Quarterly State Income Tax Roundup

California – Office of Tax Appeals (OTA) rejects agricultural apportionment exception for crop-protection product seller

In Appeals of Yorick, Inc., et al., the California OTA sustained the Franchise Tax Board’s (FTB’s) assessments and held that Yorick did not derive more than 50% of their gross business receipts from “agricultural business activity” and therefore could not use California’s equally weighted three-factor apportionment formula. The OTA focused on Yorick’s own activities, which included developing, producing, marketing, and selling chemical and biological products, rather than the agricultural use of those products by customers. The OTA’s analysis is relevant for taxpayers seeking industry-specific apportionment exceptions based on customer or product end-use facts.

Massachusetts – Appeals Court upholds manufacturing-corporation classification for contract-manufactured footwear

In Skechers USA Inc. v. Commissioner of Revenue, the Massachusetts Appeals Court affirmed the Appellate Tax Board’s ruling that Skechers was a manufacturing corporation for Massachusetts corporate excise purposes. The court noted that even though independent overseas factories physically produced the shoes, Skechers’ design specifications, prototype review, materials oversight, quality control, and production involvement were integral to the manufacturing process. For the 2015-2017 tax years, that classification required Skechers to use Massachusetts’ single-sales-factor apportionment formula for manufacturers rather than the general three-factor formula, increasing its Massachusetts tax liability. The case is significant for companies using contract manufacturers because it applies an expansive, facts-and-circumstances view of “manufacturing,” although Massachusetts since has eliminated the manufacturer/nonmanufacturer apportionment distinction for corporate excise purposes beginning in 2025.

New Hampshire – Capital-loss carryback denied across water’s-edge combined-group members

In Hologic Inc. v. Commissioner, decided on Aug. 26, 2026, the New Hampshire Supreme Court reversed the Superior Court and held that New Hampshire statutes do not permit a water’s-edge combined group to carry back one member’s capital loss to offset another member’s capital gain. Accordingly, combined groups should compute capital losses and gains at the member level before applying the combined group’s apportionment percentage for New Hampshire purposes.

Ohio – Supreme Court limits commercial activity tax (CAT) receipts to amounts actually realized

In Perrigo Sales Corp. v. Harris, decided on Sept. 22, 2026, the Ohio Supreme Court affirmed the Board of Tax Appeals and held that a prescription drug manufacturer’s CAT gross receipts were based on the net amounts actually paid to distributors under prearranged retailer pricing agreements, not the higher list prices shown on distributor invoices. The court reasoned that Perrigo never realized the list price amounts and that the chargebacks were not deductible expenses or cost of goods sold, but rather reflected the amount received based on the contract prices. The decision could be significant for taxpayers with contractual chargeback, pricing, or offset arrangements where invoice amounts exceed amounts actually received.

District of Columbia – OBBBA decoupling, PTET addback, unincorporated business tax (UBT) credit, among other items

Enacted on Aug. 13, 2026, D.C. Act 26-416 decouples from several OBBBA provisions on an emergency basis. For specified tax years, generally including 2025 and 2026 calendar years, Washington, D.C.:

• Retains five-year capitalization and amortization treatment for domestic research and experimental (R&E) expenses
• Does not adopt OBBBA Section 163(j) changes to calculate the interest limitation using earnings before interest, taxes, depreciation, and amortization – instead retaining an EBIT-style computation
• Disallows Section 168(k) bonus depreciation and depreciation under Section 168(n)
• Retains a $25,000 Section 179 cap
• Adds back certain other-jurisdiction PTET paid when a credit for taxes paid to other states is claimed
• Adjusts unincorporated business franchise tax owner credit provisions

The emergency act remains in effect no more than 90 days, with many tax provisions having specified tax-year applicability that should be reviewed carefully.

North Carolina – Updates IRC conformity and creates R&E decoupling mechanics

Enacted on July 2, 2026, S.B. 595 updates North Carolina’s IRC conformity date to July 5, 2025, conforming to many of the federal OBBBA provisions, while notably adding state-specific domestic R&E decoupling and conforming to the federal system for auditing partnerships by assessing tax at the partnership level for federal changes. North Carolina Department of Revenue guidance further explains that corporate taxpayers generally will add back 80% of federal IRC Section 174A domestic R&E deductions and deduct 25% of that addback in each of the following four taxable years.

New Jersey – Temporary $1 million CBT NOL cap with third quarter applicability

A.5322, signed by New Jersey Gov. Mikie Sherrill on June 30, 2026, after the issuance of the second quarter update, imposes a temporary $1 million aggregate cap on New Jersey CBT NOL deductions, including NOL carryovers, prior NOL conversion carryovers, post-allocation NOLs, and combined-group NOL carryovers. The cap is prorated for short-period tax years and does not apply to public utilities, and disallowed amounts will have an additional six-year carryover period extension. The NOL deduction cap will apply to tax years ending on or after July 31, 2026, and before July 31, 2030, with a 75% of entire net income NOL deduction cap being applied for periods ending on or after July 31, 2030, and before July 31, 2032.

