Ernst & Young's State and Local Tax Weekly newsletter for July 24 and July 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.

TOP STORIES

Colorado adopts Special Rule 46 addressing sales and use tax treatment of lease transactions

The Colorado Department of Revenue (CO DOR) has adopted Special Rule 46 (hereafter, final rule) providing guidance on the sales and use tax treatment of lease transactions involving tangible personal property.¹ The final rule clarifies the taxability of lease arrangements, including distinctions between long-term and short-term leases, and addresses the treatment of related party leases, lessor acquisitions, subleases and sale-leaseback transactions.

Under the final rule, leases of tangible personal property are generally treated as retail sales and are subject to Colorado and state-administered local sales taxes, unless a specific exemption applies. The final rule is intended to provide consistency in the application of sales and use tax to lease structures and to address perceived areas of noncompliance. The final rule includes guidance for both long-term and short-term leases based on the duration of the arrangement. By statute, a long-term lease is defined as one exceeding 36 months, while a short-term lease is one with a term of 36 months or less. This distinction is important because it affects both the taxability of the lease payments, as well as the treatment of the lessor's acquisition of the underlying property.

For long-term leases, a lessor's purchase of property may qualify for an exemption from sales and use tax as a wholesale sale, if the primary purpose of acquiring the property is to lease it in an unaltered condition as part of the lessor's regular business activities. If, however, the lessor uses or intends to use the property, the exemption is not available, and tax is due on the purchase. The final rule further requires these determinations to be based on the substance of the transaction rather than its form.

The final rule also establishes additional requirements for short-term lease arrangements. In general, before purchasing property tax free for use in short-term leases, a lessor must obtain permission from the CO DOR to charge sales tax on lease payments rather than to pay tax upfront on the purchase of the leased property. If the lessor fails to obtain permission, the lessor may be required to pay sales or use tax on the purchase of the property and collect tax on lease payments made by the lessee, depending on the circumstances.

The final rule places particular emphasis on lease arrangements involving related parties. Transactions between related entities are subject to heightened scrutiny, and the rule provides that a lessor is presumed to have used the property if the lease is entered into without charge or at a price that is inconsistent with arm's-length standards. An arm's-length rental charge is defined as the amount that would be charged in a comparable transaction between unrelated parties under similar circumstances, considering factors such as the lease term, location and condition of the property.

Additionally, the final rule prevents a sale-leaseback transaction from being treated as a lease for sales tax purposes when the transaction is, in substance, a financing arrangement. In these cases, the tax-treatment determination is based on the underlying economic substance of the transaction rather than its legal form. The final rule takes effect on August 30, 2026. For more on this development, see Tax Alert 2026-1565.

North Carolina updates IRC conformity with decoupling adjustments for IRC Sections 174 and 168(k), removes favorable franchise tax adjustment

On July 2, 2026, North Carolina Governor Josh Stein signed SB 595 into law as Session Law 2026-31 (the Bill). Among its wide-ranging revenue provisions, the Bill updates North Carolina's static Internal Revenue Code (IRC or Code) conformity date from January 1, 2023, to July 5, 2025, thereby incorporating federal tax changes enacted through that date, including those under the One Big Beautiful Bill Act (OBBBA). The Bill also includes targeted decoupling from the OBBBA's full first-year expensing of domestic research and experimental (R&E) expenditures under new IRC Section 174A(a), a notable change to the franchise tax treatment of affiliated indebtedness, conformity with the federal centralized partnership audit regime, new withholding requirements for gaming operators and various other tax changes. The Bill is generally effective July 2, 2026, except as otherwise noted.

The updated conformity date is particularly significant since the North Carolina Department of Revenue (NCDOR) issued guidance on February 9, 2026 (updated February 27, 2026), that instructed taxpayers to compute adjusted gross income (AGI) for individuals and federal taxable income (FTI) for corporations under the Code as of January 1, 2023. That guidance required taxpayers to disregard the OBBBA's federal tax changes for North Carolina purposes and to attach a supplemental reconciliation schedule to their 2025 returns. With the enactment of SB 595, the treatment of several key items has changed materially from what the NCDOR's guidance contemplated. On July 23, 2026, the NCDOR issued new guidance to account for the enactment of SB 595.

IRC conformity update - Bonus depreciation (IRC Section 168(k)): Because North Carolina conformed to the Code as of January 1, 2023, the NCDOR's prior guidance limited the bonus depreciation percentage for qualified property placed in service during tax year 2025 to 40% (reflecting the phase-down schedule in effect under the pre-OBBBA Code). As a result, corporations were required to compute FTI using 40% bonus depreciation and then apply the regular Modified Accelerated Cost Recovery System (MACRS) depreciation to the remaining basis.

With SB 595's update of the IRC conformity date to July 5, 2025, North Carolina now incorporates the OBBBA's restoration of 100% bonus depreciation for qualified property. This change represents a significant difference from the position outlined in the NCDOR's February 2026 guidance. Corporations that placed qualified property in service in 2025 must now compute their North Carolina FTI starting point based on the full 100% bonus depreciation deduction.

