Ernst & Young's State and Local Tax Weekly newsletter for August 8 and August 14 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

Massachusetts ATB rejects state's application of Finnigan on non-nexus combined group members protected by P.L. 86-272, upholds Section 38 manufacturer classification

The Massachusetts Appellate Tax Board (ATB) in Smithfield Packaged Meats Corp. and Combined Affiliates,¹ upheld the validity of regulations (referred to as the Combination Provisions) used by the Department of Revenue (DOR) to aggregate the activities of separate combined group members and the reclassification of certain group members as a Section 38 manufacturing corporation required to use a single sales factor formula.

The ATB, however, rejected the DOR's application of the Finnigan adjustment to group members that do not have nexus with Massachusetts (non-nexus group members) and have income that was protected from taxation by P.L. 86-272,² finding such application violated the Supremacy Clause of the US Constitution. Accordingly, the sales of those non-nexus group members were not properly reallocated to group members with Massachusetts nexus (nexus group members) for purposes of determining sales included in the numerator of the Massachusetts sales factor. Lastly, the ATB upheld the imposition of underpayment penalties for two of the tax years at issue.

Massachusetts tax law: Massachusetts law requires corporations engaged in a unitary business to file a combined report. Each member of the unitary business calculates the apportionment factor numerator based on its own statutorily prescribed apportionment formula and calculates the apportionment factor denominator by determining and aggregating the denominators of every group member, including non-nexus group members. The Combination Provisions³ promulgated by the DOR, provide guidance on how a group member determines its apportionment formula in relation to intercompany transactions. Under these provisions, the activities of the group member that produced the property and the member selling the property to an unrelated third party are jointly considered in determining the appropriate apportionment formula of the selling member — e.g., whether the member is a Section 38 manufacturer. Each group member classified as a Section 38 manufacturer must use a single sales factor apportionment formula. Corporations that do not qualify as such must use a three-factor apportionment formula. However, all corporations must use single sales factor apportionment formula effective for tax years beginning on or after January 1, 2025.

Massachusetts tax law also adopts the "Reallocation Rule,"⁴ which provides that "[e]ach taxable member of the group shall include in its sales factor numerator a portion of the aggregate Massachusetts sales of nontaxable members based on a ratio … " the numerator of which is the taxable member's Massachusetts sales and the denominator is the aggregate Massachusetts sales of all taxable members. For purposes of determining whether sales are in Massachusetts, the Reallocation Rule applies a Finnigan adjustment. Under this adjustment, if one member of a unitary group has nexus with Massachusetts, the Massachusetts sales of all members of the unitary business group, including nontaxable members, will be included in the sales factor numerator.

Background: The taxpayers, Smithfield Packaged Meats Corp. and combined affiliates, filed Massachusetts combined corporate excise tax returns for the tax years at issue, 2015 through 2017. For these years, the taxpayers' principal domestic business lines were hog production (Farmland), fresh pork products (Fresh Meats Sales), and packaged meats (Packaged Meats Sales).

For the 2015 tax year, the DOR aggregated the activities of Fresh Meats Sales (a taxable member of the combined group that sold products produced by members of the combined group) with Farmland (a nontaxable member of the combined group that manufactured and sold processed pork to Fresh Meats Sales) and reclassified Fresh Meats Sales as a Section 38 manufacturer. For the 2016 tax year, the DOR (1) reclassified Packaged Meats Sales (a taxable member of the combined group that sold products produced by members of the combined group) as a Section 38 manufacturer, (2) aggregated the activities of Package Meats Sales and Morrell (a taxable member of the combined group that both parties agreed was a Section 38 manufacturer), and (3) reclassified Fresh Meats Sales as a Section 38 manufacturer. For the 2017 tax year, the DOR reclassified Package Meats Sales as a Section 38 manufacturer (the 2017 combined group only included Morrell and Packaged Meats Sales).

In addition, in 2017, Fresh Meats Sales stopped being a taxable member of the combined group under P.L. 86-272. Nevertheless, on the original 2017 Form 355U, the taxpayers initially applied the Finnigan adjustment and assigned receipts Fresh Meats Sales derived from sales to Massachusetts purchasers to taxable members of the combined group.

In each of the years, the DOR assessed the taxpayers additional corporate excise tax, penalties and interest. The taxpayers appealed these assessments to the ATB.

