Ernst & Young's State and Local Tax Weekly newsletter for December 19, 2025 and January 2, 2026 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

Chicago budget bill increases various taxes, creates a social media amusement tax and increases the personal property lease tax rate

Chicago Mayor Brandon Johnson declined to veto the city's alternative budget bill (Record No. SO2025—0021719) approved by the Chicago City Council on December 19, 2025, allowing it to become law without his signature. The budget bill creates new and modifies existing taxes, including a new social media amusement tax, and increases the rates of the personal property lease tax and the sports betting tax. Notably, the mayor's proposed corporate head tax, which would have been imposed on businesses with 500 or more employees at a rate of $33 per employee per month, was not included in the final bill.

The changes discussed below take effect January 1, 2026, unless otherwise noted.

Social media amusement tax: Beginning January 1, 2026, the city will impose a new social media amusement tax on social media businesses that provide individual access to their social media and collect consumer data on more than 100,000 Chicago consumers¹ in a calendar year. The tax is imposed at a rate of $0.50 per the number of Chicago consumers per calendar month in excess of 100,000.

Social media includes any content shared and viewed on social media platforms — such as images, videos, audio recordings, live-streamed performances, and memes — as defined in Municipal Code of Chicago Section 4-156-1010. It does not include "bona fide" news sites or applications.

A consumer is presumed to be a Chicago consumer if their information on record or available to a social media business indicates a Chicago home address, mailing address or internet protocol address or primary usage location connected to the Chicago location is a Chicago consumer. The social media business bears the burden of proving such consumer is not a Chicago consumer. Chicago consumers will be counted once in the monthly tax imposed, with each calendar month being treated as a separate reporting period.

Business entities that are part of a controlled group of corporations are treated as a single entity for purposes of meeting the definition of a social media business.

The social media amusement tax "Rules of Interpretation" notably excludes the following from the definition of "social media business":

• Internet search or service providers
• Email services
• Streaming services, online video games, websites where the content is not user generated but includes interactive features such as chat, comments and review
• Communication services (e.g., text, audio or video communication) provided by a business to its employees and clients for use in the course of business activities and not for public distribution
• Advertising networks that only deliver commercial content
• Telecommunications carriers
• Broadband services
• Single-purpose community groups for education or public safety
• Teleconferencing or video-conferencing services that allows for real-time communications, unless the social media business's media access includes providing those services to consumers
• Cloud computing services or other nonpossessory computer leasing services (including cloud storage, shared document collaboration)
• Providing or obtaining technical support for a platform, product or service

The "Rules of Interpretation" also makes clear that the article implementing the new tax "shall have no retroactive application."

A person that violates the social media amusement article may be subject to a fine ranging from $2,500 up to $10,000 for each offense. The fine will apply for each day the violation continues.

Personal property lease tax: Effective January 1, 2026, the rate of the personal property lease tax is increased to 15% (from 11%) of the lease or rental price. Chicago's personal property lease tax is imposed on leases, rentals of personal property or nonpossessory computer leases of software, cloud software and cloud infrastructure. The law bars any increase to the rate of tax before January 1, 2028.

Sports betting: The law broadens Chicago's sports wagering tax to apply to a primary licensees' gross sports wagering receipts generated in the city via online sports wagering (i.e., over the Internet or through a mobile application). Additionally, the tax rate has been increased to 10.25% (from 2%).

Ground transportation tax: Effective July 1, 2026, the rate of the ground transportation tax imposed on ground transportation vehicles (other than taxicabs and pedicabs) that seats 10 or fewer passengers (hereafter, public passenger vehicles) is changed from $3.50 for each vehicle for each day used in the city to a rate of: (1) $98 for each licensed (and required to be licensed) public passenger vehicle for each calendar month it is used in the city to provide ground transportation and (2) $3.50 for each public passenger vehicle not required to be licensed for each day it is used in the city, capped at $98 per month. (These same tax rates apply to ground transportation vehicles that are taxicabs.)

The tax imposed on the privilege of leasing a motor vehicle within the city to a lessee on a daily or weekly basis is reduced from $2.50 to $0.50 per vehicle per rental period.