North Carolina's existing 85% bonus depreciation addback under N.C.G.S. Section 105-130.5(a)(2) and corresponding 20% deduction over the following five years under N.C.G.S. Section 105-130.5(b)(4), however, remain in effect. Accordingly, while the starting point for computing FTI now reflects 100% bonus depreciation, the addback and deduction provisions will continue to apply.

IRC conformity update - R&E expenditures (IRC Section 174A(a)): While SB 595 generally conforms to the Code through July 5, 2025, it specifically decouples from IRC Section 174A(a). IRC Section 174A(a) allows full first-year expensing of domestic R&E expenditures, replacing the amortization requirement for domestic R&E expenditures that was present under IRC Section 174. As amended by the Tax Cuts and Jobs Act of 2017, IRS Section 174 required taxpayers to capitalize and amortize domestic R&E expenditures over five years.

Importantly, SB 595 requires an addback-and-deduction mechanism under N.C.G.S. Section 105-130.5C, which operates as follows:

• Addback (Year 1): A taxpayer that claims the federal immediate expensing deduction under IRC Section 174A must add back 80% of the amount deducted for federal purposes when computing North Carolina taxable income in the year the expenditures are incurred.
• Deduction (Years 2 through 5): The addback amount is then deducted ratably over the following four tax years, with the taxpayer claiming 25% of the original addback as a deduction in each of those four subsequent years.

This North Carolina adjustment, required under SB 595, is effective (1) for tax years beginning on or after January 1, 2022, for taxpayers that elect for federal income tax purposes the retroactive application of IRC section 174A(a) of the Code for a tax year beginning in 2022, 2023, and 2024; or (2) for tax years beginning on or after January 1, 2025, for taxpayers that do not make the election.

Corporate franchise tax affiliated indebtedness modification

Creditor-side receivable deduction: SB 595 includes a change to the franchise tax treatment of affiliated indebtedness under N.C.G.S. Section 105-122 that warrants careful attention. Under North Carolina's franchise tax regime, a corporation is generally required to add affiliated indebtedness to its net worth tax base unless the indebtedness creates "qualified interest expense" for income tax purposes (i.e., interest expense paid to a related member that meets one of the statutory exceptions). Historically, the affiliated lender (creditor), assuming they were also a North Carolina filer, was permitted a corresponding deduction from its net worth tax base for the receivable to the extent the borrower (debtor) was required to include the related payable as an addition.

SB 595 modifies this framework by prohibiting a creditor from deducting the receivable from its net worth tax base if the debtor has added back the corresponding payable. The legislative history characterizes this as a technical or conforming change consistent with prior revisions to the franchise tax base. However, the practical implications of this change merit close scrutiny, particularly for affiliated groups with non-interest-bearing intercompany debt.

Significance for non-interest-bearing affiliated debt:Before the 2022 revisions, a taxpayer could potentially avoid the affiliated indebtedness addition by structuring intercompany lending on a non-interest-bearing basis, since such debt would not "create net interest expense." The 2022 legislation closed that perceived gap by requiring the addition for affiliated indebtedness unless the indebtedness creates qualified interest expense. In doing so, non-interest-bearing intercompany debt became subject to the debtor-side addition. In practice, however, many affiliated creditors may have relied on the corresponding receivable deduction to offset the franchise tax impact at the group level.

Under SB 595's modification, that creditor-side offset is no longer available. For affiliated groups with significant non-interest-bearing intercompany balances, this change could result in a meaningful net increase to a group's overall franchise tax liability, since the debtor adds back the payable without a corresponding deduction at the creditor level.

Centralized partnership audit regime: SB 595 conforms North Carolina to the federal centralized partnership audit regime enacted under the Bipartisan Budget Act of 2015 (BBA). The Bill authorizes the assessment of tax at the partnership level for federal audit adjustments and allows refunds attributable to federal audit changes. This adoption of the BBA framework means that North Carolina will follow the federal push-out and imputed underpayment procedures, providing greater consistency for partnerships operating in the state.

Individual income tax considerations: With North Carolina now conforming to the Code as of July 5, 2025, individuals must compute AGI by incorporating OBBBA provisions that affect items included in AGI, such as the changes to bonus depreciation flowing through pass-through entities. However, certain OBBBA provisions that apply below the AGI line do not affect AGI and are, therefore, not automatically adopted for North Carolina purposes. OBBBA provisions that apply below the AGI line include new above-the-line deductions for tips, overtime pay, car loan interest, and the senior deduction, as well as the increased standard deduction and the expanded state and local tax (or SALT) deduction cap. The North Carolina General Assembly would need to enact separate legislation to provide for similar adjustments.

Consistent with the corporate income tax treatment, individual taxpayers are also subject to the R&E decoupling and must apply the 80% addback and subsequent four-year ratable deduction mechanism when computing North Carolina taxable income.

