01 December 2025 State and Local Tax Weekly for October 24 and October 31 Ernst & Young's State and Local Tax Weekly newsletter for October 24 and October 31 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. In the recent ruling in Perrigo Sales Corporation v. Harris,1 the Ohio Board of Tax Appeals (BTA) held that the taxpayer was entitled to reduce its Ohio Commercial Activity Tax (CAT) receipts by chargebacks paid to wholesalers, reversing a final determination of the Department of Taxation (Department). The taxpayer is a manufacturer of pharmaceuticals and other healthcare products. In the case of drug sales, the taxpayer directly contracts with retailers to supply drugs at agreed-upon prices. The taxpayer ships its prescription products to wholesale distributors that honor the contract prices between the taxpayer and the retailers. When the taxpayer ships pharmaceuticals to the distributors, it issues an invoice at a wholesale acquisition cost (WAC). However, because of the contracts between the taxpayer and the retailers, neither party expects the WAC to reflect the actual cost of the drugs. The parties anticipate a chargeback will reduce the purchase price as between the taxpayer and the distributor. When the distributor sells the drugs to the retailers, it submits a chargeback adjustment request to the taxpayer based on the difference between the WAC and the contracted purchase price. Once the chargeback request is processed by the taxpayer, the distributor remits the net amount to the taxpayer. The taxpayer treats the net amount as the actual sales price for accounting and federal income tax purposes. The Department audited the taxpayer and assessed CAT based on the WAC without taking into account the chargeback adjustments. According to the Department, the chargebacks were not a cash discount that could reduce CAT receipts because they were not volume-based discounts or discounts for timely payment. The Department instead equated the chargebacks to manufacturer's coupons, for which no CAT exclusions are provided for reimbursements paid to retailers that accept coupons from its customer. The Department also concluded that the chargebacks were not a return or allowance, which applies in cases where there is an undoing or renegotiation of the original transaction based on a defect. On appeal, the BTA reversed the Department's decision, focusing its analysis on the fact that the taxpayer did not realize the full WAC, but rather the net amount after the chargeback adjustments. According to the BTA, the chargebacks were not separate payments but were offsets in a "unified transaction." The BTA reasoned that by emphasizing the timing of the chargebacks, the Department was elevating form over substance. The BTA also concluded that the expectation of the chargeback was "established and contemplated by the contract between [the taxpayer] and the distributor." Finally, the BTA concluded that the chargeback was not an expense but the accounting mechanism to establish the actual purchase price and gross receipts realized. For additional information on this development, see Tax Alert 2025-2179. Massachusetts Department of Revenue regulation requires withholding on behalf of nonresidents on real estate sales valued at $1 million or more Effective for real estate closings occurring on or after November 1, 2025, Massachusetts regulation 830 CMR 62B.2.4: "Withholding on Sales of Massachusetts Real Estate" (hereafter, "regulation") requires the withholding of personal income tax or corporate excise tax on sales or exchanges of Massachusetts real estate with a gross sales price of $1 million or more by nonresidents. General rule: The regulation requires withholding agents to collect and remit income tax or corporate excise tax and submit a return on transfers of real property located in whole, or in part, in Massachusetts when the gross sales price equals or exceeds the withholding threshold, which is currently set at $1 million. For transfers that would otherwise be subject to withholding but for which all the transferors are exempt, withholding agents must submit a return and a Transferor's Certification for each transferor. Unless otherwise provided, the withholding, return, and applicable Transferor's Certifications are due within 10 days of closing. Transferees must act as the withholding agent for transactions in which there is no withholding agent; if there are multiple transferees, each must act as the withholding agent and withhold on that transferee's proportionate share of the gross sales price. For transactions in which there are multiple transferors, the withholding treatment of each transferor is determined separately; however, determination of whether the withholding threshold has been met is based on the entire transaction. The withholding agent must calculate the withholding (1) as set forth in 830 CMR 62B.2.4(3)(c), or (2) at the transferor's election, as the transferor's estimated net gain derived from the transfer multiplied by the tax rate applicable to the transferor. The regulation describes how to calculate the transferor's estimated net gain, determine the applicable tax rate and elect the alternative withholding. Illustrative examples are provided.