Pennsylvania – Net controlled foreign corporation tested income (NCTI)/global intangible low-taxed income (GILTI) terminology and dividend/apportionment treatment

Pennsylvania’s revised Corporation Tax Bulletin 2019-02 addresses NCTI and foreign-derived deduction eligible income (FDDEI) terminology and states that both GILTI and NCTI are treated as dividend income, subject to a dividends-received deduction, for corporate net income tax purposes and excluded from the sales factor. As Pennsylvania’s net income tax base is computed without regard to special deductions, the GILTI and foreign-derived intangible income (FDII) deductions under IRC Section 250 of the IRS Code are not allowed for Pennsylvania purposes.

Pennsylvania – Guidance confirms IRC Section 163(j) decoupling and separate company computations

Pennsylvania Corporation Tax Bulletin 2026-01, issued Sept. 10, 2026, confirms that Pennsylvania conforms to IRC Section 163(j) as in effect on Dec. 31, 2024, such that OBBBA amendments to federal interest limitations do not apply for Pennsylvania corporate income tax purposes. The bulletin instructs taxpayers to compute the IRC Section 163(j) limitation on a separate-company basis, including intercompany and third-party interest, and provides guidance on related-party interest addbacks and carryforwards among other items.

Philadelphia – Business income and receipts tax (BIRT) guidance addresses OBBBA decoupling

Issued on Sept. 17, 2026, Philadelphia Department of Revenue guidance explains that PA Act 21 requires Philadelphia BIRT net income method filers to follow Pennsylvania’s OBBBA decoupling rules for tax years beginning after Dec. 31, 2024. As a result, taxpayers must decouple from federal treatment of domestic and foreign R&E expenditures, depreciation deductions under IRC Section 168(n), and the revised federal Section 163(j) interest limitation computations. The guidance also instructs taxpayers to maintain workpapers supporting the adjustments and provides amended return, penalty, and interest waiver procedures for certain 2025 filings.

California – Office of Tax Appeals (OTA) rejects franchise tax board’s (FTB’s) unitary business theory for out-of-state division gain

In Appeals of Western Distributing Company, et al., the California OTA reversed the FTB’s assessments, holding that Western Distributing’s Colorado beverage-distribution division was not unitary with its other divisions, including its California-connected interstate trucking division, because the record showed decentralized management, minimal arm’s-length intercompany transactions, and insufficient unity of use or dependency and contribution. The OTA also rejected the FTB’s alternative tax benefit rule argument, finding the FTB had not shown that prior deductions produced a California tax benefit requiring income inclusion. The decision limits the FTB’s ability to pull gain from a separate out-of-state business division into California apportionable income based only on shared administrative functions such as insurance, HR, accounting, or cash-management oversight.

Massachusetts – Smithfield combined-reporting decision excludes P.L. 86-272-protected entities from numerator

In Smithfield Packaged Meats Corp. & Combined Affiliates v. Commissioner of Revenue, the Massachusetts Appellate Tax Board held that the commissioner could not apply a Finnigan-style sales reallocation to include the Massachusetts receipts of a P.L. 86-272-protected affiliate in the sales-factor numerators of taxable members of the combined group, explaining that doing so indirectly taxed income protected by federal law and violated the Supremacy Clause of the Constitution. The board also upheld Massachusetts’ rule permitting intracompany manufacturing and sales activities within a combined group to be aggregated for determining whether a selling member should use the Section 38 manufacturer (single sales factor) apportionment method. On Sept. 25, 2026, the Massachusetts Department of Revenue officially filed an appeal of the Appellate Tax Board’s decision. While the decision is pending appeal, taxpayers should consider whether their situation would warrant filing protective refund claims.

Illinois – Partnership PTET election method expanded

Illinois Department of Revenue Information Bulletin FY 2027-01 states that, for tax years ending on or after Dec. 31, 2026, electing partnerships may compute Illinois PTET using either the Illinois-sourced portion of all partners’ distributive shares or the full distributive shares of resident partners plus Illinois-sourced income of nonresident partners. The bulletin also provides guidance and a worksheet for computing estimated tax payments for partnerships electing PTET.

Maine – PTET program implementation guidance

In August 2026, the Maine Revenue Services (MRS) issued Tax Alert Volume 36, Issue 10, describing the new PTET for tax years beginning on or after Jan. 1, 2026: The 2026 PTET rate is 7.15%; filing the annual PTET return constitutes the election; and qualified members receive a refundable credit equal to 90% of the member’s distributive share of Maine PTET paid. MRS stated that the Maine tax portal was expected to accept PTET payments beginning Sept. 4, 2026, and that 2026 estimated PTET payments are required only for payments due on or after July 29, 2026, with no first-year underpayment penalties.

New Hampshire – R&D credit cap expansions

H.B. 1102 became law on Aug. 19, 2026, after the legislature overrode Gov. Kelly Ayotte’s July 10, 2026, veto. For business taxpayers, the act amends the New Hampshire R&D tax credit by increasing the per-taxpayer cap from $50,000 to $100,000 effective Jan. 1, 2027, and increasing the aggregate annual credit cap from $7 million to $10 million effective Jan. 1, 2028. The act also includes nonincome tax state park fee provisions, which the governor cited as the basis for her veto.