Ernst & Young's State and Local Tax Weekly newsletter for July 4 and July 11 is now available. Prepared by Ernst & Young's State and Local Taxation group, this weekly update summarizes important news, cases, and other developments in U.S. state and local taxation.

TOP STORIES

Final federal reconciliation legislation has state income tax implications

The July 4, 2025 enactment of H.R. 1 (the Act)¹ will likely affect income taxes imposed by US state and local (collectively, state) governments. These effects stem from the fact that most state income tax laws adopt the Internal Revenue Code (IRC) for purposes of defining income.

This Alert identifies provisions in the Act with state tax implications. For a more detailed discussion of these provisions, please see Tax Alert 2025-1432 (on provisions affecting federal accounting method considerations); Tax Alert 2025-1394 (on the provisions affecting individuals); and Tax Alert 2025-1510 (on the Act's international provisions).

Summary of key provisions impacting state income taxes

The Act includes numerous provisions that impact the calculation of federal taxable income for businesses and their owners. The provisions most notable from a state income tax perspective modify the IRC as follows:

• Modify the IRC Section 163(j) business interest expense limitation by: making permanent the addback of depreciation, amortization and depletion in computing the 30% limitation, effective for tax years beginning after December 31, 2024; excluding subpart F income and global intangible low-taxed income (GILTI) (and any associated IRC Section 78 gross-up) in computing the 30% limitation, effective for tax years beginning after December 31, 2025; including a new interest capitalization coordination rule that applies the IRC Section 163(j) limitation before elective interest capitalization provisions (i.e., interest capitalization provisions other than IRC Sections 263(g) and 263A(f)), effective for tax years beginning after December 31, 2025²
• Make permanent the 100% bonus depreciation allowance under IRC Section 168(k) for eligible property acquired after January 19, 2025³
• Create a 100% depreciation allowance under new IRC Section 168(n) for US nonresidential real property (or portion thereof) used as an integral part of a qualified production activity, provided construction begins after January 1, 2025, and before January 1, 2029, and the property is be placed in service before January 1, 2031
• Make permanent the expensing of domestic research and experimentation (R&E) expenditures, effective for expenditures incurred in tax years beginning after December 31, 2024, with an option to capitalize and amortize over different periods under new IRC Section 174A(c) or 59(e)⁴
• Modify the GILTI regime by: making the deduction under IRC Section 250(a)(1)(B) permanent at 40% for tax years beginning after December 31, 2025; removing allocation of interest and R&E deductions for foreign tax credit (FTC) purposes; eliminating the adjustment for qualified business asset investment (QBAI); reducing the FTC haircut to 10%
• Modify the foreign-derived intangible income (FDII) regime by: making the deduction under IRC Section 250(a)(1)(A) permanent at 33.34% for tax years beginning after December 31, 2025; removing allocation of interest and R&E deductions; eliminating the adjustment for QBAI; carving out sales or other dispositions (other than by license) of IRC Section 367(d) intangibles and property subject to depreciation/amortization
• Modify and "correct" various rules related to controlled foreign corporations (CFCs) and the FTC
• Limit corporate charitable deductions under IRC Section 170(b)(2)(A) to the extent the aggregate of corporate charitable contributions exceeds 1% of the taxpayer's taxable income and does not exceed 10% of the taxpayer's taxable income, with certain carryforward rules applying to disallowed contributions, applicable to tax years beginning after December 31, 2025
• Modify the IRC Section 274(e)(8) deduction disallowance for employer-provided meals
• Increase the IRC Section 164(b) limitation on state and local tax (SALT) deductions from $10,000 to $40,000 effective for tax years beginning in calendar year 2025 and through 2029, with a phase-out for most individuals earning more than $500,000
• Make permanent the IRC Section 199A deduction for certain pass-through income at 20% and expand the phase-in range for the deduction limit
• Make permanent the IRC Section 461(l) limitation on excess business losses of noncorporate taxpayers
• Expand the IRC Section 1202 small business stock exclusion (see Tax Alert 2025-1407)

The effects of the Act will depend, in the immediate term, on how the states currently conform to federal tax law. Thereafter, state lawmakers may modify their tax laws in response to the IRC changes. In this respect, state legislatures will need to understand how these federal tax developments, in concert with the Act's changes to federally funded programs, will affect their state budgets. As of today, most states have already concluded, or are near to concluding, their 2025 legislative sessions. Businesses and their owners should monitor state legislative responses to the Act and anticipate corresponding guidance from state tax administrators, in assessing the Act's impact on their state taxes.

For a detailed discussion of these changes, see Tax Alert 2025-1487. For a detailed discussion of other changes in the Act, in addition to the Tax Alerts noted above, please see Tax Alert 2025-1423 (on provisions affecting tax-exempt entities); Tax Alert 2025-1508 (on provisions benefiting the oil and gas industry); Tax Alert 2025-1531 (on provisions benefiting the metal and mining industry) and Tax Alert 2025-1548 (on the provisions affecting pass-through entities).

Ohio budget legislation affects some tax provisions

On June 30, 2025, Ohio Governor Mike DeWine signed into law Amended Substitute House Bill 96 (HB 96), the state's biennial budget legislation for the fiscal period ending June 30, 2027. HB 96 contains several tax-related changes, discussed below. The governor also exercised his line-item veto authority to strike certain provisions related to data centers, certain sales and use tax exemptions, and income tax garnishment for private judgment debts.

Unless otherwise noted, these provisions become effective 90 days after the governor's signature.