Effective February 1, 2026, the law increases the license fees imposed on various public passenger vehicles and provides that the fees are non-refundable and generally are not prorated.

The law repeals the definition of "downtown zone" and replaces it with "congestion zone one" and "congestion zone two" (each term defined by the law). For singe rides provided by transportation network drivers in the city, an additional $1.50 tax applies per vehicle per ride accepted for every ride that includes a pick-up and/or drop-off between 6:00 a.m. and 10:00 p.m. in congestion zone one or congestion zone two. On weekdays, the additional tax is reduced to $0.60 for each ride that is a shared ride.

Other tax changes: Other tax changes in the budget bill include:

• Increasing the checkout bag tax to 15 cents (from 10 cents) per bag sold or used in the city; stores remitting the tax are eligible to retain 1 cent per checkout bag sold or used
• Increasing the boat mooring tax to 23.25% (from 7%), the rate of tax assessed on nonprofit corporations remains 7%
• Increasing the fine imposed on businesses operating a business without a license to a minimum of $500 up to $1,000 (from a minimum of $250 up to $500) for each offense (note: each location of a business must be separately licensed and each day a violation continues constitutes a separate offense)
• Increasing various business license fees, including the limited business license (from $250 to $500), the regulated business license (from $250 to $1,000) and regulated business license — hotels (from $250 to $1,000, plus $2.20 per room)
• Establishing a video gaming location license fee and a video gaming terminal license fee, each imposed at a rate of $500 plus $1,000 per video gaming terminal
• Imposing a 1.5% tax on the sale of alcoholic beverages for off premises consumption; this tax does not apply to retail or wholesale alcoholic beverage dealers
• Suspending the annual increase in the property tax levy for fiscal year 2026

The Chicago Department of Finance issued guidance² on rate changes brought about by the ordinance.

Texas Comptroller issues guidance on franchise tax alignment with federal law, including bonus depreciation rules under the OBBBA

On December 19, 2025, the Texas Comptroller of Public Accounts (Comptroller) issued a memo to provide guidance on a recent policy change regarding Texas Franchise Tax conformity to the current Internal Revenue Code (IRC).³ Notably, the Comptroller will now align the cost of goods sold (COGS) deduction depreciation rules with the bonus depreciation provisions of the "One Big Beautiful Bill Act" (OBBBA).

The Comptroller also said that it will amend 34 Tex. Admin. Code Section 3.587 (Total Revenue Rule) and 34 Tex. Admin. Code Section 3.588 (COGS Deduction Rule) to incorporate the changes contained in the memo.

Memo on IRC conformity

Total revenue: Historically, the Comptroller's office required a taxpayer (referred to as a taxable entity) to compute the Texas franchise tax line items picked up from a federal tax return using the IRC in effect for the federal tax year beginning January 1, 2007 (2007 IRC). Following a statutory review, the Comptroller determined that "not all amounts taken from the applicable federal return used to compute the franchise tax are tied to the 2007 IRC." Starting with the 2026 franchise tax report, a taxable entity should calculate Texas franchise tax using the amounts from the federal income tax return under the federal law in effect for that year, except where a statute or rule references the IRC. When the IRC is referenced, the taxable entity must compute such amounts using the 2007 IRC.

The Comptroller's memo uses Tex. Code Section 171.1011(c)(1)(B)(ii) as an example of when income or expense is determined under the current IRC or the 2007 IRC. Tex. Code Section 171.1011(c)(1)(B)(ii) allows a subtraction from total revenue for foreign royalties and foreign dividends, including amounts determined under IRC Section 78 and IRC Sections 951-964. The Comptroller explained that foreign royalties and foreign dividends are computed under current federal tax law but amounts under IRC Section 78 and IRC Sections 951-964 are computed under the 2007 IRC (noting that the 2007 IRC does not include GILTI under IRC Section 951A).

COGS deduction: The memo clarifies that the Comptroller will now allow federal bonus depreciation claimed on the federal tax return for assets placed in service on or after January 19, 2025 as part of a taxpayer's COGS deduction.⁴ On the 2026 franchise tax report, a taxpayer may also include a one-time net deprecation adjustment in its COGS deduction for qualifying assets under Section 171.1012(c)(6).