Other notable provisions of SB 595: Other noteworthy tax changes in SB 595:

• Withholding on gambling winnings: Effective for gambling winnings paid on or after January 1, 2027, gaming operators must withhold North Carolina income tax when the proceeds from a wagering transaction exceed $5,000 and are at least 300 times the amount wagered.
• Penny elimination rounding: The Bill provides retailers with a rounding procedure for cash transactions in connection with the elimination of the penny.
• Increased frivolous return penalty: The penalty for filing a frivolous tax return is increased from $500 to $2,000.
• Property tax refund changes: The Bill modifies procedures for obtaining refunds of improperly collected property taxes.
• Excise and privilege tax changes: Various provisions address fuels taxes, tobacco products taxes, and other excise and privilege taxes.

For additional information on this development, see Tax Alert 2026-1647.

INCOME/FRANCHISE

Connecticut: The Connecticut Department of Revenue Services (CT DRS) issued guidance on the impact recently enacted legislation has on the state's conformity to the domestic research and experimental (R&E) expenditures provisions under Internal Revenue Code (IRC) Sections 174 and 174A for Connecticut corporation business tax (CBT) purposes, specifically the net income method calculation. Under the net income method, which uses federal net income as a starting point to determine Connecticut taxable income, corporations may "deduct '[a]ll items deductible under the [IRC] effective and in force on the last day of the income year.'" Legislation enacted in 2026 (Pub. Act 26-68 (SB 1)), however, impacts the deductions allowed under IRC Sections 174 and 174A. The guidance describes the impact of these changes on (1) 2025 income tax returns, (2) income tax returns filed for tax year 2026 and thereafter and (3) amended returns for tax years beginning on and after January 1, 2022 and before January 1, 2026. For example, The CT DRS explained that corporations are not eligible to claim a deduction under IRC Section 174A for the 2025 income tax year, but they will be allowed to claim the deduction in tax years starting on or after January 1, 2026. Taxpayers filing an amended or an original Form CT-1120 for the 2025 income year will have to add back the amount of the IRC Section 174A deduction claimed on the federal return. After adding back this amount, the corporation would be allowed to claim a Connecticut subtraction modification equal to the amount deductible under IRC Section 174 as in effect on July 3, 2025. The CT DRS noted that amount deducted under IRC Section 174 "must be computed consistent with the applicable federal amortization rules" and that taxpayers will need to keep a separate state amortization schedule for domestic R&E expenditures incurred in income years before January 1, 2026 for which there is a difference in tax basis. The guidance includes an example of these rules. Under separate legislation, the state enacted interest and penalty relief for underpayment of estimated taxes and additional tax due as a result of these changes. The CT DRS explained when calculating the interest on the underpayment of estimated tax, such underpayment will not include an underpayment resulting from the state conforming to IRC Section 174 as it existed on July 3, 2025 for income years 2022–2025. The CT DRS also has the authority to waive penalties and interest on any additional tax due as a result of this change provided that the additional tax is paid by November 15, 2026 or by the due date for the tax return on which the additional tax due will be reported. Conn. Dept. of Rev. Serv., TSSB 2026-2 (July 2, 2026).

New Hampshire: New law (HB 155) increases the filing threshold for a business enterprise tax (BET) return to a business enterprise having gross business receipts in excess of $400,000 (from $250,000) during the tax period or an enterprise value tax base greater than $400,000 (from $250,000). The law also creates an automatic rate reduction when there is a certified business tax surplus, which occurs when the combined business tax revenue exceeds the combined business tax plan for the same fiscal year. For each $100 million of business tax surplus, the rate of the BET would be reduced by 0.05 percentage points. The rate reduction will take effect for tax periods beginning on or after January 1 of the calendar year immediately following the calendar year of certification. The rate reduction will not take effect if certain conditions are met. If the rate reduction is suspended the certified business tax surplus will be carried forward and be applied in the next succeeding fiscal year in which none of the conditions are met. The BET rate may not be reduced below 0.25%, with any further reduction requiring legislative enactment. The legislative budget assistant has until December 31 following the close of each fiscal year to certify the business tax surplus, if any, as well as the combined business tax plan and combined business tax revenue for the completed fiscal year. The revenue commissioner has 60 days following the certification of the surplus to publish notice of any rate reduction. These changes take effect on January 1, 2027. N.H. Laws 2026, ch. 280 (HB 155), signed by the governor on July 10, 2026.

Oklahoma: The Oklahoma legislature gave final approval to amendments to Okla. Admin. Code Section 710:50-17-51(8), regarding a corporation's adjustments to its federal taxable income to arrive at Oklahoma taxable income — specifically, dividends, add references to net CFC tested income (NCTI), a federal provision created by the One Big Beautiful Bill Act. Under the prior rule, in calculating Oklahoma taxable income, global intangible low-tax income (GILTI) included in federal income under IRC Section 951A is considered dividend income and is allocated to the taxpayer's domiciliary. The amended rule now provides that in calculating Oklahoma taxable income, foreign income inclusion under IRC Section 951A (NCTI), is considered dividend income that is allocated to the taxpayer's domicile. The final adopt date of the amended rule is May 20, 2026, with the final rule taking effect on July 11, 2026. Okla. Register (Vol. 43, No. 20, July 1, 2026).