Individual income taxes: Before HB 96's enactment, Ohio had graduated rates for individual income taxes. A 2.75% rate applied for nonbusiness income from $26,051 through $100,000, and a 3.5% rate applied for income exceeding $100,000. Income of $26,050 or less is not taxed. HB 96 phases in a flat rate of 2.75% over two years. For tax year 2025, the top bracket rate decreases from 3.5% to 3.125%, while the 2.75% rate for nonbusiness income from $26,051 through $100,000 remains. For tax year 2026, a flat 2.75% rate applies to all nonbusiness income over $26,050. HB 96 does not change the flat 3% rate for business income or the $250,000 business income deduction ($125,000 for married filing separately). HB 96 also clarifies that the resident and nonresident tax credits will be calculated after taking the business income deduction into account. For tax years beginning on or after January 1, 2025, HB 96 allows the tax commissioner to abate penalties and interest charged for failure to pay sufficient estimated state, school district, or certain pass-through entity income taxes. Penalties still apply at the discretion of the tax commissioner.

Pass-through entities (PTEs): Effective for tax years beginning on or after January 1, 2025, HB 96 allows PTEs electing to be taxed at the entity level under ORC 5747.38 to claim a refundable credit for state taxes paid (SALT deduction cap "workaround"). Prior law only allowed the owner(s) to claim the credits. HB 96 also clarifies how a PTE should calculate the tax credit allowed to its investor(s) if it elects to be taxed at the entity level or files a composite return. The credit should be calculated as the lesser of the investor's proportionate share of the tax paid by the entity or the proportionate share of the tax actually due.

Municipal income taxes: If the due date of a taxpayer's original (i.e., unextended) federal income tax return falls after the due date of its municipal income tax return, HB 96 aligns the due date of the municipal return with the federal return. This provision applies to returns required to be filed on or after January 1, 2026. In addition, HB 96 allows taxpayers who receive a valid extension of their tax return due date to file a refund claim within the later of three years after the date of the overpayment or the return's extended due date. HB 96 also extends, from six to seven months, the extension period for filing a municipal net profits tax return for taxpayers that do not request an extension to file their federal income tax return.

Sales and use taxes: HB 96 makes several sales and use tax changes.

Repeal of certain sales-and-use-tax exemptions and modification of casual sale definition: Beginning January 1, 2026, HB 96 repeals sales-and-use-tax exemptions on:

• Rental payments for "loaner" motor vehicles provided to the owner of a vehicle being repaired or serviced
• Refrigerated food vending machines
• Advertising materials or catalogs that price and describe items available for sale
• Items used by direct marketers in printing advertising material
• Equipment primarily used by direct marketers to accept orders
• Digital audio on juke boxes or similar devices in commercial establishments
• Telecommunications services used by qualified call centers
• Tangible personal property used in acquiring, formatting, editing, storing, and disseminating data or information by electronic publishing

Current law also allows an exemption for certain items sold at a casual sale, which is generally a sale of used items sold by either the user or an auctioneer. HB 96 clarifies the definition of a casual sale by explicitly including both in-person and online sales and excluding sales by an auctioneer made at the auctioneers' physical permanent place of business.

Interest on certain refunds: HB 96 eliminates interest on refunds for sales tax and use tax paid by a direct-pay permit holder. In addition, interest on refunds of county sales and use tax is eliminated. Interest will continue to be allowed for refunds of state and transit authority taxes.

Port authorities: As political subdivisions, port authorities are exempt from sales/use tax on their purchases. Port authorities can use their tax-exempt status to reduce construction costs by leasing a building to a business during construction, which allows the business to benefit from the tax savings on materials incorporated into the project. HB 96 prohibits port authorities from entering into agreements that allow a private party to benefit from the sales tax exemption on construction materials without first obtaining county commissioner approval, if the project is located outside the port authority's territorial jurisdiction. HB 96 also prohibits a port authority from entering into a capital leaseback agreement for a project in its territorial jurisdiction without approval from the board of county commissioners in which the applicable property is located or, if the applicable property is located in more than one county, from each board of county commissioners of each county in which the development is located.

Vendor discounts: Effective for returns filed after January 1, 2026, the discount for vendors that promptly pay sales and use tax is capped at $750 per vendor's license per month covered by the return. Motor vehicle leases are exempt from the discount cap.

Commercial Activity Tax — net operating loss (NOL) credit: ORC 5751.53 allows a credit against the Commercial Activity Tax for unused Ohio Franchise Tax NOLs. The credit applies to "qualifying taxpayers" who made an election before July 1, 2006. The credit is based on an "amortizable amount" derived from unused franchise tax NOLs and other factors. The credit was originally enacted to be nonrefundable from 2010-29 with any portion not claimed by 2029 becoming refundable in 2030. HB 96 converts the credit to a nonrefundable credit after calendar year 2029.

Department of Taxation (Department) procedures: Under current law, a taxpayer generally may protest an assessment of tax by filing a Petition for Reassessment within 60 days of receiving the assessment. HB 96 removes the requirement that taxpayers submit a Petitions for Reassessment through personal service or certified mail. Taxpayers would still do well to file petitions via certified mail or through the Department's online platform to retain documentation of timely filing.

When a taxpayer files a refund claim, the tax commissioner will provide a notice of the amount of refund approved or denied. The taxpayer then has 60 days to either request a hearing or provide additional information supporting the denied portion of the refund. HB 96 permits the tax commissioner to electronically notify, as an alternative to ordinary mail notice, a person applying for a tax refund if the amount to be refunded is less than what the person requested, but only if the person consents to electronic notice. Business taxpayers should update their designated contact persons for such notices to ensure timely receipt.