Findings of the ATB: The ATB found that the DOR's application of the Combination Provisions was proper, and that Fresh Meats Sales (for tax years 2015 and 2016) and Packaged Meats Sales (for tax years 2016 and 2017) were properly classified as Section 38 manufacturers. However, the ATB found that inclusion of a portion of Fresh Meats Sales, a company with P.L. 86-272 protection, in the apportionment factor numerator of each taxable member of the combined group was improper and in violation of the Supremacy Clause. The ATB also upheld the assessment of an underpayment penalty under Ma. G.L. Section 35A for tax years 2015 and 2016, but not for 2017, finding no underpayment for that year.

Section 38 manufacturer: The ATB rejected the taxpayers' challenge to the validity of the Combination Provisions used by the DOR to aggregate the activities of separate combined group members and reclassify Fresh Meats Sales and Packaged Meats Sales as Section 38 manufacturers. The ATB reasoned that as a general matter each member of a combined group must separately determine its tax liability; however, this notion "overlooks the fact that the Commissioner [of the Massachusetts Department of Revenue] was given explicit authority to promulgate regulations that address the elimination of intercompany transaction." The ATB found the express grant of regulatory authority under Ma. G.L. c. 63, Section 38B(f) is broad and not limited to the elimination and deferral of income. Rather, "the authority extends to the elimination or deferral of apportionment factors associated with the intercompany transaction" — i.e., the authority "gives the Commissioner the discretion to address the appropriate apportionment methodology after an intercompany transaction between unitary group members (one a manufacturer and the other a sales entity) has been eliminated." Accordingly, the Commissioner's promulgation of the Combination Provisions was within the statutory authority granted to it to prescribe regulations.

The ATB also rejected the taxpayers' argument that the Combination Provisions contravened statutory provisions directing manufacturing corporation status be determined on a single-corporation basis, finding instead that the regulation "simply coordinates" the combined reporting provisions in Ma. G.L. c. 63, Section 38B and the provisions in Ma. G.L. c. 63, Section 38(l)(1) that define a Section 38 manufacturer.

The Reallocation Rule - the Finnigan adjustment: The ATB agreed with the taxpayers that the application of the Finnigan adjustment to include a pro-rata portion of the sales of a nontaxable combined group member (whose income was exempt from taxation under P.L. 86-272) in the sales factor improperly frustrated the objectives of P.L. 86-272 in violation of the Supremacy Clause of the US Constitution. In so finding, the ATB considered (1) whether P.L. 86-272 prevented a state only from directly taxing an out-of-state entity that falls within its protection, and (2) whether the "person" referenced in P.L. 86-272 included an entire unitary group so that if one group member is taxable in Massachusetts because it has nexus with the state, all group members, even entities protected by P.L. 86-272, are deemed to have nexus with the state.

As to the first question, the ATB determined that P.L. 86-272 does more than prevent a state from directly taxing an out-of-state entity protected from taxation. The ATB stated that "[t]he income earned by a P.L. 86-272 protected entity is tax-exempt, without qualification. On whose tax return that income is reportable is not relevant." Turning to the second question, the ATB concluded that no support could be found in the wording or legislative history of P.L. 86-272 that the term "person" includes multiple entities that make up a combined group.

In this case, the combined group taxable income reported on the taxpayers' 2017 return included income of a P.L. 86-272 protected entity through the operation of the state's apportionment formula. In support of its position that the Finnigan adjustment did not violate P.L. 86-272, the DOR argued that the state "was not taxing a nontaxable member but rather was applying an apportionment formula in context of combined reporting that fairly reflected income attributable to Massachusetts." The ATB found the case law cited by the DOR non-persuasive, saying those decisions "subsume the activities of a P.L. 86-272 protected entity within the activities of a combined or consolidated reporting group as a whole — placing combined and consolidated reporting, and concepts of apportionment, ahead of the constitutional principles embedded in the Supremacy Clause … " The ATB noted that while apportionment principles have passed muster under the Due Process, Equal Protection and Commerce Clauses, "the Supremacy Clause raises a different concern."

The ATB also found that Massachusetts, in apportioning the Massachusetts sales of Fresh Meats Sales to taxable members of the combined group via the application of the Reallocation Rule, has indirectly done what it could not do directly — i.e., indirectly imposing a tax on the income of a P.L. 86-272 protected entity. The ATB noted that "the fact that this result was achieved indirectly rather than by direct taxation does not validate Massachusetts' action."

For additional information on this development, see Tax Alert 2026-1775.