For transactions to which there are multiple transferors, the exemption only applies to those transferors that are exempt. Thus, all other transferors are subject to withholding on the transfer. Transferors claiming the withholding exemption must certify that they are exempt on the Transferor's Certification. Other exceptions and like-kind exchanges: In certain instances, withholding may not be required or may be reduced below the required amount if the transferor completes a Transferor's Certification reporting the reason for the reduced withholding. Reduced withholding may be available for the payment of debts, foreclosures, involuntary transfers and for properties only partly located in Massachusetts. Transfers that qualify for nonrecognition of taxable gain may also be subject to reduced withholding, such as a transfer of a principal residence, a transfer between spouses or incident to a divorce, and transfers that qualify for nonrecognition under IRC Section 351 or as tax-free reorganizations under IRC Section 368. Generally, withholding is not required on any gain deferred for Massachusetts tax purposes as part of a transfer that qualifies as a like-kind exchange under IRC Section 1031. Withholding, however, is required on gain recognized under IRC Section 1031(b), even if the transfer qualifies as a like-kind-exchange. At the time of closing, if an exchange appears to qualify as a like-kind-exchange but ultimately does not qualify as such, the transferor must notify the Commissioner of the failure and remit the applicable withholding amount due within 10 days of the expiration of the statutory period specified in IRC Section 1031(a)(3). The MA DOR has also posted the draft Transferor's Certification form and instructions, as well as responses to frequently asked questions on the withholding requirements. See Tax Alert 2025-2253. San Francisco, CA: New law (Ordinance No. 187-25), effective January 1, 2026, reduces the gross receipts tax rates on gross receipts from telecommunications business activities (NAICS Code 517) by reclassifying such activities from Category 5 (tax rates range from 1% up to 1.68%) to Category 4 (tax rates range from 0.25% up to 1.512%). The law also modifies the tax credit for opening a physical location in a designated area so that taxpayers retain eligibility to take the credit. This is done by specifically listing telecommunications business activities (previously, it was included as a Category 5 business activity). San Francisco Laws 2025, Act No. 0187-25 (Ordinance No. 187-25), signed by the mayor on October 6, 2025. Florida: The Florida Attorney General filed a Bill of Complaint with the U.S. Supreme Court challenging the constitutionality of California's single-sales factor apportionment provisions combined with a special rule that excludes from the sales factor "substantial amounts of gross receipts [that] arise from an occasional sale of a fixed asset or other property held or used in the regular course of the taxpayer's trade or business … " Florida is arguing that the special rule violates the Commerce Clause, the Import-Export Clause and the Due Process Clause, and seeks to have the special rule declared unconstitutional and enjoin California from enforcing it. Florida v. California and Franchise Tax Bd., Dkt. No. 220163 (U.S. S. Ct., complaint filed, October 28, 2025). Iowa: The Iowa Director, Department of Revenue certified that the corporate income tax rate will not be reduced for tax year 2026 because the revenue threshold for recalculating the corporate income tax rate was not met. Accordingly, the corporate income tax rate for tax years beginning on or after January 1, 2026 are as follows: (1) for income of $100,000 or less, the tax rate is 5.5%, and (2) for income over $100,000, the tax rate is 7.1%. These rates also applied to tax years 2024 and 2025. Iowa Dept. of Rev., Order 2025-02 (October 21, 2025). Massachusetts: The Massachusetts Department of Revenue (MA DOR) issued a working draft technical information release on the state's conformity to certain provisions in the "One Big Beautiful Bill Act" (OBBBA, P.L. 119-21). The MA DOR explained that for corporate excise tax purposes, Massachusetts automatically conforms to the current Internal Revenue Code (IRC) and for individual income tax purposes conforms to the IRC in effect on January 1, 2024 (with conformity to current provisions for determining trade or business expense deductions, with some exceptions). The draft release includes a chart listing select provisions of the OBBBA and whether Massachusetts conforms to said provisions. For both corporate excise and individual income tax purposes Massachusetts would conform to several OBBBA provisions, including, but not limited to, those that: (1) provide for full expensing of domestic research and experimental expenditures, (2) modify the business interest limitation, (3) increase the dollar limitation for expensing of certain depreciable business