For more on this development, including a discussion of vetoed provisions, see Tax Alert 2025-1441.

INCOME/FRANCHISE

Multistate: Tax Alert 2025-1502 provides a summary of the significant legislative and administrative actions that affected US state and local income/franchise and other business taxes for the second quarter of 2025. Highlights include: (1) a summary of legislative developments in Alabama, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Minnesota, New York, Rhode Island, South Carolina, Tennessee, Texas, Vermont, Virginia and the City of Philadelphia; (2) a summary of judicial developments in New York and Wisconsin; (3) a summary of administrative developments in Indiana, Maine, Michigan, New Jersey and Texas; and (4) a discussion of federal and state and local tax items to watch in Alaska, California, Illinois, Maine and Texas.

Connecticut: New law (HB 7287) makes several changes to the state's corporation business tax (CBT). The law extends for three years, through 2028 (from 2025) the 10% CBT surcharge. The surcharge imposed on the capital base tax component of the CBT is extended through 2027, as the capital base tax component will phase out by 2028. The law eliminates the $2.5 million cap on the amount by which a combined group's tax calculated on a unitary combined basis can exceed the tax that it would have paid had it filed on a separate basis. The law also eliminates the alternative net operating loss (NOL) rule for certain combined groups. (Otherwise, Connecticut limits prior year NOL deductions to 50% of taxable income.) Specifically, a special tax preference that allowed combined groups that had more than $6 billion in NOLs from pre-2013 tax years to make an election that allowed the group to fully deduct remaining loss carryovers without regard to statutory limitations in exchange for the electing group relinquishing 50% of its unused NOL incurred before 2015. The new law requires a combined group that made this election to recalculate its remaining NOL carry-over on the return it files for income years commencing on or after January 1, 2025, and before January 1, 2026, as if the combined group had not been required to relinquish 50% of its unused NOL carry-over. The combined group may use the recalculated remaining NOLs in income years beginning on or after January 1, 2025, subject to limitations in effect for the period such losses were incurred. The law modifies a deduction, enacted in 2024, related to the state's earlier move to combined reporting. Starting in 2026, an eligible combined group shall deduct from the combined group's net income an amount equal to one-thirtieth of the amount necessary to offset the increase in the valuation allowance against NOLs and tax credits in Connecticut that resulted from the enactment of combined reporting provisions.⁵ The computation of the valuation allowance increase was previously to be based on the change in the valuation allowance reported on the combined group's financial statement for income years beginning on or after January 1, 2016, but before January 1, 2017. Provisions of HB 7287 change these dates to the combined group's financial statement for income years beginning on or after January 1, 2015, but before January 1, 2016 (i.e., one year earlier than described in the 2024 law). A combined group intending to claim this deduction had until July 1, 2025, to file a statement specifying the total amount of the deduction to be claimed with the revenue commissioner. Conn. Laws 2025, Pub. Act No. 25-168 (HB 7287), signed by the governor on June 30, 2025.

Florida: New law (HB 7031) updates the state's date of conformity to the Internal Revenue Code to January 1, 2025 (from January 1, 2024). This change took effect upon becoming law and operates retroactively to January 1, 2025. Fla. Laws 2025, HB 7031, signed by the governor on June 30, 2025.

Florida: New law (HB 7031) modifies the definition of "corporation" in the Income Tax Code (Fla. Stat. Section 220.03(e)) to exclude charitable trusts. This change took effect upon becoming law and first applies to tax years beginning on or after January 1. 2026. Fla. Laws 2025, HB 7031, signed by the governor on June 30, 2025.

Maine: New law (LD 48) updates the state's date of conformity to the Internal Revenue Code (IRC) to December 31, 2024 (from December 31, 2023). This change applies to tax years beginning on or after January 1, 2024 and to any prior tax year specifically provided by the IRC of 1986 and amendments to the IRC as of December 31, 2024. LD 48 took effect upon approval. Maine Laws 2025, ch. 432 (LD 48), signed by the governor on July 1, 2025.

New Jersey: New law (A. 4455/S. 4503) exempts from New Jersey gross income capital gains from the sale or exchange of qualified small business stock (QSBS) to the extent such gains or income are exempt from federal taxation under IRC Section 1202. This change took effect immediately and applies to tax years beginning on or after the January 1, 2026. N.J. Laws 2025, ch. 67 (A. 4455/S. 4503), signed by the governor on June 30, 2025.

Rhode Island: New law (HB 5076Aaa) modifies the definition of "net income" for purposes of the Business Corporation Tax and Rhode Island adjust gross income for individual income tax purposes. For tax years beginning on or before January 1, 2025, a corporate/individual taxpayer is required to add to its taxable income/adjusted gross income the amount of any income, deduction or allowance that would be subject to federal income tax but for the enactment of the federal One Big Beautiful Bill (OBBB). Enactment of OBBB and any Internal Revenue Service changes to forms, regulations and processing that take effect during the current tax year or within six months of the beginning of the next tax year will be sufficient to adopt emergency rules and regulations "to effectuate the purpose of preserving the Rhode Island tax base under Rhode Island law" with respect to OBBB. Individual taxpayers in calculating their Rhode Island adjusted gross income must make a similar addition modification to their federal adjusted gross income. These provisions took effect upon passage. R.I. Laws 2025, ch. 278 (HB 5076Aaa), became law without the governor's signature on June 29, 2025. See also, R.I. Dept. of Rev., Div. of Taxn., "Summary of Legislative Changes" (July 18, 2025).