Specifically, a taxable entity reporting gain from the sale of "depreciable assets associated with and necessary for the production of goods" for which depreciation is included in its franchise COGS deduction should report the gain from its federal return without adjustment for differences in state and federal basis. As an equitable remedy to account for the historic differences in federal and Texas depreciation, the Comptroller is allowing taxable entities to include a one-time net depreciation adjustment in COGS for qualifying assets on their 2026 franchise tax report. Taxpayers will base the net deprecation adjustment on the difference in depreciation claimed for federal income tax and depreciation claimed for franchise tax COGS for a given asset. Any unused 2026 net depreciation adjustment may be carried forward to consecutive reports until exhausted. The memo provides additional detail as to how to calculate this adjustment.

Apportionment: For apportionment purposes, starting with the 2026 franchise tax report, since gross receipts equals total revenue, with certain exceptions, a taxpayer's gross receipts will be based on amounts reported on the taxpayer's federal tax return, without adjustments to the 2007 IRC, except when the IRC is specifically referenced by statute or rule.

For additional information on this development, see Tax Alert 2026-0177.

INCOME/FRANCHISE

Delaware: The Delaware Division of Revenue (DE DOR) issued guidance on recently enacted legislation (HB 255) that decouples from certain provisions of the One Big Beautiful Bill Act (OBBBA). For entities taxed as a corporation, the DE DOR explained that for tax years 2022 through 2024, the state has decoupled from the OBBBA's retroactive treatment of unused capitalized qualified research and experimental (R&E) expenditures. The DE DOR said that unused capitalized expenditures from these years must be deducted as they would under the Tax Cuts and Jobs Act (TCJA). For tax years 2025 and thereafter, the DE DOR said the state conforms with federal provisions that permit expensing of qualified R&E expenditures in the tax year of the expenditure. Regarding bonus depreciation, the DE DOR explained that for both corporate and individual income tax purposes, the state has decoupled from the OBBBA's 100% bonus depreciation for qualified business property placed in service after January 19, 2025 (for individuals, this applies to property placed in service after December 31, 2025). Instead, taxpayers will continue to use bonus depreciation under the provisions of the TCJA (i.e., 40% for tax year 2025; 20% for tax year 2026; 0% for tax year 2027 and after). Delaware law also decouples from the OBBBA's 100% special depreciation allowance for qualified production property. Depreciation of such property continues under the IRC provisions that existed prior to the OBBBA. Lastly, the DE DOR explained that the OBBBA's bonus depreciation and special depreciation provision for certain business property or qualified production property sunset for property placed in service after December 31, 2030; after that date, Delaware adopts the federal rules for the relevant property classes. Del. Div. of Rev., Tech. Info. Memo. 2025-2 (December 23, 2025).

Rhode Island: On December 15, 2025, the Rhode Island Department of Revenue, Division of Taxation (RI DOT) adopted emergency regulation, 280-RICR-20-25-16, to provide guidance on modifications to Rhode Island net income due to the state's decoupling from the "One Big Beautiful Bill Act" (OBBBA).⁵ The regulation states that it will be "liberally construed" to allow the RI DOT to effectuate the purposes of the decoupling provisions under R.I. Gen. Laws Section 44-11-11(a)(1)(viii). Under the decoupling provision, "any income, deduction, or allowance that would be subject to federal income tax for taxable years beginning on or before January 1, 2025, but for the enactment of [OBBBA], must be included in net income for Rhode Island Business Corporation Tax [BCT] purposes … " Items subject to addback include: (1) business interest expense under IRC Section 163(j); (2) treatment of certain qualified sound recording productions in IRC Sections 168(k) and 181; (3) full expensing of domestic research and experimental (R&E) expenditures under IRC Section 174A — i.e., provisions that (a) allow all businesses to accelerate the expensing of these expenditures starting in tax year 2025, and (b) allow small business to retroactively accelerate expensing of these expenditures for tax years 2022, 2023 and 2024 — the emergency rule includes examples; and (4) increased dollar limitation for expensing certain depreciable business assets under IRC Section 179(b). The emergency regulation describes how partnerships, S corporations and C corporations should reflect the addback of these items on their returns.

