Ernst & Young's State and Local Tax Weekly newsletter for September 12 and September 19 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

California finalizes amendments to market-based sourcing rules, applicable for tax years beginning on or after January 1, 2026

On August 27, 2025, the California Office of Administrative Law approved the California Franchise Tax Board's (FTB) amendments to its market-based sourcing rules for receipts from services and intangibles for California corporate franchise and income tax purposes.¹ The amended regulations apply to tax years beginning on or after January 1, 2026. A copy of the final text of the amended regulations is available here.

Finalizing the amendments ends several years of interested parties meetings and multiple rounds of revisions to the regulatory language. The amendments make significant changes for specific industries, such as financial services and professional service providers, as well as changes with a cross-industry impact.

Rules for assignment of sales of services: The changes revamp the FTB's rules for assigning sales of services to businesses and government entities by providing rebuttable presumptions as to the manner in which various kinds of service revenues should be sourced.

The amended regulations adopt the following presumptive methods for the sourcing of services:

1. Services that are related to real property are sourced to the location of the real property.
2. Services that are related to tangible personal property (TPP) are sourced to the location of the TPP at the time the services were performed, unless the TPP is directly or indirectly delivered to the customer after the services, in which case the services are sourced to the location of delivery.
3. Services that are related to intangible property are sourced to the location where the intangible property is used by the customer.
4. Services related to individuals are sourced to the location of the individual at the time the services are performed.

Asset management fees: The FTB has added a provision to the regulations that requires taxpayers to source revenues for asset management services to the location of the "beneficial owner," essentially requiring a "look through" to the location of the investors that are invested in the funds. The provision adds a "value of interest" methodology and mathematical explanation with examples to source these fees to the location of the beneficial owners.

The amendments also add definitions related to the sourcing of asset management fees, including guidelines for which services are defined as "asset management services" for purposes of the regulations. The definitions of administration services, distribution services, and management services are closely modeled after the corollary definitions in CCR Section 25137-14 (the special industry revenue-sourcing regulation for mutual fund service providers that provide services to regulated investment companies).

Large volume professional services: The amendments include a provision for large-volume providers of professional services that is intended to act as a safe harbor.

If a taxpayer provides substantially similar professional services to more than 250 customers, gross receipts from those services will be assigned to the customer's billing address. If, however, more than 5% of the taxpayer's receipts from sales of that service are derived from a single customer, the receipts from this customer do not fall under the rule.

The amendments define professional services as management services, tax services, payroll and accounting services, audit and attest services, actuary services, legal services, business advisory consulting services, technology consulting services, services relating to brokering securities that generate commission income, investment advisory services other than asset management services, and services related to the underwriting of debt or equity securities.

Services provided under US government contracts when the contract cannot be disclosed: As stated above, the amendments to the rules for the assignment of sales of services include those provided to government entities. In addition, the FTB has created a new rule to specifically address services to the US government "when the government contract cannot be disclosed and no information about the service is publicly available." Under this new rule, the receipts are assigned to California based on the ratio of the population of California over the total US population.

Sourcing of sales of marketable securities for broker dealers: The amendments address the sourcing of sales of marketable securities including a definition of "customer" that is specific to these sales. For purposes of sourcing sales of marketable securities, the customer is the person, without regard to intermediaries, who gains the greatest possession of economic rights in the marketable securities. This provision includes a cascading set of rules to source the sales, including a provision that determines the customer's location by reasonable approximation if neither the customer's billing address nor the customer's commercial domicile can be determined.

Modification of examples: The FTB removed several examples that applied the market-based sourcing rules to specific factual circumstances. These examples included sourcing for accounting firms and online advertisers. In their stead, the FTB added several new or revised examples applying its updated rules.

For more on this development, see Tax Alert 2025-1848.

Colorado high court rules City of Lakewood's local tax on certain telecommunications services is invalid, creating potential for refunds

On September 8, 2025, the Colorado Supreme Court (court) held that two municipal ordinances adopted in 1996 and 2015 modifying the City of Lakewood's business and occupation (B&O) tax on certain telecommunications services, which was originally enacted in 1969, constituted "new taxes" for purposes of Colorado's Taxpayers' Bill of Rights (TABOR). Accordingly, because the City did not obtain voter approval before enacting the ordinances, as required by TABOR, the court concluded in MetroPCS California, LLC,² that the ordinances violated the Colorado Constitution and were invalid.