INCOME/FRANCHISE

Indiana: In PENN Entertainment, Inc. v. Indiana Department of State Revenue,⁵ the Indiana Supreme Court (court) held that the state's income tax add-back statute does not require taxpayers to add back unapportioned wagering excise taxes paid to other states when calculating Indiana adjusted gross income. In reversing the Tax Court's decision, the court observed that Indiana Code Section 6-3-1-3.5(b)(3) applies only to direct income taxes imposed by other states and the functional equivalent of income taxes (i.e., taxes "measured by" income). Because wagering excise taxes cover only intrastate transactions and are not subject to apportionment, the court found that wagering excise taxes paid to other states are not functional equivalents of income taxes. Accordingly, the court ruled the wagering excise taxes fall outside the scope of the add-back statute. The court emphasized that the statute should be interpreted according to its plain language and legislative intent, which was to prevent double deductions for income-based taxes, not to capture all state taxes that might reduce federal taxable income. For additional information on this development, see Tax Alert 2026-1782.

Nebraska: In Apple Inc. v. Nebraska Department of Revenue,⁶ the Nebraska District Court for Lancaster County (court), declined to apply the state's statutory apportionment methodology to accumulated post-1986 deferred foreign income under IRC Section 965(a), holding that an alternative apportionment formula is required. The court, however, found the alternative apportionment methods proposed by both the Nebraska Department of Revenue (Department) and the taxpayer were inequitable, and remanded the case to the Department's Tax Commissioner with instructions for developing an appropriate formula. This decision follows the Nebraska Supreme Court's August 2024 ruling in Precision Castparts (see Tax Alert 2024-1778), which held that IRC Section 965(a) income does not qualify for Nebraska's dividend-received deduction (DRD). Together, these cases establish that IRC Section 965(a) income is not allowed a DRD and warrants alternative apportionment. The appropriate apportionment methodology, however, remains unresolved. For additional information on this development, see Tax Alert 2026-1748.

Ohio: In Steven and Pamela Bowser v. Harris,⁷ the Ohio Board of Tax Appeals (BTA), allowed a taxpayer to claim the Business Income Deduction (BID) on the sale of an equity interest in a C corporation in which the taxpayer had materially participated. The BID allows taxpayers to deduct the first $250,000 ($125,000 for spouses filing separately) of business income from their Ohio adjusted gross income. Ohio law defines "business income" as "income, including gain or loss, from a partial or complete liquidation of a business, including, but not limited to, gain or loss from the sale or other disposition of goodwill or the sale of an equity or ownership interest in a business." In 2022, the Ohio legislature clarified the definition of business income in HB 515. Specifically, HB 515 clarified that income from a sale of an equity interest qualifies as business income when the sale is treated for federal income tax purposes as the sale of assets, or the seller materially participated in the business activities during the year of sale or any of the five preceding years applying the rules in 26 C.F.R. 1.469-5T. The taxpayers filed an amended 2018 Ohio individual income tax return seeking a refund resulting from claiming a BID related to capital gains from the sale of an equity interest in a closely held C corporation in which they actively participated in for more than 500 hours during the relevant period. The Ohio Department of Taxation (Department) denied the refund, asserting that capital gains realized from the sale of C corporation stock constitute nonbusiness income excluded from the BID. The BTA rejected the Commissioner's argument that capital gains are expressly excluded from the BID, observing that the definition of "nonbusiness income" begins with "all income other than business income" and that nonbusiness income "may" include capital gains. The BTA concluded that such a reading does not create internal inconsistency, as capital gains that do not meet the business income criteria remain excluded. The BTA then turned to the Department's argument that the 2022 legislative clarification adding language regarding "sale of an equity or ownership interest in a business" did not expand the BID to C corporation stock sales. The BTA disagreed, concluding that the statutory language was unambiguous and did not distinguish between pass-through entities and C corporations. Finally, the BTA concluded that the statutory reference to 26 C.F.R. 1.469-5T, while generally excluding corporations, did include an exception for closely held corporations in 26 C.F.R. 1.469-1T. Accordingly, the BTA reversed the Commissioner's final determination and held that the capital gains from the sale of the equity interest in the closely held C corporation in which a taxpayer materially participated qualified for the BID. For additional information on this development, see Tax Alert 2026-1771.