Pennsylvania: The Pennsylvania Department of Revenue (PA DOR) proposed amendments to its sales factor rule to establish a process for sourcing service income for corporation net income tax (CNIT). The PA DOR noted that the proposed regulatory language "relies on the general structure of the Multistate Tax Commission's Model General Allocation and Apportionment Regulations." Proposed amendments to Pa. Code Section 153.26 would change the rule's heading to limit its application to sourcing sales of tangible personal property. Proposed new rule, Pa. Code Section 153.26a, would establish primary sourcing rules for sourcing sales of services to Pennsylvania and it would establish secondary sourcing rules when the delivery location of the service cannot be determined under the primary sourcing rule. The proposal includes specific rules for determining the delivery location where the services are delivered to or on behalf of a customer by physical or electronic means and whether the customer is an individual or business, with additional guidance provided for when such determination cannot be reasonably made. Special sourcing rules would be adopted for certain industries, markets or business models, including but not limited to the following: certain digital services, pre-written and custom software, architectural and engineering services, warranties, brokerage services, advertising, card network business, services involving a customer's employees, subscription services, various transportation companies (e.g., railroad, truck, bus, airline, qualified air freight forwarding, water), pipeline or natural gas companies, satellite television service providers, telecommunications companies, delivery services, among other industries, markets and business models. The proposed new rule for sourcing services also would: (1) provide guidance for reasonably approximating the amount of service receipts that are delivered in Pennsylvania; (2) describe recordkeeping and documentary evidence that would support a taxpayer's method of sourcing and apportioning sales of services; (3) provide guidance on when the PA DOR or the taxpayer could change the taxpayer's sourcing methodology; and (4) define key terms. The proposed rules include several illustrative examples. (Penn. Bulletin, Vol. 56, No. 30 July 25, 2026).

Pennsylvania: New law (SB 146) modifyies how "net income" is calculated for purposes of determining business income and receipts tax (BIRT) liability in a City of the First Class — i.e., a city with a population of at least one million, in this case Philadelphia. As modified, Philadelphia "net income" has the same meaning as taxable income for state income tax purposes, with respect to the following: (1) research and experimental (R&E) expenditures under IRC Sections 59(E), 174, 174A or 481; (2) expenses for qualified production property under IRC Section 168(n); (3) interest deductions under IRC Section 163(j). The law further provides that later effective modifications to the calculation of taxable income (e.g., additions, deductions, exclusions or other adjustments relating to the IRC) will apply to the calculation of net income to determine Philadelphia BIRT liability. In addition, references to taxable income are deemed to be references to net income for purposes of determining Philadelphia BIRT liability. These changes apply to tax years beginning after December 31, 2024. Penn. Laws 2026, Act No. 21 (SB 146), signed by the governor on July 12, 2026.

SALES & USE

Illinois: The Chamber of Digital Commerce (Chamber) has filed a lawsuit challenging the constitutionality of Illinois's new Digital Asset Tax (DAT), which applies to the privilege of receiving from a digital asset broker any digital asset business activity by a customer in Illinois. Beginning January 1, 2027, the DAT will be imposed on brokers, exchanges, custodians or wallet providers that have a physical presence in Illinois or at least $100,000 in in-state digital-asset receipts (see Tax Alert 2026-1374). The Chamber is arguing that the DAT is facially invalided under the Illinois and U.S. constitutions and is preempted by the federal Internet Tax Freedom Act. The Chamber is seeking preliminary and permanent injunctive relief barring the Illinois Department of Revenue from implementing or enforcing the DAT. Chamber of Digital Commerce v. Harris, complaint filed (Ill. Cir. Ct., Sangamon Cnty., July 21, 2026).

Louisiana: The Louisiana Department of Revenue (LA DOR) proposed additional amendments to LAC 61:I.4412, the rule on the sales and use tax exemption for digital tools. The additional amendments were made in response to feedback from interested parties. The LA DOR explained that the proposed revisions would clarify the definitions of "exclusively for commercial purposes" and "used by the business directly in the production of goods and services." As revised, "purchased or licensed exclusively for commercial purposes" would mean "purchased or licensed solely for use in connection with a business, trade, or commercial activity and not for personal, household, or consumer purposes." The term "used by the business directly in the production of goods and services" would mean "the direct application or incorporation of a digital tool into the creation, development or production of a final product or service for sale to a customer where the tool is used to produce that product or service." This term would "not include tools that are merely supportive, administrative, managerial, planning, communication, or analytical in nature and that do not directly transform inputs into salable goods or services." The LA DOR will hold a public hearing on the proposed rule on August 27, 2026. (La. Register, Vol. 52, No. 7, July 20, 2026.)