Wisconsin: New law (SB 45) expands the state's second-lowest individual income tax bracket, which taxes income at 4.4%. Previously, single filers earning between $14,320 and $28,640, or married couples filing jointly earning between $19,090 and $38,190, were taxed at this rate. For tax years beginning after December 31, 2024, this bracket extends to single filers earning up to $50,480 and married couples filing jointly up to $67,300. Taxpayers that are married but file separately will remain in this bracket until their earnings reach $33,160. Income included in the newly expanded bracket will be taxed at the 4.4% rate, rather than the 5.3% rate applicable to the next higher bracket. SB 45 also excludes from taxation the first $24,000 of retirement income for individuals aged 67 and over (up to $48,000 for married couples filing jointly). Wis. Laws 2025, Act 15 (SB 45), signed by the governor on July 3, 2025. For other tax changes in SB 45, see Tax Alert 2025-1504.

SALES & USE

Multistate: The EY Sales and Use Tax Quarterly Update provides a summary of the major legislative, administrative and judicial sales and use tax developments. Highlights of this edition include a review of the most recent developments involving nexus, tax base and exemptions, technology, and compliance and controversy. A copy of the quarterly is available via Tax Alert 2025-1426.

Connecticut: New law (HB 7287) creates a sales and use tax exemption for sales of (1) any ambulance-type motor vehicle used exclusively to transport any medically incapacitated individual, except any such vehicle used to transport such individual for payment, and (2) any ambulance operating under a license or certificate issued in accordance with Conn. Gen. Stat. Section 19a-180. This provision takes effect on, and applies to sales occurring on or after, July 1, 2025. Conn. Laws 2025, Pub. Act No. 25-168 (HB 7287), signed by the governor on June 30, 2025.

Florida: New law (HB 7031) effective October 1, 2025, repeals Fla. Stat. Section 212.031, which imposed sales and use tax on rental or license fees for use of real property (e.g., tax on commercial rentals). HB 7031 makes conforming changes to various statutory provisions, including amending definitions in Fla. Stat. Section 212.02. Following the law change, the Florida Department of Revenue (FL DOR) issued guidance on this repeal, describing what is excluded from the repeal of the tax on commercial rentals. The FL DOR explained that tax applies to rent/license fee payments made on or after October 1, 2025 that are for rental or occupancy periods through September 2025. Tax also continues to apply to the following: (1) rentals and leases of living, sleeping, or housekeeping accommodations for six months or less; (2) parking or storage spaces for motor vehicles; (3) docking or storage spaces for boats in boat docks or marinas; and (4) tie-down or storage spaces for aircraft and airports. The FL DOR's guidance includes responses to frequently asked questions.

HB 7031 extends the sales and use tax exemption for data center property through June 30, 2037 (from June 30, 2027) and increases the required power capacity of a data center to qualify for the exemption from 15 megawatts to 100 megawatts of total power capacity. The law also modifies the sales tax exemption for bullion, provides a sales tax exemption for admissions to state parks and certain stock car races, creates a permanent back-to-school sales tax holiday for the month of August, creates a sales tax holiday for outdoor recreations items, and exempts from sales and use tax various items that had previously been included in disaster preparedness and freedom summer sales tax holidays, such batteries, smoke detectors, carbon monoxide alarms, fire extinguishers, portable generators, waterproof tarpaulins and other waterproof sheeting, ground anchor systems and tie-down kits, portable gas cans, life jackets, sunscreen, and insect repellent.

HB 7031 modifies sales and use tax provisions related to forwarding agents. Under the law change, a forwarding agent that applies for and receives a certificate will be registered as a dealer with the FL DOR. Applicants do not have to resubmit a dealer application when applying for a certificate, or the renewal of a certificate, if they are already registered as a dealer with the FL DOR and have been granted a certificate of registration for a place of business where the designated address is located. A forwarding agent must surrender its certificate to the FL DOR within 30 days after any of the following: the forwarding agent ceased doing business, changed its address or changed its principal business activity to something other than facilitating the international export of property owned by another person, or the certified address is not used for export. The FL DOR will report the state's sales tax rate and discretionary sales surtax rate as zero for special five-digit zip codes provided by the US Postal Service, with some exceptions. HB 7031 also prohibits dealers, except for forwarding agents required to remit tax, from collecting sales tax on tangible personal property shipped to a certified address listed on the FL DOR's website or in its electronic database. These changes take effect on January 1, 2026. Fla. Laws 2025, HB 7031, signed by the governor on June 30, 2025; see also Fla. Dept. of Rev., TIP No: 25A01-04 (July 24, 2025).

Louisiana: New law (HB 404) provides for the sourcing of drop shipment sales and the creation of title abstracts. Drop shipment sales will be sourced to the location of the transfer of title or possession, whichever occurs first. HB 404 defines a "drop shipment sale" as "a sales transaction in which goods are shipped directly to the customer by a third party." Such sales include those in which a dealer accepts an order for goods from a customer and places the order with a third party and the third party delivers/causes to be delivered the goods directly to the dealer's customer. Abstracts of title created by a person with a place of business in Louisiana will be sourced to the location of the person's principal place of business in the state. These changes took effect upon becoming law. La. Laws 2025, Act 498 (HB 404), became law without the governor's signature on July 1, 2025.

Louisiana: New law (HB 654), beginning January 1, 2026, requires that any new sales and use tax exemptions, exclusions, credits or rebates enacted by the legislature apply to sales and use taxes levied by all taxing authorities. HB 654 takes effect on June 8, 2025. La. Laws 2025, Act 215 (HB 654), signed by the governor on June 8, 2025.