Utah: The Utah Tax Commission proposed amendments to rule R865-6F-32 "Taxation of Financial Institutions" to implement legislative changes (2025, SB 219) that exclude sales from "investment activities or assets or trading activities or assets" from the numerator of a financial institution's sales factor but leaves them in the denominator. Proposed amendments to the rules for computing the sales factor would delete the current rules for sourcing receipts from investment assets and activities and trading assets and activities under R865-6F-32(3)(m) and replace those rules with new rules. The proposed new rule would include receipts from investment assets and activities and trading assets and activities in the sales factor in accordance with Utah Code Section 59-7-317.⁸ For purposes of the term "sales from investment activities and assets and trading activities and assets" as defined in Utah Code Section 59-7-317, net gains would mean "the amount of net gain," and it would not mean "gross receipts related to the net gain." Proposed amendments would replace the rule's current definition of "financial institution" with a reference to the term's statutory definition in Utah Code Section 59-7-317. The proposed rules would be effective for tax years beginning on or after January 1, 2026. Utah Tax Comm'n, Proposed amendments to rule R865-6F-32 (Utah State Bulletin, Vol. 2026, No. 15, August 1, 2026).

Wisconsin: The US Supreme Court has been asked to review the Wisconsin Court of Appeals ruling that an out-of-state company that had consultant agreements with Wisconsin travel agents was subject to Wisconsin's corporate income and franchise tax because it's activity in the state fall outside the protection of P.L. 86-272. The question presented to the Court is: "Do the protections of P.L. 86-272 extend only to taxpayers that solicit sales of tangible personal property or — as held in Heublein — is the federal law concerned with the level of in-state business activity regardless of how the taxpayer earns its income?" ASAP Cruises, Inc. v. Wisconsin Department of Revenue, App. No. 2023AP001251 (Wis. Ct. App., June 3, 2025), review denied, Wis. S.Ct. (February 12, 2026); petition of certiorari filed, Dkt. No. 26-92 (US S.Ct. July 13, 2026).

Wisconsin: The Wisconsin Department of Revenue (WI DOR) in its July 2026 Tax Bulletin discussed the state's conformity to the Internal Revenue Code (IRC) for 2026. The state currently conforms to the IRC as amended to December 31, 2022, and, as such, most changes in the One Big Beautiful Bill Act (OBBBA) do not apply for Wisconsin income and franchise tax purposes. The WI DOR further stated that "tax provisions that were temporarily suspended or limited through 2025 by Public Law 115-97 (2017 Tax Cuts and Jobs Act [TCJA]) are restored for Wisconsin purposes in 2026." The Tax Bulletin describes key differences between federal and Wisconsin law for 2026. Regarding domestic research and experimental (R&E) expenses under IRC Sections 174 and 174A, the WI DOR said the state follows IRC Section 174 as it existed prior to the TCJA for both foreign and domestic R&E expenses. Other differences discussed include: (1) employer payments of student loans, (2) moving expense reimbursement and deduction, (3) qualified hazardous duty areas, (4) charitable contribution limitations, among other provisions. As for depreciation and amortization, the state continues to follow the IRC as of January 1, 2014, with certain exception. While the state does not follow any federal bonus depreciation laws enacted after January 1, 2014, the WI DOR said the state follows federal law in effect for the tax year for depletion and IRC Sections 179 through 179E. Wis. Dept. of Rev., Wisconsin Tax Bulletin No. 234 (July 2026).

SALES & USE

Arkansas: The Revenue Legal Counsel of the Arkansas Department of Finance and Administration issued an advisory on the application of sales and use tax on a library's purchase of certain digital goods. Revenue Legal Counsel determined that a library's purchases of digital subscriptions to serial publications, newspapers, online journals, and databases are not subject to sales or use tax because these items are not taxable as "specified digital products." The library's purchase of access to digital audio, digital video and e-books, however, are subject to sales or use tax as these items are taxable as "specified digital products" and the library is the end user of these products, regardless of whether it purchases them outright or via a streaming service. Ark. Rev. Legal Counsel, Op. No. 2026-03 (July 22, 2026).

Colorado: In response to a ruling request, the Colorado Department of Revenue (CO DOR) said that sales of (1) medicated dressings, (2) nonmedicated dressings, bandages, and gauze, and (3) skin closure products, to a company that owns healthcare facilities that provide long-term acute care and other medical services are exempt from sales tax if they are intended to be furnished by a practitioner as part of a professional service to patients. In this case, the CO DOR found that the company purchased medicated dressings labeled "Rx only" and dispensed these items in accordance with a prescription and that the nonmedicated dressings, bandages, gauze and skin closures strips were either consumed during a patient's hospital visit or left the hospital with the patient to maintain proper wound healing. Accordingly, sales of these items to the company are exempt from sales tax. Colo. Dept. of Rev., PLR 26-004 (July 20, 2026).