assets, and (4) provide a special depreciation allowance for qualified production property. Examples of provisions that Massachusetts would not conform to for corporate excise and individual income taxes purposes include, but are not limited to: (1) full expensing for certain business property, (2) modifications related to foreign tax credit limitations, (3) modifications to the determination of deemed paid credit for taxes properly attributable to tested income, (4) sourcing certain income from the sale of inventory produced in the United States, and (5) modification of the deduction for foreign-derived deduction eligible income and net CFC tested income. For individual income tax purposes, Massachusetts would not conform to OBBBA provisions that (1) exempt qualified tip income, qualified overtime compensation and personal car loan interest from tax, (2) extend and enhance the deduction for qualified business income, (3) provide full expensing for certain business property, among other provisions. Mass. Dept. of Rev., "Working Draft TIR: Massachusetts Conformity to Certain Provisions in Public Law No. 119-21" (October 21, 2025). New York City: On October 16, 2025, the New York City (NYC or City) Department of Finance (DOF) released proposed regulations under the Business Corporation Tax (BCT) focused on definitions and nexus standards. Additional subchapters are expected to be released through subsequent rulemakings, and all subchapters may eventually be re-proposed as a single package. Tax Alert 2025-2152 describes key areas of nonconformity with the NYS's Article 9-A Regulations, including definitions, economic nexus, partnership interests, Public Law 86-272, and utility corporations and corporations conducting insurance business. The proposed regulations would take effect on the same date that all nine subchapters of Chapter 11A take effect. The current proposed regulations do not state whether the final regulations will be retroactive to the effective date of the BCT, which applies to tax years beginning on or after January 1, 2015. Virginia: The Virginia Department of Taxation (VA DOT) issued guidance on corporate apportionment of income for a pass-through entity (PTE), focusing on a corporation's use of blended apportionment factors when the corporation owns a PTE but the corporation and the PTE do not have a unitary relationship. When the corporate owner and the PTE do not have a unitary relationship, the PTE income is not included in the corporation's Income Subject to Apportionment, Line 3(g) of Schedule 500A. Similarly, the PTE's apportionment factors are not included in the corporation's apportionment factors, Line 1 or 2 of Scheduled 500A. The VA DOT explained how a corporation should reflect the PTE's income on its corporate income tax return on a non-blended basis, noting that the 2025 corporate income tax return and instructions will be updated to provide a checkbox. The VA DOT also provided guidance on how to reflect this on returns for 2024 and before and provided transition relief for those tax years. Va. Dept. of Taxn., Tax Bulletin 25-5 (October 28, 2025). Georgia: The Georgia Department of Revenue (GA DOR) issued a tax policy bulletin to provide guidance on the sales and use tax exemptions for qualifying construction materials used in capital outlay projects for educational purposes. Sales of such materials are exempt from local sales and use tax only; the exemption does not apply to state sales and use tax. Qualifying construction materials means "materials used in the construction of a capital outlay project for educational purposes that will remain as part of such project after completion of construction or that become incorporated into such project's real property." The exemption is available April 1, 2025 through December 31, 2033. The exemption will be administered by the GA DOR via a refund. Only the local school system for which the qualifying construction materials were used may claim the exemption. The local school system must file the refund claim with the GA DOR within three years from when the tax was paid. Contractors must pay state and local sales and use tax when purchasing or using the qualifying construction materials. The GA DOR noted that interest will not be paid on the tax refund. Ga. Dept. of Rev., SUT-2025-01 "Sales and Use Tax Exemptions for School Construction" (October 28, 2025). Louisiana: The Louisiana Department of Revenue (LA DOR) issued guidance on reporting the state sales tax and the occupancy tax administered by the LA DOR on accommodations involving an accommodations intermediary when the intermediary engages in separate reporting — i.e., retaining and reporting state sales taxes while forwarding the occupancy taxes to the hotel or property owner for reporting and remittance. The LA DOR noted that while it "does not agree that these taxes should be reported separately, this guidance explains how taxpayers should report them in such cases." Specific guidance is provided for: (1) room rentals in Orleans and Jefferson Parishes; (2) property owners — hotels, motels and short-term