Missouri: New law (HB 2819) allows vendors in cash transactions to round the total amount of the sale due to the nearest five cents. Rounding is follows: (1) for totals ending in one, two, six or seven cents, the amount may be rounded down to the nearest amount divisible by five cents; (2) for totals ending in three, four, eight or nine cents, the amount may be rounding up to the nearest amount divisible by five cents. Rounding is applied after all items, discounts and taxes have been calculated. These rounding provisions do not apply to transaction paid by non-cash methods (e.g., credit or debit). HB 2819 takes effect on August 28, 2026. Mo. Laws 2026, HB 2819, signed by the governor on July 13, 2026.

North Carolina: New law (SB 257) repeals the sales tax exemption for electricity used at qualifying data centers and eligible internet data centers. Before this legislative change, North Carolina allowed broad sales and use tax exemptions for certain qualifying data center operations, including exemptions for support equipment, computer equipment, software, electricity and certain other eligible purchases. The new law narrows these incentives by eliminating the sales tax exemption for electricity purchased for use at qualifying data centers and eligible internet data centers. Electricity will now be subject to sales tax at a rate of 7.0%, regardless of the locality in which it is consumed. Under SB 257, the repeal took effect when the bill became law on July 7, 2026, and applied to electricity sold on or after that date. HB 56, however, changes the effective date so that the repeal applies beginning with the first electricity billing period that begins at least 30 days after enactment — i.e., billing periods that start on or after August 6, 2026. Guidance issued by the North Carolina Department of Revenue addresses implementation of the repealed exemption and clarifies the treatment of electricity purchased after the effective date. N.C. Laws 2026, SB 257 and HB 56, both bills signed by the governor on July 7, 2026. See also, N.C. Dept. of Rev., Important Notice: Repeal of Exemptions for Electricity Used at Datacenters (July 23, 2026). For more on this development, see Tax Alert 2026-1662.

Pennsylvania: New law (SB 146) provides guidance on situsing local sales tax for cities of the first class and counties of the second class. For Cities of the First Class (i.e., cities with a population of at least 1 million, currently Philadelphia) and Counties of the Second Class (i.e., counties with a population of 1 million but less than 1.5 million, currently Allegheny County), the location of the retail sale is deemed to be at the same location of the sale for state sales and use tax purposes, unless a different rule applies. These changes apply to tax years beginning after December 31, 2025.

The law also makes clear that the Local Tax Enabling Act does not authorize a municipality that receives state funding to impose an amusement tax on complimentary or resort-sponsored admission to resort places that are provided by the resort to overnight guests without a separate charge for the amusement admission, unless the Local Tax Enabling Act is amended to permit such tax. Penn. Laws 2026, Act No. 21 (SB 146), signed by the governor on July 12, 2026.

BUSINESS INCENTIVES

Hawaii: New law (SB 2580) amends the motion picture, digital media and film production income tax credit. Under current law the amount of the credit is 22% of the qualified production costs incurred by a qualified property in any county of the State with a population over 700,000; the credit is increased to 27% if the county has a population of 700,000 or less. SB 2580 provides an additional credit of 5% of the qualified production costs incurred when the workforce on the qualified production is at least 80% local hires. The law also requires taxpayers claiming a tax credit to submit an independent third-party certification issued by a qualified CPA. Such certification must be submitted within 90 days following the end of each tax year in which qualified production costs were expended. SB 2580 also increase the cap on the total tax credits claimed per qualified production to $20 million (from $17 million). This limit does not apply to any qualified production that incurs at least $60 million of qualified production costs. The cap on the total amount of credits allowed in a year is capped at $60 million (from $50 million); the cap for the subsequent year may be increased by the unclaimed amount in the prior year. The law amends the definition of "qualified production", changing references to "television" to "broadcast television" and adding provision for "streaming platform". In addition, SB 2580 exempts from the general excise tax certain amounts received by a motion picture project employer from a client company that represent reimbursements for costs paid or incurred by the client company for reasonable employment-related costs of motion picture project workers or loan-out companies (such as employee wages or salaries, payroll taxes, insurance premiums and employment benefits). The exemption does not apply to amounts paid for services, administration, overhead, profit, markups or similar fees. Lastly, the law extends the sunset date of the credit to January 1, 2038 (from January 1, 2033). Haw. Laws 2026, Act 185 (SB 2580), signed by the governor on July 6, 2026.

Hawaii: New law (SB 2360) "modernizes the enterprise zone program" and extends the eligibility period of the general excise tax exemption for qualified businesses within state enterprise zones (EZ). SB 2360 allows additional activities with the EZ to qualify for EZ benefits, including (1) retail activity by a local manufacturer made within the EZ; (2) the processing of value-added agriculture products; (3) research, development, sale or production of all types of medical products and medical and health care services; (4) activities of the Hawaii food and product innovation network; (5) the provision of professional services by health care professionals in health care-related sectors; (6) research and development of aerospace technology; and (7) information technology design and production services. SB 2360 adds definitions of "Hawaii food and product innovation network," "innovation enterprise," "tangible person property," and "value-added agricultural product". SB 2360 allows the Department of Business, Economic Development, and Tourism (Department) to declare up to two census tracts on state land that contain an innovation enterprise to be designated as an EZ, subject to the governor's approval. The Department, in consultation with the Department of Taxation, is required to conduct a comprehensive review of the state's EZ program, including the evaluation of the economic impact of the program and an assessment of whether existing EZ continue to meet eligibility criteria for designation. SB 2360 also extends the eligibility period for general excise tax exemptions for businesses within state EZs, effective January 1, 2028. SB 2360 takes effect on July 1, 2026. Haw. Laws 2026, Act 1284 (SB 2360), signed by the governor on July 6, 2026.