Maryland: The Maryland Department of Treasury issued a technical bulletin on the digital advertising gross revenues tax. The bulletin provides an overview and statutory history of the tax, includes definitions of various terms (such as advertising, advertising services, digital advertising services), and explains digital advertising service. The bulletin also discusses the following general information: (1) persons subject to the tax; (2) filing, payment and recordkeeping requirements; (3) calculating the tax; (4) filing a refund for overpayment of tax; and (5) exclusions from the tax. Md. Dept. of Treas., Tech. Bulletin No. 59 "Digital Advertising Gross Revenues Tax" (July 11, 2025).

Maryland: The Maryland Department of Treasury issued a technical bulletin on multiple points of use (MPU) certificates. Maryland law allows a buyer who knows when purchasing data and information technology services, software publishing services, digital codes, or digital products that it will be used concurrently both inside and outside the state, or resold to a member of an affiliated group, to present the vendor with an MPU certificate. A valid MPU certificate relieves the vendor of the obligation to collect and remit sales and use tax, and instead, requires the tax be remitted by either the buyer or member of the affiliated group the items were resold to. The bulletin provides an overview of MPU certificates, includes definitions of key terms, explains the process for requesting an MPU certificate, and describes the duties of buyers and vendors when an MPU certificate is used. Md. Dept. of Treas., Tech. Bulletin No. 54 "Multiple Points of Use Certificates (MPU)" (July 1, 2025).

Rhode Island: New law (HB 5076Aaa) expands the definition of "services" to include parking services, effective October 1, 2025. For purposes of this provision, parking services means offering a parking space in a parking facility in exchange for a parking fee for a duration of less than one month. Effective for tax periods beginning on or after January 1, 2026, HB 5076 increases the rate of the local hotel tax from 1% to 2% and imposes and a new 5% whole home short-term rental tax. This new tax is imposed on the total consideration charged for occupancy of a house, condominium, mobile homes or other resident dwelling in Rhode Island that is rented in its entirety. As explained by the Rhode Island Department of Taxation (RI DOR), a short-term rental is a rental for 30 or fewer days without a signed, active, rental agreement. Such rentals include rentals offered through an online hosting platform. The RI DOR noted that the whole home short-term rental tax is distinct from the state hotel tax on single room short-term rentals and that no rental is subject to both the state hotel tax and the whole home short-term rental tax. R.I. Laws 2025, ch. 278 (HB 5076Aaa), became law without the governor's signature on June 29, 2025. See also, R.I. Dept. of Rev., Div. of Taxn., "Summary of Legislative Changes" (July 18, 2025).

Wisconsin: New law (SB 45) eliminates the state sales tax on household energy bills, effective October 1, 2025. This permanently implements the exemption that applied only from November 2024 through April 2025. SB 45 also provides an exemption from the sales tax for information products used by insurance companies. This exemption is effective October 1, 2025. Wis. Laws 2025, Act 15 (SB 45), signed by the governor on July 3, 2025. For other tax changes in SB 45, see Tax Alert 2025-1504.

BUSINESS INCENTIVES

Federal: The final tax reconciliation bill (H.R. 1, the Act), enacted on July 4, 2025, permanently extends the New Markets Tax Credit (NMTC), which was due to expire at the end of 2025. The NMTC program, administered by Treasury's Community Development Financial Institutions (CDFI) Fund, was established in December 2000 by Congress. The program was designed to encourage investment in operating businesses and real estate projects in low-income communities. It allows individual and corporate investors to receive a tax credit against their federal income tax for making qualified equity investments in investment vehicles called CDEs. An investor's credit totals 39% of the investment in a CDE and is claimed over seven years. Most transactions are structured so that one party gets the credit and the project benefiting the low-income community receives a forgivable loan. A CDE must use substantially all of the investment to make qualified investments in low-income communities (see Tax Alert 2023-1586). The Act amends IRC Section 45D(f)(1)(H) to change the provision ending the NMTC in 2025. Instead, the language reads that the NMTC limitation is $5b for each calendar year after 2019. For more on this development, see Tax Alert 2025-1428.

Federal: Final reconciliation legislation signed into law on July 4, 2025 (H.R. 1, the Act), changes the calculations and qualification criteria for the low-income housing tax credit. Under current law taxpayers can claim the low-income housing credit annually over 10 years for costs associated with building or rehabilitating rental housing for low-income tenants. To qualify, a low-income building must either receive a credit allocation from the state allocating agency or be financed with proceeds from certain tax-exempt bonds, subject to the volume limit for private activity bonds. The total number of housing credits available for allocation by a state is capped by the state housing credit ceiling, which is determined by several components, including the unused carryforward component, population component, returned credit component, and national pool component. For non-federally subsidized construction of new housing and substantial rehabilitation of existing housing (i.e., the project receives a state credit allocation), the credit is calculated so that its present value equals at least 70% of a building's qualified basis (referred to as 9% credits). For federally subsidized construction of new housing, substantial rehabilitation of existing housing and certain housing acquisition costs (i.e., the portion of a rehabilitation project that is purchased), the credit is calculated so that its present value equals at least 30% of a building's qualified basis (referenced as 4% credits).

Under the new law, the Act permanently increases the state housing credit ceiling for purposes of the 9% credit by multiplying the dollar amounts for those years by 1.12. It also adjusts the requirement for tax-exempt bond financing for purposes of the 4% credit to allow additional buildings to qualify for housing credits without needing a state credit allocation. Specifically, buildings will qualify for 4% credits if at least 25% of the aggregate basis is financed by qualified obligations, with certain conditions. The increase in state housing credit ceilings is effective for calendar years after 2025. The modifications to the tax-exempt bond financing requirement will apply to buildings where the tax-exempt financing was issued after December 31, 2025. For additional information on this development, see Tax Alert 2025-1421.