On the same day, the RI DOT also adopted emergency regulation 280-RICR-20-55-16, to provide guidance on modifications to Rhode Island individual income due to the state's decoupling from the OBBBA.⁶ For those subject to the individual income tax, the following "above the line" items that may be taken as a deduction on the taxpayer's federal return will have to be added back in determining the taxpayer's Rhode Island modified federal adjusted gross income (federal AGI): (1) business interest expense deduction under IRC Section 163(j); (2) Section 174A amortization adjustments for R&E expenditures (an example is included); (3) increased dollar limitations for expensing certain depreciable business assets under IRC Section 179(b); and (4) qualified sound recording production deduction under IRC Sections 168(k) and 181. The emergency regulation describes how to reflect this addback on forms filed by sole proprietors, partners in a partnership and owners in an S-corporation (collectively, "owner"), and additional filing requirements for such owners if the entity elects to file an original or amended federal return for tax years 2022, 2023 and/or 2024 to accelerate expensing of R&E expenditures. "Below the line" items that are not reflected in federal AGI that Rhode Island has decoupled from and will not allow an exclusion for include tip income, overtime compensation, and interest on car loans for qualified vehicles. The RI DOT acknowledged the federal increase to the State and Local Tax (SALT) deduction cap, noting that the state will continue to administer the pass-through entity tax.

The emergency rules are effective for 120, unless they are extended to 180 days. The RI DOT also has created a webpage on which it is posting its guidance on OBBBA (specifically, the title of the RI DOT webpage is "H.R. 1 (Public Laws No.: 119-21)").

Tennessee: The Tennessee Department of Revenue (TN DOR) updated its Franchise and Excise Tax Manual to discuss provisions of the "One Big Beautiful Bill Act" (OBBBA) that may affect the determination of net earnings subject to Tennessee excise tax from which the state has decoupled or that require a special adjustment as well as provisions that do not affect the determination of net earnings for excise tax purposes. OBBBA provisions examined in the manual include the following:

• Federal bonus depreciation under IRC Section 168(k) — Tennessee decouples from this OBBBA provisions as the state follows IRC Section 168(k) as it exists and applies under the Tax Cuts and Jobs Act (TCJA).
• Qualified production property under IRC Section 168(n) — Tennessee decouples from this provision as the state follows bonus depreciation under IRC Section 168 as it exists and applies under the TCJA.
• Research and development (or "experimental") expenditures (R&E expenditures) — Tennessee allows full expensing as the state decoupled from the TCJA version of IRC Section 174 to allow taxpayers to continue to apply full expensing of R&E expenditures for excise tax purposes and it conforms to IRC Section 174A "via the state's general rolling conformity with the [IRC], as amended." The TN DOR noted that taxpayers should not amend their 2022, 2023 or 2024 excise tax returns unless they did not make an adjustment on Schedule J to fully expense their R&E expenditures paid or incurred in those years.
• Business interest expense limitation under IRC Section 163(j) — Tennessee allows full expensing as the state conforms to the pre-TCJA version of IRC Section 163(j); the TN DOR said taxpayers who are limited in deducting business interest expense under the OBBBA will have to make appropriate addback and deduction adjustments on Schedule J of the excise tax return to reverse the federal deduction and to deduct all business interest paid or incurred during the year.
• IRC Section 179 expensing — Tennessee conforms to this provision via its general rolling conformity with the IRC.
• Net CFC tested income (NCTI, formerly global intangible low-taxed income (GILTI)) — Tennessee requires a special adjustment. (Further discussed below.)
• Foreign-derived deduction eligible income (FDDEI, formerly foreign-derived intangible income (FDII)) — Tennessee conforms to this provision via its general rolling conformity to the IRC. (Further discussed below.)
• Qualified opportunity zones and funds (QOZF) — Tennessee conforms to the OBBBA's gain deferral and subsequent recognition provisions related to QOZF provisions via its general rolling conformity to the IRC.
• Charitable contributions floor limitations — Tennessee decouples from this provision and requires special adjustments.