The Lakewood B&O tax originally applied to "the occupation and business of maintaining a telephone exchange and lines connected therewith in [Lakewood] and of supplying local exchange telephone service to the inhabitants of the city." Following deregulation of the telecommunications industry in 1996, the State of Colorado enacted a law providing that "any tax, fee, or charge imposed by a political subdivision shall be competitively neutral among telecommunications providers." In 2014, the State expanded the scope of the statute to cover broadband services.

In response, in 1996 and 2015, Lakewood revised its B&O tax to reflect the State and federal changes, noting that the "tax set forth in this chapter is not a new tax, the extension of an existing tax or an increase in a tax, but is the reduction of an existing tax to new entrants in order to eliminate a potential barrier to the entry of new providers into the business of providing basic local exchange service within Lakewood." The municipality did not seek or obtain voter approval before making the changes.

Effective November 4, 1992, TABOR requires districts to obtain voter approval in advance of adopting any "new tax."³ Although TABOR does not expressly define what constitutes a "new tax," Colorado courts have explained that a "new tax" suggests creation, rather than alteration, but that the expansion of an existing tax to a new class of goods or activity "may constitute a new tax." Further, courts have noted that a legislative change causing only an "incidental and de minimis revenue increase" (as a percentage of the taxing authority's overall tax revenue and budget) — considered in light of whether any revenue increase projected to be generated by a legislative change is incidental to the legislation's purpose — would not constitute a new tax for TABOR purposes.

Applying these principles, the court concluded that both the 1996 and the 2015 ordinances constituted "new taxes," requiring voter approval under TABOR. Specifically, the court noted that the 1996 ordinance "expanded the class of providers subject to the tax to all persons, including non-utilities, who provided cellular service to any business or entity as its primary local telecommunications service." With respect to the 2015 ordinance, the court explained that the measure "further expanded the [B&O] tax to cover the provision of all cellular service to any business, person, or entity," thereby bringing "providers that supply cellular service to any person (rather than only to a business or entity) and to those providing cellular service when the service is not the recipient's primary local telecommunications service" within the scope of the tax.

For additional information on this development, see Tax Alert 2025-2005.

INCOME/FRANCHISE

Alabama: The Alabama Department of Revenue (AL DOR) issued guidance on the state's tax treatment of research and experimental (R&E) expenditures. Effective for tax years beginning on or after January 1, 2024, Alabama decouples from the Tax Cuts and Jobs Acts (TCJA) amendments to IRC Section 174 related to amortization of R&E expenditures; instead, taxpayers may deduct the R&E expenditures or treat them as deferred expenses in the same manner as provided by IRC Section 174 before tax year 2022.⁴ The guidance explains that in claiming this deduction on an Alabama return, the amount amortized and deducted on the federal return must be added back to taxable income. Add back will have to be made for each year until the remaining amount is fully amortized. The "One Big Beautiful Bill Act" (OBBBA)⁵ allows taxpayers to fully expense domestic R&E expenditures for tax periods beginning after December 31, 2024; it also allows taxpayers to accelerate the deduction of ("write-off") previously capitalized and unamortized amounts from 2022 to 2024. Taxpayers making an election under OBBBA Section 70302(f)(2)(ii) — i.e., to deduct remaining unamortized amounts with respect to such expenditures over two-taxable years beginning with the first tax year beginning after December 31, 2024 — will have to add back these expenses to Alabama income to the extent the expenses were previously deducted on an Alabama return. The AL DOR's guidance include instructions for Form 20C (C corporations), Form ET-1 (Financial Institutions), Form 20S (S corporations), and Form 65 (Partnerships/limited liability entities). Ala. Dept. of Rev., Notice Research and Experimental Expenditures (September 11, 2025).

Michigan: The Michigan Department of Treasury (MI DOT), in response to changes made by the "One Big Beautiful Bill Act" (OBBBA) to the federal limitation on the state and local tax (SALT) deduction, is providing limited relief to certain taxpayers that made the flow-through entity (FTE) tax election. Under Michigan law, an FTE may elect in to the Michigan FTE tax by making a payment of tax on or before the last day of the ninth month after the end of the tax year. Generally, the election is binding for three tax years. Because some taxpayers may have made the FTE election payments before the OBBBA was enacted, the MI DOT is offering limited relief, allowing such taxpayers to request a refund of the PTE tax payments. Taxpayers that request and receive this relief will not be deemed to have made an election for that tax year. Relief is subject to certain conditions. The MI DOT said payments for valid request will be refunded, noting that it will not transfer any payments that qualify for relief. The MI DOT guidance includes instructions for requesting relief. Mich. Dept. Treas., "Notice Regarding Flow-Through Entity Tax Election Relief in Light of Pub. L. 119-21, One Big Beautiful Bill Act (OB3)" (updated September 26, 2025).