rentals; (3) accommodations intermediaries; (4) room rentals outside of Orleans and Jefferson Parishes; (5) local occupancy taxes. The LA DOR noted that the guidance does not apply to room rentals that do not involve accommodations intermediaries. La. Dept. of Rev., RIB No. 25-026 (October 24, 2025). Louisiana: The Louisiana Department of Revenue (LA DOR) issued guidance on the partial sales and use tax exemption on in-state registered boats. The exemption applies when the combined state and local tax due on an in-state registered boat exceeds $20,000, after allowable credits have been applied. Only accessories that are attached to the boat at the time of purchase are included in the sales price for purposes of determining whether the $20,000 threshold has been met. The guidance lists the accessories and other items not included in the sales price for purposes of the cap, including accessories not attached to the boat, general accessories (e.g., gas cans, fishing poles, rope, boat covers), and trailers. Boat dealers must charge, collect and remit tax due when the combined state and local sales tax due is $20,000 or less. When the combined tax exceeds $20,000, the dealer should not collect and remit, but instead include the statement "Subject to Sales Tax Cap" on the sales receipt/invoice and advise the purchaser to self-report, among other requirements. Dealers must collect and remit tax on items not included in the sales price of the boat (e.g., trailers). Guidance is also provided for purchasers who must self-report. La. Dept. of Rev., RIB No. 25-024 (September 20, 2025). Tennessee: In response to a ruling request from a company that provides mobile healthcare solutions, the Tennessee Department of Revenue (TN DOR) determined that the state's sales and use tax applies to subscription fees for mobile healthcare solutions designed to promote heart health management because the true object of the transaction is the taxable sale of software. The company's subscription package includes software elements (such as a software license that allows participants to download the mobile app for tracking health information and providing a tool to help understand and improve heart health) and other elements such as blood pressure monitor, marketing materials and technical support. The TN DOR found the objective of the company's transactions with its clients is a health-related mobile app that tracks various aspects of a participant's health and provides tools to assist participants in improving their health. The tracking, guidance, other tools and generation of health information are performed by the software app and not by medical professionals or the company's employees. Accordingly, the true object of the transaction is the taxable sale of remotely accessed software. The TN DOR concluded that the transactions are not exempt as information or data processing services (under Tenn. Code Ann. Section 67-6-231) or as a subscription to data processing and information services that allow data to be generated, acquired, stored, processed or retrieved and electronically delivered to the purchaser (under Tenn. Code Ann. Section 67-6-233). The TN DOR reasoned that "there is no raw data to be converted to a readable form and subsequently processed by a computer" and that tracking this information and providing participants with tools to improve their health based on such information is not data processing. The TN DOR also found that the company can use a resale certificate when purchasing tangible personal property, such as Bluetooth blood pressure monitors, for resale along with the software app. Tenn. Dept. of Rev., Revenue Ruling #25-08 (October 24, 2025). Wisconsin: The Wisconsin Department of Revenue (WI DOR) issued guidance on the application of the state's sales tax to various types of virtual currency. Sales and purchases of convertible virtual currency, which functions as a substitute for money (e.g., bitcoin, Ethereum and stablecoins), are not subject to the state's sales tax. The WI DOR said tax is due on taxable goods and services purchased with convertible virtual currency. Sales of nonconvertible virtual currency, which can be redeemed for products or services within a specific platform or application but not for cash (e.g., in-game coins, streaming tokens, platform credits), is taxable at the time of sale if it entitles the holder of the currency to redeem it for specific taxable products or services. No additional tax applies when the virtual currency is redeemed for taxable products or services; however, tax applies to additional consideration given for the taxable product or service at the time of sale. Nonconvertible virtual currency that represents a stored monetary value and can be redeemed toward the purchase of products or services, like a gift card or gift certificate, are not taxable. The WI DOR included examples of the application of tax to various transactions. Wis. Dept. of Rev., Wis. Tax Bulletin No. 231 (October 2025). Federal: In new frequently asked questions (FAQs) released October 22, 2025, the IRS addressed the disallowance of