Pennsylvania: New law (SB 146) establishes the innovate in PA 2.0 tax credit, under which a qualified taxpayer may purchase tax credits from the Department of Community and Economic Development (DCED) and apply such credits against its insurance premiums tax liability. Such credits may be claimed starting in calendar year 2030 against insurance premiums tax liability incurred for a tax year that begins on or after January 1, 2029. A "qualified taxpayer" is (1) an insurance company authorized to do business in the state or (2) a holding company that has at least one insurance company subsidiary authorized to do business in the state, and that have an insurance premiums tax liability and contribute capital to purchase premiums tax credit. A qualified taxpayer may carry forward unused credit to a succeeding tax year, provided that the credit may not be carried forward to tax years beginning after December 31, 2041. Unused credit may not be carried back. A qualified taxpayer may also transfer tax credits held without restriction to any entity that is a qualified taxpayer that meets certain conditions. The total aggregate amount of credits that may be applied against the insurance premiums tax is capped at $15 million per year. The DCED may sell up to $125 million in tax credits to qualified taxpayers.

The law also modifies the aggregate amount of manufacturing and investment tax credit that may be issued by the DCED, allows for additional designations of Keystone Opportunity Expansion Zones for shipbuilding in a City and County of the First Class (i.e., Philadelphia) and additional zones in certain Counties of the Second-Class A, and allows the DCED to designated Residential Revitalization Keystone Opportunity Zones in certain Counties of the Third Class. Penn. Laws 2026, Act No. 21 (SB 146), signed by the governor on July 12, 2026.

PROPERTY TAX

California: New law (SB 1437) extends the sunset date for the valuation methodology for intercounty pipeline rights-of-way by five years. Under California law, there is a rebuttable presumption in favor of a full cash value assessment for an intercounty pipeline rights-of-way on publicly or privately owned property, including rights-of-way that are the subject of a change in ownership, new construction or any other re-appraisable event during the period from March 1, 1975 through June 30, 2031 (from June 30, 2026), provided that certain valuation standards are met in determining the assessed value. SB 1437 extends the rebuttable presumption through tax year 2030–2031 (from 2025–2026). These statutory provisions (Cal. Rev. and Tax Code Section 401.10) are repealed on January 1, 2032 (from January 1, 2027). Cal. Laws 2026, ch. 63 (SB 1437), signed by the governor on July 6, 2026.

Illinois: The Illinois Department of Revenue issued its study of the Illinois property tax system. The study, which was mandated by law enacted in 2024 (SB 3455), includes: (1) a comparison of property assessment practices, property tax systems, and tax structures in Illinois to other states including Georgia, Indiana, Iowa, Kentucky, Michigan, Missouri, North Carolina, Ohio, Pennsylvania and Wisconsin; (2) a review of Cook County's classification system used for assessing real property; (3) a review of real estate transfer taxes and homestead exemptions in the state; (4) a review of the state's laws for appealing assessments and for collecting property taxes; (5) analysis of preferential assessments or incentives; (6) review of the State's reliance on property taxes and the historical growth in property tax levies; and (7) recommendations for improving the system. Ill. Dept. of Rev., FY 2026 Property Tax Study: A comprehensive study of the Illinois Property Tax System (June 30, 2026).

New York City: On July 10, 2026, the New York City (NYC or City) Department of Finance (Department) adopted final rules — NYC Admin. Code Section 62-01 to Section 62-08² — on the administration of the City's recently enacted surcharge on certain real properties that do not serve as primary residences, also referred to as the pied-à-terre tax (surcharge).

The final rules were effective immediately. The surcharge applies to fiscal years beginning July 1, 2026, and is set to sunset on June 30, 2031. The surcharge is imposed on secondary homes (specifically, one- to three-family residential properties, residential condominium units, and residential cooperative dwelling units, collectively "covered property") in NYC that do not serve as a "primary residence" and meet a minimum value threshold. The Department will determine whether a covered property is a primary residence and taxpayers must refute adverse determinations by filing an appeal. This year, the Department must make its initial determinations on primary residences and provide notice of such determination no later than August 30, 2026.

The Department has identified approximately 31,000 properties that may be subject to the surcharge. Property owners who receive a notification by mail indicating that the Department has initially determined their property to be a second home and believe the determination is incorrect must appeal that determination with the Department by September 18, 2026, or at a time determined by the Commissioner upon showing "good cause." The statutory timeframe for appealing an initial non-primary residence determination is 30 days from the date of mailing, and the deadlines on the Department's website appear to imply that the Department has completed the mailing process for the initial 2026-27 determinations.