New Jersey: An industry trade association for catalog, online, direct mail and other remote-selling merchants and their suppliers has filed a complaint in the New Jersey Tax Court, seeking to have declared invalid New Jersey's recently adopted regulations concerning P.L. 86-272 and its application to activities conducted over the internet (N.J.A.C. 18:7-1.9 and N.J.A.C. 18:7-1.9A), as they conflict with federal law under P.L. 86-272. American Catalog Mailers Association v. Director, N.J. Division of Taxn., No. 010021—2025 (complaint filed September 12, 2025).

Rhode Island: In Advisory 2025-18, the Rhode Island Department of Revenue, Division of Taxation (RI DOT) stated that the state decouples from the One Big Beautiful Bill Act (OBBBA) changes to domestic R&E expenditures, specifically the federal treatment of accelerated expensing of domestic R&E expenditures and from federal allowance for small businesses to retroactively accelerate expensing of R&E expenditures for tax years 2022, 2023 and 2024. The RI DOT noted that under legislation⁶ enacted earlier this year, Rhode Island decouples from OBBBA. Taxpayers that make an election to amend their federal return for tax years 2022, 2023 or 2024 to accelerate these expenses will have to file an amended Rhode Island return and complete the RI Schedule 174A as well as either the RI Schedule HR1-Individual or RI Schedule HR1- Entity. The RI DOT noted that "[t]hese schedules, along with Schedule M, will effectuate the addback required pursuant to Rhode Island law." Taxpayers that make a federal election to accelerate the deduction of unamortized amounts paid for, or incurred in, tax years before 2025 on the 2025 federal tax return will have to complete the RI Schedule 174A as well as either the RI Schedule HR1-Individual or RI Schedule HR1- Entity. The guidance also discusses the following: (1) tax year 2024 filings on extension; (2) forms potentially impacted for tax years 2022, 2023 and 2024; (3) information for tax year 2025 all filers; and (4) guidance on new Form RI Schedule 174A, RI Schedule HR1-Individual or RI Schedule HR1-Entity. The RI DOT indicated that it will be issuing guidance on other provisions related to OBBBA in the coming weeks. R.I. Dept. of Rev., Div. of Taxn., Advisory 2025-18 (September 12, 2025).

SALES & USE

Louisiana: The Louisiana Department of Revenue issued a sales and use tax rate table listing the applicable taxable rate of over 200 transactions for exemptions and exclusions. Rates are listed for the following periods: (1) April 1, 2016 through June 30, 2016; (2) July 1, 2016 through June 30, 2017; (3) July 1, 2017 through June 30, 2018; (4) July 1, 2018 through December 31, 2024; and (5) January 1, 2025 through December 31, 2029. The rate table includes legislative changes enacted during the 2025 legislative session. La. Dept. of Rev., R-1002 "Taxable Rate of Transactions for Exemption and Exclusion" (August 2025).

South Carolina: In response to a ruling request, the South Carolina Department of Revenue (SC DOR) said that construction contractor's use of scaffolding to install insulation into a customer's building is not subject to sales tax as a rental of tangible personal property because the true object of the transaction between construction contractor and the customer is the installation of insulation and not the renting of scaffolding. In regard to a separate transaction, the SC DOR found that Company A's temporary provision and delivery, assembly, disassembly and subsequent removal of scaffolding it owns to job sites for construction contractor's use in installing insulation is the rental of tangible personal property subject to sales tax. In this instance, the SC DOR determined that the service for assembly and disassembly of the scaffolding was incidental to the transfer of the scaffolding and that the true object of the transaction was the rental of tangible personal property, i.e., the scaffolding. The SC DOR noted that the entire gross proceeds of sales for the rental of scaffolding is subject to sales tax without any deduction for costs for materials, labor, service or any other expenses. S.C. Dept. of Rev., SC Private Letter Ruling #25-1 (September 15, 2025).

