiguously sources receipts from sales of tangible personal property to Texas if the taxpayer yields possession and control of the goods to a buyer at a location in Texas even if the buyer subsequently transports those goods to another jurisdiction for consumption or use.

California – Management activities create nexus

In Setamel, the Office of Tax Appeals held that an S corporation was doing business in California due to managerial functions performed by a shareholder in the state. The taxpayer’s organizational location was not determinative.

California – Minimal payroll sufficient for nexus

In MGG Enterprise, the Office of Tax Appeals found that even $12,000 of payroll created nexus despite statutory thresholds suggesting higher levels. The decision clarifies that statutory factor presence thresholds provide safe harbors, not limitations. Even minimal in-state activity might trigger filing obligations.

Illinois – Expansion of STAR bond program

Illinois enacted S.B. 1911, significantly expanding the Sales Tax and Revenue (STAR) bond program to support large-scale development projects. A Feb. 9, 2026, press release highlights expected economic benefits, including job creation and capital investment. The program introduces new eligibility criteria and geographic requirements.

Worldwide reporting proposals

California, Hawaii, and Maine are considering proposals requiring worldwide combined reporting. These measures would significantly expand the tax base for multinational corporations. All proposals remain under legislative consideration.

Kansas – Eliminates administrative deference

Under H.B. 2183, courts no longer may defer to agency interpretations and must apply de novo review.

Indiana – Amnesty program announced

The Indiana Department of Revenue announced in its Feb. 4, 2026, Tax Bulletin that it will offer a tax amnesty program from July 15, 2026, through Sept. 15, 2026. Eligibility has been expanded under S.B. 243 to include liabilities prior to Jan. 1, 2024. Additional guidance is expected.