Regarding NCTI, the TN DOR explained that the state conforms to IRC Section 951A via its rolling conformity with the IRC, but for purposes of taxing NCTI, it does not conform to the related deduction for such income under IRC Section 250. Thus, taxpayers will include any NCTI inclusion in their excise tax starting point on Schedules J1, J2, J3 or J4, and they should not report the portion of IRC Section 250 deduction related to NCTI on the excise tax return. The TN DOR said only 5% of NCTI is included in the excise tax base. The two special adjustments taxpayers with NCTI inclusion must make on the excise tax return Schedule J are: (1) the deduction of the NCTI inclusion amount included in the excise tax starting point, and (2) the add back of 5% of the taxpayer's NCTI without the related IRC Section 250 deduction.

As for the FDDEI deduction, the TN DOR explained that the state conforms to the FDDEI deduction. Taxpayers required to file on a separate entity basis also must calculate the FDDEI deduction on a separate entity basis. In addition, taxpayers must apply the taxable income limitation under IRC Section 250(a)(2) by computing their federal taxable income on a separate entity basis without regard to any Tennessee addition or subtraction modifications to net earnings.

The TN DOR noted that this discussion "is not intended to provide a comprehensive overview of all OBBBA provisions, but rather, it focuses on OBBBA provisions that are most likely to have excise tax implications." Tenn. Dept. of Rev., "Franchise and Excise Tax Manual" (updated December 2025).

Texas: The Texas Comptroller of Public Accounts has adopted amendments to 34 Tex. Admin. Code Section 3.586 "Margin: Nexus," to provide additional guidance on determining economic nexus. The current economic nexus rule provides that a foreign taxable entity that does not have a physical presence in Texas will have nexus with the state and be subject to the state's franchise tax if, during the federal income tax accounting period, it had gross receipts from business done in Texas of $500,000 or more, as sourced under 34 Tex. Admin. Code Section 3.591(e) and (f). For purposes of this provision, "gross receipts" is defined as "all revenue reportable by a taxable entity on its federal return, without deduction for the cost of property sold, materials used, labor performed, or other costs incurred." As amended, the rule requires a foreign taxable entity that apportions its margin using a method other than gross receipts use gross receipts as sourced under 34 Tex. Admin. Code Section 3.591(e) and (f) in determining whether the economic nexus threshold has been met. The adopted amended rule was file with the Secretary of State on December 18, 2025, and takes effect on January 7, 2026. Tex. Comp. of Pub. Acct., Amended 34 Tex. Admin. Code Section 3.586 (Tex. Register, January 2, 2026).

SALES & USE

Hawaii: The Hawaii Department of Taxation (HI DOT) announced the court ordered enjoinment of Act 96 (Haw. Laws 2025), specifically the provision that imposes the transient accommodations tax on cruise ships.⁷ Due to this enjoinment, the HI DOT said that until further notice it will refrain from enforcing this tax on cruise ships. Other provisions of Act 96, however, remain in effect. Thus, the increase of the rate of the transient accommodations tax from 10.25% to 11% will be in effect for the period of January 1, 2026, through December 31, 2030. Haw. Dept. of Taxn., Announcement No. 2026-01 (January 2, 2026).

Texas: The Texas Comptroller of Public Accounts determined that for purposes of the optional single local use tax rate for remote sellers, the estimated average rate of local sales and use taxes imposed in Texas during the preceding state fiscal year ending August 2025 is 1.75%. This rate will be in effect for the period from January 1, 2026, to December 31, 2026. Tex. Comp. of Pub. Accts., Texas Register "In Addition" (50 TexReg No. 52 December 26, 2025).

Washington: The Washington Department of Revenue (WA DOR) announced the following changes to the reusable bag fees: (1) the requirement for thicker plastic bag from 2.25 mils to 4 mils thick is delayed to January 1, 2028 (from January 1, 2026); and (2) for calendar years 2026 and 2027, retailers selling reusable plastic carryout bags that are at least 4 mils thick must collect both the existing 12-cent pass-through charge and the new 4-cent state penalty. The WA DOR noted that the fee for compliant paper bags remains unchanged at 8-cents. Wash. Dept. of Rev., Special Notice "Changes to reusable bag fees" (December 11, 2025).