North Carolina: New law (SB 595) provides that when a retailer or marketplace facilitator solely meets the sales threshold (i.e., making gross sales in excess of $100,000 from remote sales sourced to the state, including sales as a marketplace seller, for the previous or the current calendar year), it is engaged in business in the state on the first day of the first calendar month occurring at least 60 days after the threshold is exceeded. This change took effect when it became law — July 2, 2026 — and applies to retailers that exceed the threshold on or after that date. Accordingly, only remote sellers that solely exceed the sales threshold on or after July 2, 2026 are allowed at least 60 days to register and begin collecting and remitting sales and use tax. The additional time to register and begin collecting tax does not apply to remote sellers that satisfy any of the other conditions in N.C. G.S. Section 105-165.8(b) or that exceeded the sales threshold before July 2, 2026. N.C. Laws 2026, SL 2026-31 (SB 595), signed by the governor on July 2, 2026; See also, N.C. Dept. of Rev., Important Notice: Extended Compliance Period for Certain Remote Sellers (August 6, 2026).

North Carolina: New law (SB 257) modifies sales tax refund provisions for nonprofit hospitals, including hospital and medical accommodations operated by an authority or other public hospital. The law requires that a nonprofit hospital system and all of its affiliates and a hospital authority/public hospital and all of its related facilities, be treated as one entity for purposes of claiming a refund of state and local sales tax. This requirement does not apply to the University of North Carolina Health Care System and each of its component units, its systems affiliates and it managed entities — they will be treated as separate entities, and each are allowed up to the aggregate annual refund amount. This change took effect on July 7, 2026 and applies to refunds issued for purchases made on or after that date. The North Carolina Department of Revenue (NC DOR) issued guidance on this law change, noting that for refunds issued for purchases made on or after July 1, 2026, and before July 7, 2026, the portion of the refund attributable to this period will be based on the law as it existed before July 7, 2026. The NC DOR indicated it will update the refund forms and instructions for this law change by January 1, 2027. The guidance includes examples. N.C. Laws 2026, SL 2026-41 (SB 257), signed by the governor on July 7, 2026; see also, N.C. Dept. of Rev., Sales and Use Tax Directive 26-3 (August 6, 2026).

North Carolina: New law (SB 595) expands the sales and use tax base to include peer-to-peer vehicle sharing providers. Under the law, peer-to-peer vehicle sharing providers are required to pay tax on gross receipts derived from limited possession commitments (i.e., long-term lease or rental, short-term lease or rental and vehicle subscriptions). The tax is effective on, and applicable to gross receipts derived from rentals and leases billed on or after, October 1, 2026. Current applicable tax rates are as follows: (1) an 8% tax applies to short-term leases or rentals, (2) a 5% tax applies to vehicle subscriptions, and (3) a 3% tax applies to long-term leases or rentals. Counties and cities may levy a gross receipts tax of up to 1.5% on the gross receipts from short-term leases or rentals of vehicles to the public. These taxes are in addition to other taxes and fees imposed. Guidance issued by the North Carolina Department of Revenue describes how to register and report the tax. N.C. Laws 2026, SL 2026-31 (SB 595), signed by the governor on July 2, 2026; see also, N.C. Dept. of Rev., Sales and Use Tax Directive 26-2 (July 23, 2026).

Utah: The Utah Taxpayers Association (UTA) is challenging the constitutionality of Utah's new targeted advertising tax (see Tax Alert 2026-0833). Beginning January 1, 2027, SB 287 (enacted March 25, 2026) imposes an annual tax on entities that derive at least 50% of their gross receipts in a year from targeted advertising and (1) earn $1 million or more in gross receipts from targeted advertising to an audience or individual in Utah, and (2) earn $100 million or more in gross receipts derived from all targeted advertising, regardless of location. The UTA is asserting that the targeted advertising tax is unlawful and unconstitutional because it: (1) is preempted by the Supremacy Clause as the tax violates the Internet Tax Freedom Act (ITFA); (2) is a tax on internet access barred by ITFA; (3) imposes an undue burden on interstate commerce in violation of the Commerce Clause; and (4) taxes activities occurring outside Utah's borders in violation of the Due Process Clause. The UTA is seeking an injunction prohibiting the Utah State Tax Commissioner from enforcing the tax. Utah Taxpayers Ass's v. Utah State Tax Comm'n, Utah Dist. Ct., Third District (complaint filed, July 28, 2026).