Connecticut: New law (HB 7287) increases the amount of refund of research and development and research and experimental tax credits that a biotechnology company may receive to 90% of the value of the credit (for all other companies the amount of refund remains 65% of the value of the credit). This change took effect July 1, 2025, and applies to income years beginning on or after January 1, 2025. Conn. Laws 2025, Pub. Act No. 25-168 (HB 7287), signed by the governor on June 30, 2025.

Connecticut: New law (HB 7166) modifies the state's tax credits for film and digital medial production and film infrastructure development. The law exempts eligible production companies that produce interactive website for public distribution or exhibition from the following requirements that a production companies otherwise must meet in order to be eligible for the credit: the company (1) conducts at least 50% of their principal photography days in Connecticut, or (2) expends at least 50% or at least $1 million of its postproduction costs within the state. These changes took effect on, and apply to applications open or filed on or after, July 1, 2025. HB 7166 also repeals the tax credit for digital animation production companies, effective from passage. Conn. Laws 2025, Pub. Act No. 25-165 (HB 7166), signed by the governor on July 1, 2025.

Florida: New law (HB 7031) creates the rural community investment program. An eligible business is a business that at the time a rural fund initially invest in the business: (1) has less than 250 employees; (2) has its principal business operation in Florida; and (3) has its principal business operations located in a rural community in Florida. The revenue department will begin accepting applications for approval as a rural fund starting November 1, 2025. The law sets forth the information that must be included in the application. Beginning in fiscal year 2025–2026, the aggregate amount of tax credit available is capped at $7 million, in each state fiscal year. The cumulative amount of tax credits that may be claimed is limited to $35 million during the existence of the program. A taxpayer awarded a credit may apply 20% of the credit against its state tax liability in the tax years containing the first through fifth credit certification dates. The amount of credit that exceeds the taxpayer's state tax liability may be carried forward for up to the tax year containing the 11th credit certification date. The credit may not be refunded, sold or transferred, except for transfers to an affiliate or allocations to partners, member or shareholder of a partnership or limited liability company that earned the credit. The revenue department may recapture all or a portion of the tax credit under certain circumstances. The department may not accept any new applications after December 1, 2029. Fla. Laws 2025, HB 7031, signed by the governor on June 30, 2025.

Oklahoma: New law (SB 586) provides that for purposes of the new direct job creation requirement under the Oklahoma Quality Jobs Program, the leasing of employees by the business or employees provided under contract with the business constitute an employer-employee relationship between the employees and the business (e.g., they will be considered as a business's own employees). SB 586 takes effect on November 1, 2025. Okla. Laws 2025, ch. 102 (SB 586), became law without the governor's signature on May 8, 2025.

Rhode Island: New law (HB 5076Aaa) sunsets and modifies various tax credits. The following credits sunset for tax years beginning on or after January 1, 2026: (1) the elective deduction for research and development (R&D) facilities; (2) the credit for R&D property acquired, constructed or reconstructed or erected after July 1, 1994; (3) the employment tax credit; (4) the tax incentive for capital investment in small businesses; (5) the jobs growth act tax credit; and (6) the specialized investment tax credit. The sunsetting R&D credits allowed on or before December 31, 2025, may be carried forward into tax years beginning in 2026. Effective for tax years beginning on or after January 1, 2026, the credit allowed for qualified research expenses may not reduce the tax due for that year by more than 50% of the tax liability and, in the case of a corporation, to not less than the minimum tax imposed by R.I. Gen. Laws Section 44-11-2. Excess credit may be carried over for up to 15 years. HB 5076 also modifies the motion picture production company tax credit, the rebuild Rhode Island tax credit, and the historic preservation tax credit. R.I. Laws 2025, HB 5076Aaa, became law without the governor's signature on June 29, 2025. See also, R.I. Dept. of Rev., Div. of Taxn., "Summary of Legislative Changes" (July 18, 2025).

Wisconsin: New law (SB 45) establishes a film tax credit, with an aggregate $5 million cap per year for a project and a $1 million cap for any single applicant per year. The credit is available for tax years beginning after December 31, 2025. Wis. Laws 2025, Act 15 (SB 45), signed by the governor on July 3, 2025. For other tax changes in SB 45, see Tax Alert 2025-1504.

PROPERTY TAX

Florida: New law (HB 7031) extends to 10 years (from five years) the period in which lands classified for assessment purposes as agricultural lands that are taken out of production by a state or federal eradication or quarantine program will continue to be classified as agricultural lands. The change took immediate effect, and applies to agricultural lands that have been taken out of production and are eligible to receive a de minimis assessment on or after July 1, 2025. HB 7031 also enhances the property tax exemptions for affordable housing for land that is owned by, or leased/subleased from, a nonprofit entity, and creates property tax exemptions for affordable housing for multifamily projects on state-owned land and for affordable housing, new multifamily projects on government-owned land. Provisions related to affordable housing property tax exemptions first apply to the 2026 tax rolls.

HB 7031 requires the Office of Economic and Demographic Research to study the state's property tax structure and expenditures of property tax revenues by local governments and political subdivisions, with a focus on the taxation of homestead property. The purpose of the study is to "analyze the potential impact of eliminating or significantly reducing ad valorem assessments on homestead property and provide policy options for mitigating negative fiscal consequences." The law states what must be in the study, including the effects of assessment limitations, potential impacts on public services, an assessment of the state's housing market and consumer behavior regarding home improvements. A report detailing the study's findings and policy options is due to legislative leaders by November 1, 2025. Fla. Laws 2025, HB 7031, signed by the governor on June 30, 2025. See also, Fla. Dept. of Rev., PTO 25-03 (July 9, 2025).