certain employee retention credits (ERCs) under the "One Big Beautiful Bill Act" (P.L. 119-21, OBBBA). The ERC is a refundable federal employment tax credit, first enacted as part of the CARES Act in 2020, that was available for qualified wages paid by eligible employers during the COVID-19 pandemic from March 13, 2020, through September 30, 2021 (December 31, 2021, for recovery start-up businesses). The statute of limitations expired on April 15, 2024, for claiming the 2020 credit, and on April 15, 2025, for claiming the 2021 credit. As of July 4, 2025, the OBBBA disallows refunds for the third and fourth quarters of 2021 if the claim was filed after January 31, 2024. FAQ 1 reiterates that no refunds will be issued for ERC claims filed after January 31, 2024, for the third and fourth quarters of 2021. Under FAQ 3, the IRS will not expect taxpayers to return the refund if they filed a claim after this date for this period and received the refund before July 4, 2025. The IRS then states that "other compliance activities may still result in an adjustment or bill," without further explanation (emphasis in the original). Under FAQ 6, a return is considered filed as of the date the claim was postmarked and properly mailed or submitted to the appropriate IRS office. If a taxpayer filed an amended return after January 31, 2024, withdrawing an ERC claim that was filed before January 31, 2024, for the third and/or fourth quarters of 2021, FAQ 4 says the IRS will still process the amended return. If a taxpayer's return contains other claims besides a disallowed ERC claim, FAQ 7 says the IRS will process the other items as appropriate. FAQ 8 allows taxpayers to appeal disallowed ERC claims that were filed on or before January 31, 2024, to the IRS Independent Office of Appeals. For additional information on this development, see Tax Alert 2025-2229. New Mexico: The Court of Appeals of New Mexico reversed a district court's ruling barring enforcement of an ordinance enacted by the City of Santa Fe, that imposes a 3% excise tax on the transfer of residential real properties valued at more than $1 million. In so ruling, the Court agreed with the City that the plaintiffs (two individuals who are realtors and property owners in Santa Fe and members of the Santa Fe Association of Realtors, Inc., which is also a plaintiff) lacked standing to challenging the validity of the ordinance. The Court found that the plaintiffs "did not present evidence to establish the threat of a direct injury required for standing." The Court vacated the district court's order and dissolved the permanent injunction. Kurt Hill v. City of Santa Fe, No. A-1-CA-42062 (N.M. Ct. App. October 27, 2025). New York: New law (A.335-C) provides an exemption from real property tax for residential real property transferred from a nonprofit housing organization, community land trust or land bank to a low-income household. The real property tax exemption is an amount between 25% and 75% of the assessed value of the residential real property. The exemption will be discontinued if the property granted the exemption: (1) ceases to be used primarily for residential purposes; (2) ceases to be used as a primary residence; or (3) is transferred to another person or entity (other than to heirs or distributees of the owner that meet the requirements of being a qualified low-income household at the time of the transfer.) The law describes the information that must be included in the application for the exemption. The law took effect immediately. N.Y. Laws 2025, ch. 432 (A.335-C), signed by the governor on October 16, 2025. New Mexico: The New Mexico Department of Taxation & Revenue (Department) announced that the following changes in reporting and paying income tax withholding and the workers' compensation assessment fee will apply effective January 1, 2026:
For more on this development, including other changes to consider, see Tax Alert 2025-2134. Washington: The Washington Department of Revenue (WA DOR) issued a special notice on the new tax rate and classification for payment card processing activities (i.e., "services related to directly or indirectly acquiring, processing, or routing electronic transactions for issuers, acquirers, payment networks, or merchants"). Starting January 1, 2026, income from payment card processing activities must be reported under the new 3.1% Payment Card Processing business and occupation (B&O) tax classification. Income subject to this classification is apportionable and it may be subject to the surcharge on Specified Financial Institutions and the Workforce Education Investment Surcharge on advanced computing businesses. Payment card processing activities do not include the following: (1) issuing and authorizing the use of payment cards; (2) authorization, clearance and settlement of electronic transactions by a payment network; (3) retail services or the retail sale of hardware or software. The WA DOR said that businesses may deduct interchange fees, network fees and portions of fees retained by other processors from the gross amount reported under the Payment Card