BUSINESS INCENTIVES

Alaska: New law (SB 130) extends the sunset date of the Fisheries Product Development Tax Credit to January 1, 2037 (from January 1, 2027) and expands its reach so that it is available for qualified expenditures for new property used to produce "value-added products" from "any species of fish or shellfish" (changed from salmon, herring, pollock, sablefish and Pacific cod). In addition, the definition of "qualified investment" is expanded to include "other temperature reducing technologies," this is in addition to already included ice-making machines. The law requires the Alaska Department of Revenue to make a preliminary determination of whether a taxpayer's proposed investment qualifies for the credit within 60 days of receiving the proposed investment from the taxpayer. SB 130 took effect immediately and it applies retroactively to January 1, 2026. Ak. Laws 2026, ch. 32 (SB 130), became law without the governor's signature on June 25, 2026.

Delaware: New law (HB 364) establishes the Delaware entertainment production tax credit. A qualified company is eligible to claim a credit equal to 30% of qualified expenditures for qualified activities⁹ against the corporate income tax, the personal income tax, the insurance premium tax, or the bank franchise tax. To be eligible for the credit, a qualified company must: (1) show that its qualified activities resulted in qualified expenditures in excess of $100,000 during any 12 consecutive month period, and (2) provide opportunities for Delaware residents to serve as interns. A qualified company may transfer, sell or assign any or all unused credits, provide that such action is registered with and approved in advance by the Division of Small Business (Division). The Division has 60 days to approve or deny the transfer, sale or assignment. The amount of credit exceeding a qualified company's tax liability cannot be refunded but it may be carried forward for up to five years. Carryback is not allowed. Total credits allowed in any fiscal year is capped at $10 million. The law allows for the public disclosure of any amount of credit awarded or transferred. The Division may promulgate regulations, applications and forms necessary to implement the new credit. The Division has until January 1, 2027, to develop procedures for qualified companies for approval of audits and the transfer and sale of tax credits. The law lists the information a taxpayer must include in an application for the credit. Applications may not be submitted after June 30, 2031; however, projects that received initial approval before that date may receive final approval after that date. Unused credits that receive final approval may be carried forward to the extent the five-year carryforward period extends beyond that date. Lastly, the law requires the Division by December 1, 2028 and by December 1, 2030, to submit a report that includes various data on the credit, including (1) the number of applications received, approved and denied; (2) a list and description of each approved project and each denied project; (3) the total amount of credits receiving initial approval and final approval and the total amount of credits actually claimed; (4) the number of individuals employed in the State by eligible productions, and (5) the total production spending in the state. HB 364 took effect on July 1, 2026. Del. Laws 2026, HB 364, signed by the governor on July 1, 2026.

Hawaii: The Hawaii Department of Taxation (HI DOT) issued guidance on the renewable energy technologies income tax credit and how the $40 million aggregate cap on the credit applies to credits claimed in 2027 for renewable energy technologies systems installed and placed in service in 2026. The $40 million aggregate cap on the credit was added by legislation enacted earlier this year (Act 24, Laws 2026). The cap applies retroactively to the beginning of 2026 and, as such, credits claimed in 2027 for renewable energy technologies systems installed and placed in service in 2026 will be subject to the cap. Following the enactment of the law change, Governor Josh Green issued Executive Order 26-02 (EO) on the disruption to renewable energy projects and investments that could result from the retroactive application of the annual credit cap. The EO exempted certain renewable energy projects from the cap applicable to systems installed and placed in service in 2026 and directed the HI DOT to issued clarifying guidance. The guidance issued by the HI DOT states that the annual cap on the renewable energy technologies income tax credit "will apply to claims made in 2027 for renewable energy technologies systems installed and placed in service in 2026, except that the cap will not apply to systems installed and placed in service before May 21, 2026, and to systems installed and placed in service by the end of calendar year 2026, provide taxpayer can demonstrate … that it made an investment of resources for the system prior to May 21, 2026, upon reasonable reliance that it could claim the full amount of allowable tax credits." Haw. Dept. of Taxn., Tax Information Release No. 2026-02 (July 31, 2026).