Tennessee: In response to a ruling request from a company that makes frozen food products and has a manufacturing facility in Tennessee, the Tennessee Department of Revenue (TN DOR) addressed the application of the state's sales and use tax industrial machinery exemption to equipment and supplies used in quality assurance testing. The TN DOR found the following items, which are fully describe in the ruling request, qualified for the exemption: (1) in-process product testing such as supplies (e.g., micro testing supplies, allergen test kits, pipettes, PH test kits, sterile bags, sanitary scoops, listeria and salmonella testing kits) and equipment (e.g., metal detectors, fat analyzers, penetrometers, viscometers, PH meters, water activity meters); (2) certain equipment and supplies to maintain a sanitary food production environment, specifically airflow equipment and dehumidifiers; and (3) third-party quality assurance services (e.g. calibration service, with the TN DOR noting that water quality testing service is a nontaxable service). The following items did not qualify for the exemption: (1) ingredients testing (e.g., microbiology choloforms test supplies, standard plate count test supplies); (2) equipment and facility testing (e.g., ATP test kits, swab testing supplies, annual test kits-metals, pesticides, E.coli); and (3) certain equipment and supplies to maintain a sanitary food production environment, specifically cleaning supplies. The TN DOR explains why each item does or does not qualify for the exemption. Tenn. Dept. of Rev., Letter Ruling #25-06 (June 18, 2025; issued September 30, 2025).

Tennessee: In response to a ruling request from a company that makes frozen food products and has a manufacturing facility in Tennessee, the Tennessee Department of Revenue (TN DOR) discussed the applicability of the state's sales and use tax industrial machinery exemption to computer hardware and software used in manufacturing. The company's manufacturing process includes usage of computer hardware and software. Examples of hardware includes servers, PCs, tablets, routers, wireless devices, sensors and scan guns. The TN DOR found the following items, which are fully describe in the ruling request, qualified for the exemption: (1) certain manufacturing line optimization (MLO), specifically MLO hardware, certain software, production scales, and PLC-programable logic controller; (2) certain supervisory control and data acquisition (SCADA), specifically SCADA hardware, certain software, PLC-programable logic controller; (3) quality data management system (QDMS) (e.g., tablets, QDMS software, PLC-programable logic controller); and (4) packaging/case labelling software (e.g., case printers, pallet printers). The following items did not qualify for the exemption: (1) certain MLO, specifically strongarms (boxes)-stainless steel enclosure for monitor, PCs; (2) certain SCADA, specifically strongarms (boxes)-stainless steel enclosure for monitor, PC; and; (3) refrigeration energy management system (REMS) (e.g., REMS hardware, REMS software, PLC-programable logic control); and (4) product lifecycle management (PLM) (e.g., PLM module within ERP system). The TN DOR explains why each item does or does not qualify for the exemption. Tenn. Dept. of Rev., Letter Ruling #25-07 (July 29, 2025; issued September 30, 2025).

Texas: A Texas Administrative Law Judge (ALJ) upheld the Comptroller of Public Accounts' assessment of sales and use tax on a taxpayer's sales of taxable and nontaxable online services that were bundled into various packages. The combined services included, but were not limited to, search engine optimization (SEO) services, social media advertising, website hosting, traffic reports, search engine results page enhancements, and keyword marketplace research. The taxpayer appealed the assessment, arguing that the SEO services were non-taxable and that they were not explicitly deemed taxable until March 2019. In rejecting the taxpayer's argument, the ALJ found the use of the word "includes" in the definition of data processing in Tex. Tax Code Section 151.0035, "demonstrates a legislative intent to define data processing as broader than the enumerated activities stated in the statute." Moreover, in determining the types of activities that constitute taxable data processing, the Comptroller "has addressed a variety of services that do not necessarily conform to the specific examples cited in the rule." This includes the Comptroller determining that both SEO services and modifying webpage content, are both taxable data processing services. When taxable services and nontaxable unrelated services are sold or purchased for a single charge, the total charge will be presumed taxable when the portion of the single charge relating to taxable services represents more than 5% of the total charge. Tex. Comp. Pub. Accts., STAR System No. 202507016H (July 2, 2025).