Processing B&O classification. (The WA DOR noted that these fees paid to other processors are not deductible from the Service and Other Activities B&O tax classification.) The notice describes the payment card processing activities that are subject to the new classification. Wash. Dept. of Rev., Special Notice "New tax rate and classification for payment card processing activities" (October 28, 2025). Federal — International: The October 2025 edition of Trade Talking Points provides updates on the following topics: (1) United States (US) trade policy and tariff announcements; (2) European Union (EU) trade policy announcements; (3) United Kingdom (UK) developments; (4) global trade developments involving Canada, Mexico and China; and (5) trade remedy developments involving the UK and the European Commission. The October 2025 edition can be found via Tax Alert 2025-2199. International — Portugal: A new law (Law no. 62/2025, October 27, 2025) introduces the value-added tax (VAT) group regime in Portugal, allowing VAT group members to consolidate their VAT balances into a single periodic return without affecting the normal operation of each entity's activity. Although each member remains obliged to submit its own periodic VAT returns, the tax balance calculated for the various members is aggregated into a group return. Under this regime, the parent entity is responsible for paying the group's VAT, while all members are jointly and severally liable for the VAT due. In case of a consolidated VAT credit position, the parent entity is the entity eligible to request the VAT refund to the tax authorities. In addition to having a financial link (verified whenever the parent entity owns, directly or indirectly, at least 75% of the capital of other entities (i.e., subsidiaries), and this participation grants the parent more than 50% of the voting rights), all entities within the VAT group must pursue a similar, complementary or interdependent economic objective and operate under a common management structure or according to a single business strategy. The option to participate in the VAT group regime is exercised by the parent entity and applies to all group entities that meet certain requirements. The new law becomes effective from taxable periods starting July 1, 2026 and later. For additional information on this development, see Tax Alert 2025-2182. International — Uruguay: Through Decree No. 220/025, issued on October 23, 2025, the Ministry of Economy and Finance established that, between November 15, 2025 and April 30, 2026, a full value-added tax (VAT) exemption will apply to various activities within the tourism sector if the purchasers are nonresident individuals and the payments are made using (1) a credit or debit card issued abroad or (2) other electronic payment instruments funded from abroad, provided that the acquirer or the collection entity is resident in Uruguay. The initiative aims to continue supporting the tourism industry through tax incentives designed to promote the use of electronic payment methods. For additional information on this development, see Tax Alert 2025-2194. Wednesday, December 10, 2025. 2025 employment tax year in review (2:00-3:30 p.m. ET; 11:00-12:30) In this webcast, our employment tax professionals will discuss the following common areas of year-end payroll and employment tax concern: (1) 2025 and 2026 federal and state tax rates and limits; (2) IRS guidance on taxation and reporting of paid family and medical leave insurance benefits; (3) One Big Beautiful Bill Act (OBBBA); (4) changes to catch-up contributions under the SECURE Act 2.0; (5) federal and state unemployment insurance developments; (6) state and local income tax withholding developments; and (7) highlights from our 2025 payroll year-end checklist. Register here. Wednesday, December 17, 2025. Domestic tax quarterly webcast series: a focus on state tax matters (1:00-2:30 pm ET / 10:00-11:30 am PT). For our final quarterly webcast in 2025, we welcome Craig Johnson, the Executive Director of the Streamlined Sales Tax Governing Board, Inc. (SST), and Fred Nicely, Senior Tax Counsel with the Council on State Taxation, who will join us to discuss the collaborative efforts of state and local governments and the business community to streamline states' sales and use tax laws by creating more uniformity and simplifying sales and use tax administration. Panelists also will discuss hot topics in sales and use tax risk management in select states, including discussions on tax base differences between state and local jurisdictions, regulatory developments and enforcement policies of interest to multijurisdictional entities. We will round out the webcast with a state and local tax policy discussion. Topics to be discussed include an update on the current state of the states, results from the November 2025 state elections, trends from 2025 state legislative sessions and the policy considerations going into the 2026 legislative sessions. Register here. 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.
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