The Department recently launched an online surcharge exemption application portal for residential homes and condos and cooperative units, which appears to be the mechanism for filing the 30-day appeals as well as proactive declarations of primary residence status, though the language is unclear. The Department's webpage also includes a growing collection of frequently asked questions, eligibility guidance and information regarding the documentation required to support an exemption claim, making it an important resource for taxpayers and their advisors as the surcharge is implemented.³ For additional information on this development, see Tax Alert 2026-1674.

CONTROVERSY

Federal: In Keysight Technologies, Inc. & Subsidiaries v. United States, the US Court of Federal Claims held that Treasury lacked the authority to issue Treas. Reg. Section 1.951A-2(c)(5) (the disqualified basis regulation). This regulation disallows, for purposes of computing global intangible low-taxed income (GILTI), any deduction or loss attributable to "disqualified basis" arising from certain related-party transactions in the gap period before the effective date of IRC Section 951A. In reviewing Treasury's authority to issue the disqualified basis regulation, the court applied the standard articulated by the Supreme Court in Loper Bright Enterprises v. Raimondo, which requires courts to exercise independent judgment in interpreting statutes rather than defer to an agency's interpretation. For more on this development, see Tax Alert 2026-1663.

PAYROLL & EMPLOYMENT TAX

Multistate: State unemployment insurance (SUI) trust funds are largely financed by employer contributions (in Alaska, New Jersey and Pennsylvania employees also make contributions). States are required to maintain a SUI taxable wage base of no less than the limit set under the Federal Unemployment Tax Act (FUTA). The 2026 FUTA wage limit of $7,000 has remained unchanged since 1983, despite increases in the federal minimum wage and annual cost-of-living adjustments over the last 43 years. Some states are conservative in their approach to maintaining adequate SUI trust fund reserves. Consequently, the SUI wage base is flexible in those states, meaning it is indexed to the average wage and/or or varies based on the trust fund balance. For 2025, 28 jurisdictions had a flexible wage base. Tax Alert 2026-1640 includes a chart that lists the 2026 SUI wage bases and the minimum and maximum SUI tax rates, including surcharges that are not certified and not included in state SUI wages on the federal Form 940.

Connecticut: Governor Ned Lamont approved HB 5003 imposing a new requirement concerning employer transparency about pay codes used in pay statements and modifying various other state employment law provisions. For a summary of all the workforce provisions contained in HB 5003, see the analysis provided by the Connecticut state legislature. Tax Alert 2026-1586 describes some of the provisions of significant note, all of which are effective October 1, 2026.

Massachusetts: The Massachusetts Department of Revenue released TIR 26-4 to explain whether and how provisions of the federal One Big Beautiful Bill Act (OBBBA) apply for Massachusetts income tax purposes. Massachusetts generally defines taxable income as contained in the federal Internal Revenue Code (IRC) in effect on January 1, 2024. However, for trade or business expense deductions, the state generally follows the IRC as currently in effect, subject to limited exceptions, and also conforms to certain other specified IRC provisions. The chart in Tax Alert 2026-1567 summarizes the compensation and benefits provisions of the OBBBA and whether the current Massachusetts tax code conforms to those provisions.

North Carolina: New law (SB 257) progressively lowers the personal income tax rate from 3.99% to 2.99% over seven years. Before SB 257, North Carolina law contained a series of conditional tax rate reductions that depended on the state meeting General Fund revenue triggers. (See Tax Alert 2023-1685.) Starting in 2027, SB 257 repeals these previously enacted trigger-based reductions for the 2027–2034 period and replaces them with the following schedule of automatic tax rate cuts: (1) for tax years 2027, 2028 and 2029 — an individual income tax rate of 3.49% (down from 3.99% in 2026); (2) for tax years 2030, 2031 and 2032 — an individual income tax rate of 3.24%; and (3) for tax years 2033 and thereafter — an individual income tax rate of 2.99%. After the rate reaches 2.99%, S.B. 257 authorizes up to two additional future rate reductions that may occur between 2035 and 2040 if specified General Fund revenue thresholds are achieved. N.C. Laws 2026, SL 2026-41 (SB 257), signed by the governor on July 7, 2026. For more on this development, see Tax Alert 2026-1630.

Ohio: The Ohio Department of Revenue (Department) has updated its income tax withholding tables and formulas reflecting a scheduled decrease in the tax rates under HB 96 enacted in 2025. (Specifically, retroactive to January 1, 2025, the top personal income tax rate was reduced from 3.5% to 3.125%. Effective January 1, 2026, a flat personal income tax rate of 2.75% applies to income over $26,050.) The modified withholding formulas/tables apply to wages paid on and after August 1, 2026. The Department states that the set optional flat rate for bonuses and irregular wage payments is 2.75% for 2026. For additional information on this development, see Tax Alert 2026-1619.