BUSINESS INCENTIVES

Louisiana: The Louisiana Department of Revenue adopted amendments to LAC 61:I.1902, 1903 and 1905 to specify documentation required for claiming the inventory tax credit (LAC 61:I.1902), the Workforce Child Care Tax Credit (LAC 61:I.1903) and the credit for property taxes paid by certain telephone companies (LAC 61:I.1905). For example, the documentation required for claiming the inventory tax credit at the time of filing includes: (1) Form R-10610, Schedule of Ad Valorem Tax Credit Claimed by Manufacturers, Distributors and Retailers; (2) a copy of the ad valorem tax assessment prepared by the assessor's office; and (3) a copy of the cancelled check or receipt of electronic payment for ad valorem tax assessment. A manufacturer that has claimed the property tax exemption under the Industrial Tax Exemption Program (ITEP) during the tax year in which the local inventory taxes were levied and is a member of a consolidated federal income tax return that includes such manufacturer must submit the following documentation: (1) Form R-10610-ITE, Schedule of Ad Valorem Tax Credit Claimed by ITEP Manufacturers for Ad Valorem Tax Paid on Inventory; (2) a copy of the ad valorem tax assessment prepared by the assessor's office; and (3) a copy of the cancelled check or receipt of electronic payment for ad valorem tax assessment. For these credits, interest accrual will be suspended during any period of delay in the issuance of a refund, when such delay is due to the taxpayer's failure to provide any of the required documentation. The amended regulations were adopted on December 20, 2025.

PROPERTY TAX

Arkansas: In response to a request for an opinion regarding the business personal property tax exemption, the Arkansas Attorney General (AG) opined that a medical clinic, which the AG assumed was privately owned and operated and not a federal entity, cannot claim a business personal property tax exemption solely because the underlying property was purchased with federal grant funds. The AG noted, however, that the medical clinic may qualify for the public charity exemption if it meets the exemption's requirements (i.e., it is open to the public, it provides services regardless of the patient's ability to pay, and it uses any profits from patients who are able to pay to maintain or expand its charitable operations). The AG also noted that the medical clinic will not lose its tax-exempt status if it bills patients who can pay or if it refers the delinquent accounts of such patients to a collection agency. Ark. Atty. Gen., Op. No. 2025-077 (December 18, 2025).

Wisconsin: The Wisconsin Department of Revenue discusses how the United States Postal Service change to the postmark application process from local application to regional sorting centers may affect property tax payment timeliness. Wis. Dept. of Rev., "Changes to Postmark Application Process" (December 12, 2025).

COMPLIANCE & REPORTING

Louisiana: The Louisiana Department of Revenue (LA DOR) issued guidance on changes to the tax structure of S corporations,⁸ treating them as pass-through entities for Louisiana income tax purposes, effective for income tax periods beginning on or after January 1, 2026. Before this change, S corporations were taxed like C corporations and could make a special S corporation exclusion election allowing for flow through income, losses, deductions and credits to shareholders. For tax periods before January 1, 2026, an S corporation's Louisiana income and tax liability are reported on LDR Form CIT-620 "Louisiana Corporation Income Tax Return" and the special S corporation election can be made. For tax periods beginning on or after January 1, 2026, S corporations must file an information return; however, a completed LDR Form CIT-620 is still required to determine how to allocate and apportion income — this return is informational only. Shareholders will calculate and pay tax on their income tax returns. The S corporation may make a composite payment on behalf of nonresident shareholders. The informational and composite returns must be filed electronically. Further, for tax periods beginning on or after January 1, 2026, qualified subchapter S subsidiaries will automatically be treated as a disregarded entity. The LA DOR further explained that: (1) an S corporation still has the option to be taxed as a C corporation; (2) S corporations that make the pass-through entity tax (PTET) election cannot file a composite return and make composite tax payments for same period the PTET election is made; and (3) if an S corporation elects to file and pay composite tax for its nonresident shareholders it cannot also make the PTET election. An S corporation may voluntarily make estimated tax payments when it files a composite return. S corporations doing so would follow the same procedures used by C corporations for making estimated payments. If the S corporation does not make composite tax payments, a nonresident shareholder is responsible for Louisiana estimated tax on their share of S corporation income. La. Dept. of Rev., Revenue Information Bulletin No. 25-032 (December 16, 2025).