Texas: In response to a ruling request from a company that provides employers access to telehealth services, the Texas Comptroller of Public Accounts said that the company's telehealth services, including related items provided with those services such as online health questionnaires, online medication profiles, online education content (e.g., videos, recorded webinars, courses and articles) and test kits, are not subject to sales tax because they are not an enumerated taxable service. The Comptroller noted that while the company performs some activities that may meet the definition of data processing services, because the company's providers and staff use their specialized knowledge and discretionary judgment to provide these services, the company's telehealth services are not taxable data processing services. The Comptroller also found the online education content is not a taxable information service as the content "is not general or specialized news or other current information." The Comptroller noted that it has generally treated this kind of education services as a nontaxable service. In regard to test kits, which are tangible personal property, the Comptroller said the test kits are not taxable when the company provides them to enrolled patients as an included test used by the company in performing telehealth services. The company is not selling the kits to patients; the company, however, will have to pay any applicable tax when purchasing the test kits. Tex. Comp. Pub. Accts., STAR System No. 202507018L (July 1, 2025).

BUSINESS INCENTIVES

California: New law (SB 254) establishes a tax credit for qualified expenditures related to transmission projects. The credit may be claimed against the corporate and individual income taxes in an amount equal to 20% of qualified expenditures paid or incurred by a qualified taxpayer (i.e., a taxpayer that is participating entity under the Accelerator Revolving Fund Program) during the tax year, not to exceed $20 million per qualified taxpayer per year. The credit can be claimed for tax years beginning on or after January 1, 2026 and before January 1, 2036. The law defines "qualified expenditures" as "costs paid or incurred for planning, design, engineering, permitting, construction, and equipment directly related to the eligible transmission project or qualified wages paid or incurred to employees of a qualified taxpayer that perform services directly related to the eligible transmission project." The amount of credit that exceeds the taxpayer's net tax, may be carried over up to eight years. If the credit under this provision is claimed by the qualified taxpayer, an otherwise allowed deduction under this part for any amount of qualified expenditures paid or incurred by the qualified taxpayer must be reduced by the amount of the qualified expenditures taken into account in calculating the credit allowed. A qualified taxpayer that claims the credit is prohibited from earning a return on equity for the eligible transmission project for the portion of the project the credit is claimed. The law also requires the California Infrastructure and Economic Development Bank to inform the Franchise Tax Board of any eligible transmission projects it approves for financial assistance. Cal. Laws 2025, ch. 119 (SB 254), signed by the governor on September 19, 2025.

Louisiana: The Louisiana Department of Revenue (LA DOR) issued a revenue ruling to address a common issue under the Louisiana New Markets Tax Credit Program, specifically whether certain investments and investments structures comply with the program requirements. The LA DOR said that the investment requirements can be met through a stacked leverage structure utilizing indirect and direct funding provided state sub-community development entity invests 100% of the cash purchase price in qualified low-income community business within 12 months of the original qualified equity investment date. La. Dept. of Rev., Revenue Ruling No. 25-001 (September 18, 2025).

Nebraska: The Nebraska Department of Revenue (NE DOR) issued guidance on a recently enacted law change (LB 644, Neb. Laws 2025) that, effective October 1, 2025, prohibits foreign adversarial companies from receiving any benefits from Nebraska tax incentive programs. This prohibition applies to entities applying for credits, investors who would claim the entity's credits on their tax returns and individuals who would claim the credits based on employment with or a donation to a foreign adversarial company. The NE DOR said that any credit held by a foreign adversarial company on or after October 1, 2025 will be permanently disallowed, including credits owned by such entity on October 1, credits transferred to a foreign adversarial company on or after that date, and prior year credits that have been carried forward. The foreign adversarial company will not earn any future credits. The guidance defines "foreign adversary", listing countries considered such, and "foreign adversary company." The NE DOR's guidance lists the credits that taxpayers who are employed by a foreign adversarial company are not eligible to claim due to their employment with such company. Neb. Dept. of Rev., "Foreign Adversary Company Notice" (September 24, 2025).

PROPERTY TAX

Texas: New law (HB 23), effective for ad valorem tax years beginning on or after January 1, 2026, provides an ad valorem tax exemption for all real and personal property owned by nonprofit corporations organized for charitable, educational and scientific purposes, in counties with populations of 3.3 million or more persons, when the property is used to promote agriculture, support youth and provide educational support in the community. The exemption does not apply to any interests held by for-profit lessees of the exempt property. Tex. Laws 2025 (2nd Special Session), HB 23, signed by the governor on September 17, 2025.

CONTROVERSY

New Jersey: The New Jersey Division of Taxation (NJ DOT) provided guidance on its pilot voluntary mediation program, which will run October 1, 2025 through September 30, 2027. The mediation pilot program is a way for taxpayers to resolve Corporation Business Tax (CBT) and Sales and Use Tax (SUT) audit controversies of $5,000 or more (without considering penalties and interest). During the mediation program, staff from the NJ DOT's Audit Branch and the taxpayer/taxpayer representative will have an informal meeting with a trained mediator. The mediator will guide the discussion and process. The mediator does not have the authority to impose a settlement on the parties, but may facilitate a discussion that may lead the parties to a mutually agreeable resolution of the pending tax controversy.