MISCELLANEOUS TAX

North Carolina: New law (SB 257) increases the excise tax on sports wagering operations and imposes a new excise tax on prediction markets. Effective July 7, 2026, the excise tax on sports wagering operators increases to 23% (from 18%). This rate increase applies to gross wagering revenue received on or after that date. Starting in 2027, SB 257 imposes a new tax on prediction markets. The tax is imposed at a rate of 6% of the operator's net trading fee revenue apportionable to North Carolina. Net trading fee revenue is a prediction market's revenue less the following: (1) broker or market maker compensation; (2) promotional incentives, funds or rebates; (3) platform fees or clearing fees charged by a derivatives clearing organization; and (4) withdrawal fees. An operator's net trading fee revenue is apportionable to North Carolina when it involves the trading of an event contract by a resident of the State, who is domiciled and present in the State at the time of the trade, on a prediction market that results in the payment of trading fees by that resident. The new tax applies to net trading fee revenue received on or after January 1, 2027. N.C. Laws 2026, SL 2026-41 (SB 257), signed by the governor on July 7, 2026.

GLOBAL TRADE

Federal: On July 23, 2026, the Office of the United States Trade Representative (USTR) announced final action in its Section 301 Trade Act of 1974 (Section 301) investigations into the acts, policies and practices of 60 economies related to "their failure to impose and effectively enforce a prohibition on the importation of goods produced with forced labor." Effective 12:01 a.m. Eastern Time on July 24, 2026, additional duties of either 10% or 12.5% apply to most imports from the covered trading partners, subject to specified product exclusions. The final action follows the USTR's June 2, 2026 determinations and proposed responsive measures. The duties take effect as the temporary 10% tariffs under Section 122 of the Trade Act of 1974 are set to expire, establishing a new Section 301-based tariff framework tied to failure to adopt and/or enforce forced labor import prohibitions. For additional information on this development, see Tax Alert 2026-1607.

Federal: On July 20, 2026, United States (US) President Donald Trump signed three proclamations imposing an additional 50% ad valorem tariff on certain Canada-origin goods, invoking Section 338 of the Tariff Act of 1930 (19 U.S.C. 1338) (Section 338) related to Canadian import measures affecting US motor vehicles, alcoholic beverages and dairy. The additional duties take effect at 12:01 a.m. Eastern Time on August 19, 2026 for goods entered for consumption, or withdrawn from warehouse for consumption, on or after that time. For additional information on this development, see Tax Alert 2026-1566.

Federal: On July 20, 2026, United States (US) President Donald Trump announced two measures intended to strengthen domestic manufacturing capacity and reduce reliance on foreign sources of strategic materials. First, the President issued a Presidential Proclamation (Proclamation) directing the US Secretary of Commerce to establish a new incentive program for businesses that invest in building, expanding or refurbishing primary aluminum production facilities in the United States. Under the program, approved participants may be eligible to import specified volumes of primary aluminum at a reduced Section 232 tariff rate equal to one-half of the otherwise applicable rate. Second, the President issued an Executive Order (EO) aimed at strengthening defense supply chains and increasing domestic acquisition of critical materials. Among other actions, the EO restricts the use of waivers for certain critical materials sourced from designated countries, establishes new supply-chain mapping requirements for defense contractors and directs the qualification of alternative domestic sources where available. For additional information on this development, see Tax Alert 2026-1569.

Federal: On July 15, 2026, the United States Trade Representative (USTR) issued a Notice of Action under Section 301 of the Trade Act of 1974, as amended (Section 301), concluding its investigation into certain acts, policies and practices of Brazil. The investigation, initiated on July 15, 2025, examined issues related to digital trade and electronic payment services, unfair and preferential tariffs, anti-corruption enforcement, intellectual property protection, ethanol market access and illegal deforestation. The USTR determined on June 1, 2026 that Brazil's acts, policies and practices under investigation are unreasonable or discriminatory and burden or restrict United States (US) commerce and proposed imposing additional duties of 25% on all goods of Brazil, with specified exemptions. Following its review of written submissions and public hearing testimony, and at the specific direction of the President, the USTR has determined to impose the proposed 25% additional duty on certain products of Brazil, with exemptions set forth in Annexes I and II to the Notice of Action. For additional information on this development, see Tax Alert 2026-1530.

UPCOMING WEBCASTS

Wednesday, August 26, 2026. Domestic tax quarterly webcast series: a focus on state tax matters (1 pm ET). For our third quarterly webcast in 2026, panelists will discuss state tax compliance considerations for corporations and partnerships filing their 2025 returns. They will also highlight recently enacted state tax law changes that take effect in 2026 and may impact quarterly estimated tax payments, including state responses to the One Big Beautiful Bill Act. Additionally, panelists will discuss state penalty and interest relief provisions related to retroactive law changes that affect 2025 tax-year returns and 2026 quarterly tax payments. Panelists will provide an overview of recent state and local tax legislative and regulatory developments of interest to multijurisdictional entities. Lastly, panelists will provide an overview of state and local tax-related ballot measures that are up for a vote in the November 3, 2026 general election. 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.