Hawaii: New law (HB 1920) modifies the low-income housing tax credit (LIHTC) by allowing a partner or member that is a partnership or limited liability company that has been allocated an LIHTC to further allocate the credit or transfer, sell or assign (collectively, "transfer") all or a portion of the credit to any taxpayer, whether or not the taxpayer owns a direct or indirect interest in the qualified low-income building. For any tax year in which the credit is transferred the transferor must notify the Hawaii Department of Taxation of such transfer within the allotted time. The transferee is prohibited from further transferring all or a portion the credit to any taxpayer. The law extends the sunset date of the LIHTC to December 31, 2032 (from December 31, 2027). Haw. Laws 2026, Act 205 (HB 1920), signed by the governor on July 8, 2026.

North Carolina: New law (SB 401) extends the sunset date of the conservation tax credit so that the credit expires for tax years beginning on or after January 1, 2031 (from January 1, 2027), for donations made on or after January 1, 2031 (from January 1, 2027). SB 401 took effect upon becoming law. N.C. Laws 2026, S.L. 2026-11 (SB 401), signed by the governor on June 22, 2026.

PROPERTY TAX

Delaware: New law (HB 283) expands the list of exceptions from the Realty Transfer Tax to include conveyances between a grandparent and grandchild or the spouse of the grandchild (this is in addition to the existing exception for conveyances between a parent and child or spouse of a child). The law also changes references from "husband and wife" to "spouses". HB 283 took effect upon becoming law. Del. Laws 2026, HB 283, signed by the governor on July 23, 2026.

Michigan: New law (SB 721) amends the Commercial Redevelopment Act, which allows a reduced property tax on qualifying commercial property that is redeveloped for commercial use, by extending the date upon which a new commercial redevelopment exemption from ad valorem property tax cannot be granted to after December 31, 2035 (from December 31, 2025). Exemptions in effect as of that date will continue until the exemption certificate expires. The law also allows an applicant to submit an amended application if an error or mistake in an application for a commercial facilities exemption certificate is found after the local governmental unit has issued a certificate for the application. The local governmental unity may approve or deny the amended application. The bill took effect on July 22, 2026. Mich. Laws 2026, Act No. 34 (SB 721), signed by the governor on July 21, 2026.

Michigan: New law (SB 722) amends the Commercial Rehabilitation Act, which provides property tax abatements to encourage the rehabilitation of existing commercial buildings, by extending the date upon which a new commercial rehabilitation exemption certificate cannot be granted to after December 31, 2035 (from December 31, 2025). Exemptions in effect as of that date will continue until the exemption certificate expires. In addition, the law extends to 12 years (from 10 years) the maximum length of time a commercial rehabilitation certificate may be active. The term "commencement of the rehabilitation" is defined to mean "the date the first building or other trade permit is issued related to the rehabilitation of the qualified facility, unless sufficient documented proof can be provided to show that rehabilitation did not start until a later date." The term does not include demolition activity (or the issuance of a demolition permit) that occurs before the first building or other trade permit is issued. The law also allows an applicant to submit an amended application if an error or mistake in an application for a commercial rehabilitation exemption certificate is found after a qualified local governmental unit has passed a resolution approving the application or after the commission has issued a certificate for the application. The local governmental unit may approve or deny the amended application. The bill took effect on July 22, 2026. Mich. Laws 2026, Act No. 35 (SB 722), signed by the governor on July 21, 2026.

Rhode Island: The Rhode Island Department of Revenue (RI DOR) issued an advisory regarding the state's new non-owner-occupied property tax, which is imposed on Rhode Island residential property with an assessed value over $1 million when the property is not occupied by the owner for 183 days or more in a privilege year. An exemption applies to such properties that are not occupied by the owner but are rented for at least 183 days during the year. The RI DOR said that a "Certificate of No Tax Due" is required for the sale or transfer of properties with an assessed value of more than $1 million. The Certificate must be requested a minimum of 10 days before the closing date. The Certificate is valid for 30 days from issuance. The Certificate must be requested by the seller or by the seller's attorney or realtor on the seller's behalf. R.I. DOR, ADV 2026-17 (July 31, 2026).