The mediation program is nonbinding, the parties cannot be forced to do something they do not agree to do, and any party, including the mediator, can terminate the mediation at any time. Mediation does not replace an audit; the NJ DOT noted that mediation "is not a time to present new information or raise new issues." Generally, the parties will have 180 days from the application of mediation filing date to resolve the issues. Mediation will terminate after 180 days, unless the parties and the mediator agree to extend the mediation period. If mediation is terminated, Audit will provide the taxpayer with the audit closing documents, giving the taxpayer full statutory protest and appeal rights.

The NJ DOT's guidance: (1) describes the mediation process and how to prepare for it; (2) sets forth principles participants are expected to adhere to when in mediation; (3) explains the scope of confidentiality regarding mediation communications, noting that while confidentiality is broad there are common exceptions, and that participating parties must sign a mediation agreement that affirms their understanding and acceptance of the confidentiality rules; and (4) describes the application process and forms that will need to be submitted. Following the ending of the pilot mediation program, the NJ DOT will evaluate the program's utility and effectiveness and whether it should be made permanent. The NJ DOT has posted FAQs on the mediation program. N.J. Div. of Taxn., Mediation Pilot Program webpage (updated September 15, 2025) and TB-115(R) (revised September 2, 2025).

PAYROLL & EMPLOYMENT TAX

Ohio: The Ohio Department of Taxation has issued updated percentage method, optional computer method and withholding tables for use with wages paid on and after October 1, 2025. The updates reflect legislation enacted this year that lowered personal income tax rates retroactive to January 1, 2025, to 3.125% (from 3.5%). Effective January 1, 2026, a flat personal income tax rate of 2.75% applies to income over $26,050. The updated percentage and option computer methods reflect the highest withholding tax rate of 3.64%, down from 3.8%. The supplemental rate of withholding for bonuses and irregular wage payments is set by law at 3.5%. For additional information on this development, see Tax Alert 2025-1929.

Oregon: On July 24, 2025, Oregon Governor Tina Kotek signed into law HB 2271, which provides certain Oregon employers with a nonrefundable tax credit against their state unemployment insurance (SUI) tax liability for calendar year 2025. The credit amount is the lesser of $5,000 or the employer's total SUI taxes due for 2025. Tax credits less than $100 in any calendar year are not allowed. For additional information on this development, see Tax Alert 2025-1830.

GLOBAL TRADE

Federal: The US Supreme Court, on September 9, 2025, granted certiorari and a motion to expedite oral argument in Trump, et al. v. V.O.S. Selections, Inc., et al., the case challenging the legal basis for President Trump's Reciprocal Tariff Policy. The case follows an August 29, 2025 decision by the US Court of Appeals for the Federal Circuit, which held that President Trump exceeded his authority under the International Emergency Economic Powers Act in imposing certain tariffs. Opening briefs on the merits are due by September 19, 2025, with additional briefs and responses required throughout September and October, indicating an expedited schedule for the case. For additional information on this development, see Tax Alert 2025-1832.

Federal — International: On September 16, 2025, the Office of the United States Trade Representative (USTR) officially initiated the public process for the first six-year review of the United States-Mexico-Canada Agreement (USMCA). This public process provides a critical opportunity for stakeholders across industries to provide input on the operation, effectiveness, and future direction of the USMCA, which governs nearly $1.3 trillion in annual trade among the three North American nations. The first review will take place on July 1, 2026. The U.S., Canada, and Mexico must submit recommendations for the Joint Review no later than June 1, 2026. For additional information on this development, see Tax Alert 2025-1870.

VALUE ADDED TAX

International — Italy: In Ruling 216/2025, issued on August 20, 2025, the Italian Revenue Agency affirmed that services provided between two fixed establishments (FEs) of the same company (Head Office) participating in a European Union (EU) Value-Added Tax (VAT) Group are subject to VAT. Because the Head Office is a member of a VAT Group in an EU country, the unity between the two FEs is broken for VAT purposes. As a result, services that the United Kingdom (UK) FE provides for the Italian FE are subject to VAT in Italy. For additional information on this development, see Tax Alert 2025-1829.