CONTROVERSY

Michigan: New law (HB 4098) allows Michigan Tax Tribunal hearings and proceedings to be held electronically. Specifically, they can be held telephonically, by videoconferencing or in person. Mich. Laws 2025, PA 53 (HB 4098), signed by the governor on December 23, 2025.

PAYROLL & EMPLOYMENT TAX

Multistate: Employees in as many as 10 states could see reduced state income tax withholding rates in 2026, reflecting a wave of tax cuts enacted by legislatures as part of broader economic growth and competitiveness strategies. In several cases, the 2026 reductions are not newly adopted but stem from laws passed in prior years that authorize phased or incremental decreases in personal income tax rates over two or more years. As a result, withholding tables may change automatically as these lower rates take effect. Employers may want to proactively notify employees in affected states about the potential reduction in withholding and encourage them to review and, if appropriate, update their state withholding allowance certificates to ensure their payroll withholding aligns with their expected state income tax liability. For additional information on this development, see Tax Alert 2025-2591.

Alabama: The Alabama Department of Treasury has published a report that analyzes various state taxes and their conformity with the One Big Beautiful Bill Act (OBBBA). (Alabama Department of Revenue, OBBBA Analysis and Tax Provisions.) For state income tax and withholding purposes, Alabama conforms to the federal Internal Revenue Code (IRC) on a rolling forward basis but only for those IRC sections explicitly referenced in Alabama's statutes. Because the OBBBA adds new sections/subsections to the IRC, some of its provisions are not currently coupled with Alabama's tax code. The Alabama legislature could address some of these conformity gaps when it reconvenes in January 2026. For more on this development, see Tax Alert 2025-2525.

Iowa: As a result of recent legislation, the Iowa Workforce Development (Department) announced that employers will have lower state unemployment insurance (SUI) costs beginning in 2026 due to a reduced taxable wage base and a lower maximum SUI tax rate. On June 5, 2025, Governor Kim Reynolds signed SF 607 into law, simplifying Iowa's UI tax tables and cutting the maximum employer tax rate from 9% to 5.4%, while also significantly reducing the portion of wages subject to SUI. As a result of the new law, the taxable wage base for calendar year 2026 will decrease to $20,400, down from $39,500 in calendar year 2025. Additionally, employers pay SUI taxes based on an assigned experience rate multiplied by the state's taxable wage base, which is set as a fraction of the prior year's average annual wage. SF 607 reduced that fraction from two-thirds to one-third of the average annual wage. The Department recalculates the average annual wage each year as part of the process used to determine maximum and minimum unemployment benefits. The average annual wage for 2024 was $61,098.90. For additional information on this development, see Tax Alert 2025-2555.

MISCELLANEOUS TAX

Tennessee: In response to a ruling request from an operator of cryptocurrency automated teller machines (a.k.a., Bitcoin teller machines or BTMs), the Tennessee Department of Revenue (TN DOR) said that the operator's receipts from the sale of Bitcoin and other cryptocurrencies are not subject to the Tennessee business tax because the operator is selling and buying intangible personal property. Under Tennessee law, the business tax applies to sales of tangible personal property and services; the tax does not apply to intangible personal property. The TN DOR also found that the operator's receipts from transaction fees from currency exchange services are excepted from the Tennessee business tax under the exception for "services furnished by exchanges, exchange clearing houses and other services allied with the exchange of securities and commodities." Tenn. Dept. of Rev., Revenue Ruling #25-10 (December 16, 2025).