PAYROLL & EMPLOYMENT TAX

Federal: In Notice 2026-28 (released August 5, 2026), the IRS outlined guidance on calculating the paid family and medical leave (PFML) credit under IRC Section 45S, which was expanded and made permanent by the One Big Beautiful Bill Act. Under the amended IRC Section 45S, employers that maintain an insurance policy for PFML during the tax year may elect to calculate the credit based on premiums paid or incurred on that policy rather than only on wages paid to qualifying employees while on leave. The Notice modifies Notice 2018-71 and states that Treasury and the IRS intend to issue proposed regulations under IRC Section 45S that will be consistent with the guidance in the Notice. For more on this development, see Tax Alert 2026-1693.

Multi-jurisdiction: The July 2026 edition of Payroll Month in Review is now available. Developments in federal, state and local payroll and human resources matters are highlighted, as are our insights to improve US employment tax and payroll compliance. This month's publication features the insight, "State unemployment insurance wage bases and tax rates for 2026 (updated as of July 29, 2026)." A copy of the newsletter is available via Tax Alert 2026-1680.

MISCELLANEOUS TAX

Texas: The Texas Comptroller of Public Accounts issued a memorandum (memo) providing guidance on the acceptable methods for determining "a reasonable charge for depreciation of the marketing facility," under Tex. Code Section 201.101 (market value) for purposes of calculating marketing costs for Natural Gas Severance Tax purposes. The Comptroller has presumed the following to be reasonable depreciation methods: (1) 10-year straight-line depreciation and (2) the modified accelerated cost recovery system (MACRS) by asset class. Taxpayers may use other Generally Accepted Accounting Principles if they can show that the other method is more reasonable than straight-line or MACRS depreciation. Taxpayers that do not use the same amount or same deprecation method as used on its federal return to calculate deductible marketing cost must provide documentation to support its calculations and any portion of the federal return requested by an auditor. The Comptroller further explained that depreciation of assets (or pool of assets) used for marketing and non-marketing purposes must be allocated between different activities. When a marketing facility is leased and not owned, the Comptroller explained that depreciation is not allowed and instead the taxpayer may deduct the rental charge as a marketing cost. The memo also provides guidance on use of the marketing facilities' value when one company acquires another. Tex. Comp. of Pub. Accts., STAR No. 202607001M (July 8, 2026).

GLOBAL TRADE

Federal: On August 6, 2026, President Donald Trump issued a proclamation, "Adjusting Imports of Polysilicon and Its Derivatives Into the United States," adjusting imports of polysilicon and its derivative products under Section 232 of the Trade Expansion Act of 1962 (Section 232). The action follows a report from the Secretary of Commerce (the Secretary) finding that imports of polysilicon and its derivatives are entering the United States in such quantities and under such circumstances as to threaten to impair the national security. The proclamation combines two remedies: (1) a minimum import price program and (2) a 15% ad valorem tariff on polysilicon derivatives, with a company-specific onshoring incentive program. The stated intent is to establish a commercially viable domestic market for the full range of polysilicon and polysilicon derivatives, including semiconductor and solar-grade material. The tariff replaces a narrower safeguard on solar cells and modules that expired in February 2026. The polysilicon action complements the semiconductor Section 232 measures adopted in Proclamation 11002 of January 14, 2026, which the new proclamation cites in connection with scaling US semiconductor production. Covered products are identified in Annex I and Annex II to the proclamation. For additional information on this development, see Tax Alert 2026-1695.

Federal: On August 13, 2026, the United States (US) President issued a proclamation titled Adjusting Imports of Unmanned Aircraft Systems and Unmanned Aircraft Systems Components into the United States, adjusting the imports of covered unmanned aircraft systems (UAS) and their parts and components. The proclamation imposes tiered ad valorem duties under Section 232 of the Trade Expansion Act of 1962, as amended (Section 232) on UAS and UAS components identified in the proclamation's Annex I, II and III, establishing reduced-rate treatment for specified trading partners, and creating an onshoring incentive program administered by the Secretary of Commerce (the Secretary). The relevant Harmonized Tariff Schedule of the United States (HTSUS) modifications are set out in Annex IV. The duties apply in addition to any other applicable duties, taxes, fees and charges, except as otherwise specified. The action follows a report from the Secretary, who found that UAS and UAS components are being imported "in such quantities and under such circumstances as to threaten to impair the national security of the United States." The report cited substantial import penetration, reliance on foreign sources for critical components such as motors, electronic speed controllers, lithium-ion batteries and docking stations, information security risks and insufficient domestic production capacity. For additional information on this development, see Tax Alert 2026-1752.

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.