Rhode Island: New law (HB 5076Aaa) increases the real estate conveyance tax. The tax is imposed on each deed, instrument or writing by which interest in real estate is conveyed to a purchaser and when the consideration paid exceeds $100. The rate of the tax is increased from $2.30 to $3.75 for each $500, or fractional part of, the purchase price. The rate of the additional real estate conveyance tax on properties over $800,000 is also increased from $2.30 to $3.75 for each $500, or fractional part of, the consideration in excess of $800,000 that is paid. These changes take effect October 1, 2025. Starting in 2026, the $800,000 threshold will be adjusted annually by the percentage increase in the Consumer Price Index for all Urban Consumers (CPI).

HB 5076Aaa imposes a new tax on non-owner-occupied residential property with an assessed value of $1 million or more. "Non-owner occupied" is residential property that is not the owner's primary residence and is not occupied by the owner for a majority of days in a given "taxable year" (i.e., July 1 through June 30). The new tax will be imposed for taxable years beginning on or after July 1, 2026, and is in addition to any other taxes. The tax will be measured by the assessed value of the real estate at a rate of $2.50 for each $500 or fractional part of the assessed value in excess of $1 million. Beginning July 1, 2027, the $1 million threshold will be adjusted annually by the percentage increase in the CPI. The tax does not apply to any properties or buildings that are rented or were rented for more than 183 days during the prior tax year and subject to the Residential Landlord Tenant Act or to sales and use tax and/or hotel tax. R.I. Laws 2025, ch. 278 (HB 5076Aaa), became law without the governor's signature on June 29, 2025. See also, R.I. Dept. of Rev., Div. of Taxn., "Summary of Legislative Changes" (July 18, 2025).

Wisconsin: New law (SB 45) provides a property tax exemption for radio, cellular and telecommunication towers used exclusively to support equipment providing telecommunications services or used as digital broadcasting equipment for radio, television or video service. This exemption applies to assessments as of January 1, 2026. SB 45 also exempts such property owned by a telephone company, effective for assessments as of January 1, 2027. Wis. Laws 2025, Act 15 (SB 45), signed by the governor on July 3, 2025. For other tax changes in SB 45, see Tax Alert 2025-1504.

COMPLIANCE & REPORTING

Hawaii: The Hawaii Department of Taxation (HI DOT) announced that for tax years 2025 and thereafter, it will process withholding of income tax by partnerships, estates and trusts. In 2019, law was enacted (SB 1350, Act 232) requiring partnerships, estates, and trusts (collectively, "entity") to withhold income tax of nonresident partners and beneficiaries. Tax is to be withheld in an amount equal to the highest marginal tax rate applicable to nonresidents multiplied by the amount of the taxpayer's distributive share of income attributed to Hawaii as reflected in the entity's tax return. This requirement does not apply to publicly traded partnerships as they are required to file an annual information return for each unit holder with Hawaii sourced income. Although the law provided that this requirement applies to tax years beginning after 2018, the HI DOT delayed implementation of this withholding. In June 2025, the HI DOT announced that starting in tax year 2025, it will process withholding of income by entities. Taxpayers should report this withholding on Form N-4P and Schedule NP for nonresident partners and Form N-4T and Schedule NT for taxpayers who are trusts or estates. The HI DOT said that quarterly withholding payments are not required for entity withholding and that payments can be made on the entity's tax return. Nevertheless, quarterly payments may be made by filing Form N-201V. The HI DOT noted that if withholding payments are not made when Form N-4P is submitted to nonresident partners, then withholding claims on the nonresident partner's tax return may be denied. Haw. Dept. of Taxn., Announcement No. 2025-02 (June 13, 2025).

CONTROVERSY

Louisiana: New law (HB 404), effective July 1, 2025, prohibits the accrual of interest on overpayments of sales and use tax on exempt purchases by a taxpayer holding a direct payment number until 180 days after the later of the due date of the return, the filing date of the return or refund claim on which the overpayment is claimed, or the date the tax was paid. HB 404 also prohibits a refund for any overpayment that is based on a tax shelter, tax sham, tax evasion scheme, or any transaction that lacks a legitimate business purpose or otherwise fails the economic substance doctrine as determined by a final judicial decision. La. Laws 2025, Act 498 (HB 404), became law without the governor's signature on July 1, 2025.

Rhode Island: New law (HB 5695) allows a municipality to, by ordinance, authorize one tax amnesty period every three years, during which penalties and interest on overdue real estate payments and tangible tax payments may be waived. A request to waive these penalties and interest must be made in writing, signed and dated by the taxpayer by July 1 of the year in which the municipality schedules the amnesty program. HB 5695 took effect upon passage. R.I. Laws 2025, HB 5695, signed by the governor on June 26, 2025.

PAYROLL & EMPLOYMENT TAX

Federal: Final budget reconciliation legislation (H.R. 1), signed into law on July 4, 2025 (the Law), contains several provisions affecting compensation and benefits, including individual deductions for tips and overtime, and the tax treatment of various employee benefits. The Law creates individual deductions for tips and overtime, which are premised on new employer reporting, and makes changes to existing provisions, including the following: deduction disallowance for employer-provided meals; paid family and medical leave credit; employer payments of student loans under educational assistance programs; employee retention credit program; bicycle commuting benefits; moving expenses deduction and income exclusion; executive compensation excise tax for tax-exempt organizations; executive compensation deduction for publicly held corporations; employer-provided childcare credit; and health savings accounts. The Law does not include a prior proposal to increase unrelated business income tax of certain tax-exempt entities for commuting-related benefits provided to employees. For additional information on this development, see Tax Alert 2025-1476.