GLOBAL TRADE

Federal — International: The United States (US) Department of Commerce and the Office of the US Trade Representative (USTR) published a notice (USTR Notice) in the Federal Register on December 18, 2025, implementing certain tariff-related elements of a trade framework between the United States, Switzerland and Liechtenstein. The USTR Notice modifies the Harmonized Tariff Schedule of the United States (HTSUS) to apply, for products from Switzerland or Liechtenstein, the higher of either the US most-favored-nation (MFN) rate or a total rate of 15% composed of the MFN duty plus a country-specific International Emergency Economic Powers Act (IEEPA) tariff. Certain products from Switzerland and Liechtenstein are exempt from the country-specific IEEPA tariff under the Potential Tariff Adjustments for Aligned Partners Annex identified in Annex I of the USTR Notice. Products cited include certain agricultural goods, unavailable natural resources, aircraft and aircraft parts, generic pharmaceuticals and their ingredients and chemical precursors. The HTSUS modifications in Annex II apply to goods entered for consumption, or withdrawn from a warehouse for consumption, on or after 12:01 a.m. Eastern Time on November 14, 2025. For additional information on this development, see Tax Alert 2025-2566.

Federal: In AGS Company Automotive Solutions, et al. v. US Customs and Border Protection (decided December 15, 2025), a panel of the United States (US) Court of International Trade (CIT) denied a preliminary injunction seeking to halt liquidation (or finalization) of entries subject to International Emergency Economic Powers Act (IEEPA) tariffs. Importers had filed motions seeking to suspend liquidation of entries subject to IEEPA tariffs while the legality of those tariffs is being litigated. The case proceeds in parallel to V.O.S. Selections, Inc. v. United States, a challenge to the executive orders imposing IEEPA tariffs that has been argued at the Supreme Court (oral argument held November 5, 2025). The plaintiffs argued that once entries are liquidated, they risk losing access to refunds. The Government countered that, if the IEEPA tariffs are ultimately held unlawful, the court has authority to order reliquidation and issue refunds with interest — and the Government would not oppose such relief. The CIT agreed and denied the preliminary injunction. For additional information on this development, see Tax Alert 2025-2530.

Federal: US Trade Representative (USTR) Jamieson Greer has briefed lawmakers on Capitol Hill regarding the Administration's current views of the operation of the US-Mexico-Canada Agreement (USMCA), issues between the three countries, and whether it will extend the terms of the Agreement as part of the July 1 Joint Review. In short, USTR described stakeholder views as being mostly supportive of the USMCA but that improvements are needed. USTR outlined several key issues that it believes must be addressed by Canada, by Mexico, and trilaterally before USTR will recommend to the President that the USMCA be extended for another 16-year term. For additional information on this development, see Tax Alert 2025-2567.

Federal: On December 23, 2025, the Office of the U.S. Trade Representative (USTR) published a Notice of Action in its Section 301 investigation of China's acts, policies, and practices related to targeting of the semiconductor industry for dominance. USTR has determined that China's acts, policies, and practices are actionable under the statute and announced an 18-month phase in of tariffs on semiconductors and related products. For additional information on this development, see Tax Alert 2025-2606.

VALUE ADDED TAX

International — Italy: Since mid-2025 the Italian Tax Authorities (ITA) seem to have increased their focus on financial intermediaries, putting particular emphasis on the value-added tax (VAT) treatment of year-end true-up transfer pricing (TP) adjustments. These actions may have a significant impact on the sector. Through the analysis of transfer pricing documentation and contracts, the ITA have challenged whether TP adjustments qualify as "VAT-relevant consideration" and have argued that TP adjustments functioning as margin corrections rather than true price alterations, fall outside the scope of VAT under Art. 2 para 3 of Presidential Decree No. 633/1972. As a result, they have assessed nondeductible VAT based on modifications to the pro-rata VAT deductibility percentage. The ITA's position is based on recent rulings, providing that TP adjustments only influence the VAT taxable base if they: (1) constitute consideration, (2) relate to specific supplies of goods or services relevant for VAT purposes, (3) link directly to the original transaction consideration. In situations in which adjustments merely align margins without contractual and documental evidence that the adjustment changes a consideration for a supply, the ITA have concluded these are not VAT-relevant. For additional information on this development, see Tax Alert 2025-2509.

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.