MISCELLANEOUS TAX

Florida: New law (HB 7031) extends certain fuel tax rate reductions that were enacted in 2025. Under HB 7031, the rates are extended as follows: (1) the excise tax on each motor fuel equivalent gallon of natural gas fuel will remain at 2 cents per gallon until December 31, 2030 (from December 31, 2026); (2) for such fuel designated as the "ninth-cent fuel tax" the additional tax imposed is 0.5 cents per gallon until December 31, 2030 (from December 31, 2026); and (3) for such fuel designated as the " "local option fuel tax" the additional tax imposed is 0.5 cents per gallon until December 31, 2030 (from December 31, 2026). Effective January 1, 2031 (from January 1, 2027), the rate of the excise tax on motor fuel equivalent gallon of natural gas is increased to 4 cents per gallon and the additional taxes are each increased to 1 cent per gallon. Through 2029 (from "for 2026"), the additional tax rate on natural gas fuel, which is designated as the "State Comprehensive Transportation System Tax" is reduced to 2.9 cents per gallon and reverts to 5.8 cents per gallon in 2031 and thereafter. Through 2029 (from "for 2026"), the additional tax rate on each motor fuel equivalent gallon of natural gas fuel for the privilege of selling natural gas fuel is reduced to 4.6 cents per gallon and reverts to 9.2 cents per gallon in 2031 and thereafter. Fla. Laws 2025, HB 7031, signed by the governor on June 30, 2025.

Ohio: In Aramark Corp.,⁶ the Ohio Supreme Court (the Court) upheld an Ohio Board of Tax Appeals determination that the company was not entitled to a Commercial Activity Tax (CAT) refund on the grounds it did not satisfy the agency exclusion provided by ORC 5751.01(F)(2)(l). ORC 5751.01(F)(2)(l) excludes from CAT "[p]roperty, money, and other amounts received or acquired by an agent on behalf of another in excess of the agent's commission, fee, or other remuneration." ORC 5751.01(N) generally defines an "agent" as "a person authorized by another person to act on its behalf to undertake a transaction for the other." ORC 5751.01(N) provides that the definition of "agent" "includes" a list of fact situations. At issue in this case was ORC 5751.01(N)(2), which provides that an agent includes "[a] person retaining only a commission from a transaction with the other proceeds from the transaction being remitted to another person." In its analysis, the court reviewed its prior decision on the exclusion, Willoughby Hills Dev. & Distrib., Inc.⁷, which seemed to reinforce the Department's long-standing position that a common law agency relationship had to exist to claim the exclusion. While the court did not expressly overrule Willoughby Hills, it characterized the opinion's language as an "interpretive gloss," indicating it disapproved of the decision "to the extent that it requires a showing of actual authority on the part of the taxpayer to qualify as an agent" for purposes of the exclusion. While the court seemed to agree with the taxpayer that it was a "person authorized … to undertake a transaction for the other," it nonetheless denied the exclusion because the taxpayer did not meet the requirement of ORC 5751.01(N)(2). The court observed that the taxpayer did not merely retain a commission, but "kept for itself the reimbursements that it acquired" and, as such, was acting on behalf of itself with regard to the reimbursements and not the client.⁸ For more on this development, see Tax Alert 2025-1439.

Rhode Island: New law (HB 5076Aaa) gives the Rhode Island Department of Revenue the authority to convene, in consultation with the governor, an advisory work group that will review and analyze the potential impacts of any adopted federal tax actions. The work group, which would include various stakeholders such as tax administrators and tax advisors, would develop options for administrative actions and legislative considerations that would address federal funding changes impacting Rhode Island revenue. The work group has until October 31, 2025 to forward to the governor and legislative leaders a report that includes the group's findings, recommendations and options for consideration. R.I. Laws 2025, ch. 278 (HB 5076Aaa), became law without the governor's signature on June 29, 2025. See also, R.I. Dept. of Rev., Div. of Taxn., "Summary of Legislative Changes" (July 18, 2025).

GLOBAL TRADE

Federal: On July 7, 2025, President Donald Trump signed an Executive Order extending country-specific tariffs rates from the original deadline of July 9, 2025 to August 1, 2025. Additionally, the President issued "tariff letters," introducing new country-specific tariffs ranging from 25% to 40%, to 14 countries as an ongoing effort to reach bilateral agreements ahead of the new deadline. The letters indicated that current and future sectoral tariffs imposed under Sec. 232 authority would be exempt from these tariff rates, and that any retaliatory action from United States trading partners would result in another rate increase. For more on this development, see Tax Alert 2025-1397.

International — Canada: On June 27, 2025, Canada introduced a 50% surtax on imports of steel goods in accordance with SOR/2025-148, Order Imposing a Surtax on the Importation of Certain Steel Goods, which is intended to address the risk of trade diversion from third countries that could result from tariffs recently imposed by the United States (US) on imports of steel goods. On July 2, 2025, Canada initiated its consultation with Canadian producers on their ability to produce certain products. Canada also announced it has halted collection of the digital services tax (DST) imposed under the Digital Services Tax Act and that it will introduce legislation to rescind the tax. The DST had proven to be an obstacle in recent trade negotiations between Canada and the US. For additional information on this development, see Tax Alert 2025-1419.

Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor.