Ernst & Young's State and Local Tax Weekly newsletter for September 4 and September 11 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

Pennsylvania Department of Revenue issues new guidance on corporate net income tax treatment of IRC Section 163(j) for tax years beginning on or after January 1, 2025

The Pennsylvania Department of Revenue (Department) released Corporation Tax Bulletin 2026-01 on September 10, 2026, providing guidance on the state's corporate net income tax (CNIT) treatment of the Internal Revenue Code (IRC) Section163(j) business interest expense limitation for tax years beginning on or afterJanuary 1, 2025. Bulletin 2026-01 operates alongside Corporation Tax Bulletin 2019-03 (as revised July 30, 2026), which addresses the CNIT treatment of IRC Section 163(j) for tax years beginning before January 1, 2025. The two bulletins create a bifurcated set of rules that apply based on when the tax year begins — i.e., either before, or on or after, January 1, 2025.

General CNIT treatment of the IRC Section 163(j) business interest limitation: Bulletin 2026-01 implements Act 45 of 2025 (HB 416, see Tax Alert 2025-2403), which decoupled the CNIT from changes made to IRC Section 163(j) by the One Big Beautiful Bill Act (OBBBA, P.L. 119-21). The OBBBA amended IRC Section 163(j), effective for tax years beginning after December 31, 2024, to compute adjusted taxable income (ATI) under the "EBITDA" (earnings before interest, taxes, depreciation and amortization) method, adding back depreciation, amortization and depletion and raising the 30%-of-ATI ceiling. Pennsylvania decoupled from these changes, instead requiring taxpayers to apply IRC Section 163(j) as in effect on December 31, 2024, retroactively applicable to tax years beginning after December 31, 2024. Due to this change, ATI must be computed on the "EBIT" (earnings before interest and taxes) basis for Pennsylvania CNIT purposes.

Bulletin 2026-01 requires taxpayers to calculate their federal interest expense deduction on a separate-company basis, using the provisions of IRC Section 163(j) in effect in 2024.¹ The Department further stated that because "separate company rather than consolidated concepts apply" for the CNIT computation, each taxpayer must include intercompany and third-party interest in calculating its interest expense under IRC Section 163 and the corresponding limitation under IRC Section 163(j). Thus, each taxpayer on a separate-company basis will determine whether the interest expense limitation applies, regardless of whether its federal consolidated group has a current-year limitation. Such analysis includes "determining whether the individual entity has gross receipts sufficient to meet the requirements of [IRC] Section 163(j)(3), when calculated on a separate entity basis without elimination of related party receipts." The Department also noted that, for purposes of implementing IRC Section 163(j), it will follow federal elections made by a taxpayer or its consolidated group under IRC Sections 163(j)(7)(B) or (C).

While similar provisions apply under Bulletin 2019-03, significantly, Bulletin 2026-01 did not provide for a consolidated group exemption. Bulletin 2019-03required CNIT taxpayers to apply the IRC Section 163(j) limitation but provided that a member of a federal consolidated group need not compute a separate-company limitation unless the group reported an IRC Section 163(j) limitation on its consolidated Form 1120 (referred to herein as the "consolidated group exemption"). For many taxpayers, that has resulted in no applicable Pennsylvania limitation, even when a separate-company computation would have produced a substantial interest expense disallowance. The Department's July 2026 update to Bulletin 2019-03limits the Bulletin's application, including the federal consolidated group exemption, to tax years beginning before January 1, 2025.

Bulletin 2026-01 effectively confirms the repeal of the consolidated group exemption for tax years beginning on or after January 1, 2025, as this exemption is not included in the new bulletin.

EY observation: Members of a federal consolidated group that reported no consolidated federal limitation, and recognized no Pennsylvania interest expense disallowance through 2024, may face a first-time interest expense disallowance for CNIT purposes in 2025. That disallowance would be measured under the EBIT-based ATI standard, which is generally more restrictive than the federal EBITDA-based standard.

Interest expense associated with addback provisions: Both Bulletins 2019-03 and 2026-01 require taxpayers with an interest expense or costs that would be subject to the state's related-party expense disallowance rule to allocate their federal IRC Section 163(j) limitation on a pro rata basis to the relevant related and unrelated party amounts. Taxpayers must use a fraction consisting of the post-limitation federal interest expense over total interest expense without regard to the limitation, multiplied by the taxpayer's Pennsylvania "interest expense or cost" to determine the amount of current year related-party interest potentially subject to addback. Taxpayers also must track the breakout of their federal interest deduction carryforward between third-party interest expense and interest expense falling within the related-party addback definition.²

Under Bulletin 2019-03, previously disallowed related-party interest expense is evaluated for a Pennsylvania addback when it "becomes fully deductible on a Federal separate company basis or becomes fully deductible per Pennsylvania policy" (referred to herein as the "Pennsylvania deductibility prong" of the addback-timing analysis). Taxpayers then determine the amount of related-party interest, if any, that must be added back for CNIT purposes. Bulletin 2026-01 modifies the trigger for determining when previously disallowed related-party interest must be added back for Pennsylvania CNIT purposes by eliminating the Pennsylvania deductibility prong. Thus, for tax years beginning on or afterJanuary 1, 2025, the addback-timing analysis is triggered only when the interest "becomes fully deductible on a federal separate company basis."

Revised guidance on interest expense associated with nonbusiness income: Both Bulletins 2019-03 and 2026-01 require taxpayers with an IRC Section 163(j) interest expense limitation and nonbusiness income to determine the overall interest expense associated with the nonbusiness income and allocate the interest limitation to that amount on a pro rata basis. Bulletin 2019-03 provides that interest expense carryforward amounts linked to the nonbusiness income "can only be used to offset nonbusiness income amounts in future periods."

Bulletin 2026-01 revises this provision, stating that future-year deduction capacity for carryforward interest expense amounts "should be pro-rated between" the business and nonbusiness carryforward amounts.

IRC Section 382 additional limitation on interest expense: Taxpayers with an existing interest expense carryforward that had been limited by IRC Section 163(j) may be subject to an additional limitation on the use of IRC Section 163(j) carryover amounts if they subsequently enter into a transaction resulting in the application of IRC Section 382, as outlined in Corporation Tax Bulletin 2008-03. Bulletin 2026-01 provides that, in this instance, taxpayers should check the applicable IRC Section 381/382/Merger net operating loss box on Form RCT-101 and attach a supporting statement detailing the applicable IRC Section 382 limitation.

New expectation for partnership reporting to corporate partners: Both Bulletins 2019-03 and 2026-01 require corporate partners to track partnership-level IRC Section 163(j) amounts on a partnership-by-partnership basis and report the resulting addback and carryforward items. Bulletin 2026-01 incorporates guidance similar to Bulletin 2019-03, with notable differences. Bulletin 2026-01 specifies that a partnership calculates its own federal interest limitation amount under IRC Section 163(j) in effect as of December 31, 2024. Further, in determining whether interest is properly classifiable as "business interest," a partnership must rely on federal guidance applicable as of December 31, 2024.

Bulletin 2026-01 also provides that, even if a partnership does not provide its corporate partners with a supplement to the partner's Schedule K-1 containing distributive share and other information needed to comply with Pennsylvania's conformity to the IRC, the corporate partner remains responsible for accurately calculating its CNIT liability, including recomputing the IRC Section 163(j) limitation under the pre-2025 federal rules.

For additional information on this development, see Tax Alert 2026-2014.

New York City extends deadline for filing an exemption to pied-à-terre tax initial non-primary residence determinations to October 6, 2026

The New York City (NYC or City) Department of Finance (Department) has announced that the deadline for filing an exemption application to an initial non-primary residence determination under the City's new pied-à-terre tax has been extended to October 6, 2026, from September 18, 2026.³

Background: The new pied-à-terre tax was enacted in May 2026.⁴ Since the enactment, the Department has:

• Adopted rules⁵ on the administration of the surcharge
• Issued on July 24, 2026, a supplemental property assessment roll that included information on over 900,000 NYC residential properties, including properties that may be covered by the surcharge
• Identified approximately 31,000 properties that may be subject to the surcharge
• Launched an online surcharge exemption application portal for residential homes and condos and cooperative units
• Set up a webpage that includes frequently asked questions, eligibility guidance and information regarding the documentation required to support an exemption claim

Tax Alert 2026-1674 (dated August 4, 2026) summarizes these developments (note, the supplemental roll is not discussed).

Additionally, a group of homeowners has challenged the legality of the City's actions related to the administration of the surcharge.⁶ (The homeowners are not challenging the validity of the new law.) Specifically, the homeowners are challenging: (1) the public distribution of a supplement roll that lists over 900,000 NYC homeowners' names, addresses and property values as "related to" the surcharge, and (2) the written notice sent to 17,000 NYC homeowners on the list who "may be subject" to the surcharge but who can apply for an "exemption." The homeowners are asserting that in issuing these two notices, "the City has arbitrarily and capriciously foisted onto [NYC] residents the burden of proving they are not subject to the [s]urcharge, instead of the City … discharging the City's own statutory obligation in the first instance to diligently assess and determine … the properties that are actually subject to the [s]urcharge." The homeowners are seeking a declaratory judgment that the supplemental roll and mailed notices are without legal effect and that the mailed notices do not constitute proper notice under the law and should be annulled and vacated. While Justice Wayne Ozzi of the New York State Supreme Court, Richmond County, issued a temporary restraining order (TRO) against the City prohibiting it from taking certain action related to the surcharge, an appellate court subsequently lifted that order, allowing the City to continue to implement the surcharge. A hearing in the case was held on August 31, 2026.

In its response to the legal challenge brought by several homeowners, the Department said that it "updated and clarified on its website that a property's appearance on the roll does not indicate that it is subject to the surcharge." The Department also noted that a majority of the properties on the supplemental roll would not be subject to the surcharge, stating that "only the approximately 17,000 properties to which [the Department] sent notices could potentially be subject to the surcharge." The Department said it sent updated letters to 4,400 property owners and 6,400 properties owned by entities or trusts for which the information available to the Department (such as 2025 tax returns) does not establish the use of the property as a primary residence and what information would be required to determine a property is not subject to the surcharge. The Department sent those updated letters before August 31, 2026.

The NYC Council has also held oversight hearings on the Department's implementation of the surcharge.

Extended surcharge exemption application deadline: 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 had to make its initial determinations on primary residences and provide notice of such determination by August 30, 2026. Property owners who received a notification by mail indicating that the Department has initially determined their property to be a second home and believe the determination is incorrect have until October 6, 2026 (extended from September 18, 2026) or a date determined by the Commissioner upon showing "good cause" to appeal that determination by submitting a surcharge exemption application. To assist taxpayers with determining exemption eligibility, the Department has added an "exemption eligibility tool" to its non-primary residence property surcharge webpage.

Taxpayers should work closely with their tax advisors to evaluate the documentation needed to support a challenge to a non-primary residence determination. For the current tax year, taxpayers must first challenge a non-primary residence determination through the Department; however, beginning next year, taxpayers will generally have the option of either pursuing the non-primary residence determination challenge with the Department or combining both valuation and non-primary residence challenges in a single proceeding before the NYC Tax Commission. Cooperative apartment owners should be particularly mindful that only the cooperative shareholders corporation may challenge a non-primary residence determination for cooperative units. As a result, cooperative boards and shareholders should coordinate any challenge to residency use status and assessed value to ensure that all procedural requirements are met and available appeal rights are preserved.

Further, taxpayers should be aware that any documents or information submitted to the Department in connection with the surcharge is expressly excluded from New York's taxpayer secrecy protections and may therefore be subject to public disclosure. Accordingly, taxpayers should carefully review all submissions and consider redacting sensitive or confidential information to the extent appropriate and permissible before providing materials to the Department.

For additional information on this development, see Tax Alert 2026-1927.

INCOME AND FRANCHISE TAXES

Federal: On August 25, 2026, the US Department of the Treasury and the Internal Revenue Service issued proposed regulations (REG-115646-25) that would implement revisions to the pro-rata share rules, which were enacted under the One Big Beautiful Bill Act (OBBBA). First, the proposed regulations would set forth new rules for determining US shareholders' pro-rata shares of a controlled foreign corporation's (CFC) subpart F income and tested income or tested loss, including new allocation methodologies and new requirements or elections to close tax years. Additionally, they would extend those rules to IRC Section 951B and terminate regulations that become unnecessary. The proposed regulations would also address the transition rule for certain pre-OBBBA dividends by adopting the framework in Notice 2025-75. Further, the proposed regulations would modify information reporting requirements under IRC Section 6038. The proposed regulations would affect US shareholders of CFCs, including US shareholders or CFCs undertaking mergers, acquisitions, or other restructurings. Similarly, they would affect foreign-controlled US shareholders of foreign-controlled CFCs that are subject to IRC Section 951B. For additional information on this development, see Tax Alert 2026-1865.

Illinois: The Illinois Department of Revenue (IL DOR) proposed amendments to 86 Ill. Adm. Code 100.2455, 100.2465, 100.2470 and 100.2490, related to modifications to taxable income of individuals, corporations, trusts and estates, and partnerships to implement legislative changes. Proposed amendments expand the discussion on deductions for expenses related to certain federal credits disallowed under IRC Section 280C that may be subtracted for Illinois income tax purposes. IRC Section 280C(c) provides that the domestic research or experimental (R&E) expenditures (as defined in IRC Section 174A(b)) otherwise taken into account as a deduction or charge to capital account is reduced by the amount of credit allowed under IRC Section 41(a). Proposed amendments would provide for an Illinois subtraction modification for the reduced amount of credit that is allowed under IRC Section 41(a). Proposed amendments would modify current provisions discussing: (1) IRC Section 280C(a) for wages or salaries paid or incurred related to certain credits (proposed amendments would expand the list of credits); and (2) IRC Section 280C(b) for qualified clinical testing expenses for certain drugs for rare diseases or conditions. Proposed amendments would add provisions for: (1) IRC Section 280C(d) regarding the low sulfur diesel fuel production credit, (2) IRC Section 280C(e) regarding the mine rescue team training credit, (3) IRC Section 280C(f) regarding the credit for security of agricultural chemicals, (4) IRC Section 280C(g) regarding the credit for health insurance premiums, and (5) IRC Section 280C(h) regarding the credit for small employer health insurance premiums. Proposed amendments also would address the allowable subtraction modifications for railroad maintenance credits, gross income from alternative energy credits, and changes in a policyholder's share of the increase in policy cash values of life insurance policies and annuity and endowment contracts. Interested parties have 45 days after publication to submit comments on the proposed rulemaking. Ill. Dept. of Rev., Proposed Amendments 86 Ill. Adm. Code 100 (Ill Register, Vol. 50, Issue 36, September 4, 2026).

SALES AND USE TAXES

Alabama: The Alabama Department of Revenue adopted amended Rule 810-6-3-.50 "Credit Card Transaction Fees" which provides that to be excludable from the measure of sales and use tax, the credit card transaction fee (as defined in Act 2026-587), must be separate and identifiable from other charges. The new rule takes effect on October 15, 2026.

Illinois: A nonprofit trade association whose members engage in electronic commerce has filed a lawsuit challenging the constitutionality of Illinois's new tax on targeted advertising services (TAS). Beginning January 1, 2027, a new 10% tax applies to gross receipts from TAS provided in Illinois, which occurs when the location of the user-consumer of the targeted advertisement is in Illinois (see Tax Alert 2026-1374). In its complaint, the trade association is arguing that the TAS is invalid under the U.S. Constitution and is preempted by the federal Internet Tax Freedom Act. Specifically, the trade association is arguing that the TAS violates the Commerce Clause because: (1) it is not fairly apportioned as it is sourced to Illinois based solely on a user-consumer's Illinois location and it fails the "internal consistency" test; and (2) it discriminates against interstate commerce. The trade association also asserts that the TAS violates the Due Process Clause because it taxes extraterritorial values and violates the First Amendment as a discriminatory tax on the press. The trade association is seeking to have the TAS declared unlawful and the state enjoined from enforcing and collecting the TAS from its members. Netchoice v. Illinois, Case No. 2026CH08791 (Ill. Cir. Ct., Cook Cnty., filed September 11, 2026).

Illinois: A nonprofit trade association whose members engage in electronic commerce has filed a lawsuit challenging the constitutionality of Illinois's new social media platform fee. Beginning January 1, 2027, the social media platform fee is imposed on social media platforms at a tiered rate based on the number of users on whom they collect data within a month. If a social media platform does not pay the fee due, a penalty equal to 100% of the unpaid fee and any penalties will apply each month until the fee is paid. (See Tax Alert 2026-1374.) In its complaint, the trade association is arguing that the new social media platform fee is unconstitutional because: (1) it is preempted by the federal Internet Tax Freedom Act as a "discriminatory" and a "multiple" tax; (2) it violates the Commerce Clause as it is not fairly apportioned, it fails the "internal consistency" test, and it discriminates against interstate commerce; (3) it violates the Due Process Clause as it taxes extraterritorial values; and (4) it violates the First Amendment as a discriminatory tax on the press. The trade association is seeking to have the social media platform fee declared unlawful and the state enjoined from enforcing and collecting the fee from its members. Netchoice v. Illinois, Case No. 2026CH08789 (Ill. Cir. Ct., Cook Cnty., filed September 11, 2026).

Iowa: In a declaratory order, the Iowa Department of Revenue (IA DOR) found a Bitcoin mining company's purchase of application-specific integrated circuit (ASIC) hardware that it will use to mine Bitcoin does not qualify for the sales tax exemption for tangible personal property that is "directly and primarily used in processing by a manufacturer."⁷ The IA DOR determined that the company is not "engaged in processing" as "[p]rocessing is limited to activities that result in tangible personal property," which includes prewritten software. Bitcoin is a cryptocurrency; it is not tangible personal property since it cannot be seen, weighted, measured, felt, touched, or otherwise perceived, nor does it constitute prewritten computer software as it does not provide any instructions to a computer or cause a computer to process data or perform a task. Rather, "[i]t is an intangible asset that exists, by definition, only digitally or virtually." The IA DOR also found the company is not engaging in any activities that are specifically listed as constituting manufacturing or engaging in manufacturing in the ordinary meaning of the term. The IA DOR reasoned that (1) cryptocurrency mining "is not normally thought of as manufacturing a product," (2) the company is not creating a product but is mining or unlocking Bitcoin, and (3) the company is not using raw materials to make something "in the sense a manufacturer would" but is using numerical inputs. In the Matter of SITBIT LLC, Dkt. No. 1302522 (Iowa Dept. of Rev., declaratory order, July 21, 2026).

Missouri: New law (SB 1553) expands the definition of "product" for purposes of the sales tax exemption for energy, machinery, equipment, and materials used or consumed in the manufacturing, processing, compounding, mining, or producing of any product to include "critical materials" and "critical pharmaceuticals." The law defines "critical materials" as metal or metal complexes included on the U.S. Department of Interior's list of critical materials that "serve an essential function in key energy, defense, and consumer product technologies and have a high risk of supply chain disruption." The law defines "critical pharmaceuticals" as pharmaceutical active ingredients, key starting materials or essential finished pharmaceuticals that the U.S. Food and Drug Administration's has listed as critical to national security or public health and that have a high risk of supply chain disruption. SB 1553 took effect on August 28, 2026. Mo. Laws 2026, SB 1553, signed by the governor on July 13, 2026.

Philadelphia, PA: The Philadelphia Department of Revenue (DOR) said that starting October 1, 2026, business must collect the City's 2% local sales tax based on where a taxable purchase is delivered (a change from collecting tax at the point of sale, based on the seller's location). Under Act 21 of 2026, the law change applies retroactively to tax years after December 31, 2025; however, the DOR said that it "is giving businesses time to update their systems" and that it will start enforcing the change on October 1, 2026. Philadelphia Dept. of Rev., Post "Philly's Sales Tax rules are changing — here's what you need to know" (September 8, 2026).

Rhode Island: The Rhode Island Division of Taxation (RI DOT) found that sales of a company's AI generated reports, which are based on information clients provide through a questionnaire on the company's online dashboard, are taxable because the company is selling access to vendor-hosted prewritten computer software. The software provides clients access to use the company's dashboard to upload questionnaire data and download the generated report. The RI DOT determined that the company is selling access to a "set of coded instructions designed to cause a 'computer' or automatic data processing equipment to perform a task," noting that the company "could not receive the questionnaire responses or share the report with its clients without the online dashboard." The RI DOT found that the software meets the definition of prewritten computer software because it is not designed and developed to the specifications of a specific purchaser, and there are no facts indicating that the software is customizable. Lastly, the RI DOT found the software is vendor-hosted as it is accessed through the Internet and/or a vendor-hosted server. Accordingly, sales made to Rhode Island customers are taxable retail sales. R.I. Div. of Taxn., Declaratory Order No. 2026-01 (August 31, 2026).

Tennessee: A lawsuit has been filed challenging the constitutionality of a new Tennessee law that imposes a $10 per transaction sales tax on the service of transmitting money from a location originating in Tennessee to a location outside the United States or its territories by an entity licensed under the Tennessee Money Transmission Modernization Act. (See Laws 2026, SB 2166/HB 2502.) The tax is scheduled to go into effect on January 1, 2027, however, in August 2026, the Davidson County Chancery Court issued an order prohibiting the Tennessee Department of Revenue (TN DOR) from enforcing the law until a final determination as to the constitutionality of the tax has been made. The TN DOR stated that if the tax is upheld, it will provide a 45-day grace period before it begins enforcing the tax. Tenn. Dept. of Rev., Sales and Use Tax Notice #26-12 (updated August 28, 2026).

BUSINESS INCENTIVES

Federal: On September 4, 2026, the IRS published the 2026 inflation adjustment factor and reference prices for calculating the IRC Section 45Y clean electricity production tax credit (PTC), which applies to the sales, consumption or storage of electricity produced in the United States or a possession at a qualified facility under IRC Section 45Y(c)(1). The inflation adjustment factor for calendar year 2026 for purposes of IRC Section 45Y(c)(1) is 2.0570. For facilities eligible for PTC under IRC Section 45Y(a)(2)(A), the PTC for the sales, consumption or storage of electricity is 0.6 cents per kilowatt hour on the sale of electricity from all eligible technologies. The rate for facilities eligible for PTC under IRC Section 45Y(a)(2)(B), which applies if prevailing wage and apprenticeship requirements are met, is 3.1 cents. For example, if a qualified facility produced 1m kilowatt hours in 2026, the credit would be 1m x $.006 x 2.0570, which equals $12,342 (or 1m x $.031x 2.0570, which equals $61,710, if prevailing wage and apprenticeship requirements are met). For additional information on this development, see Tax Alert 2026-1921.

Missouri: New law (SB 1553) establishes a tax credit, which starting January 1, 2027, the Department of Economic Development may award qualified companies that incur at least $5 million in qualified project costs for the construction, expansion or conversion of their facilities to produce critical materials or critical pharmaceuticals. The credit, which can be claimed against the tax due under chapter 143 (the income tax) or chapter 148 (tax on financial institutions), is equal to a percentage of the project costs incurred by the qualified company on or after January 1, 2027, as follows: (1) 20% of qualified project costs if the qualified company incurs at least $5 million but less than $15 million in qualified project costs, and (2) 25% of qualified project costs if the qualified company incurs at least $15 million in qualified project costs. The law states that no tax credit will be authorized for any qualified company that incurs less than $5 million in qualified project costs. Qualified project costs are defined as "costs incurred by a qualified company for the construction, expansion, or conversion of facilities and the acquisition of equipment for the production of critical materials or critical pharmaceuticals." Such costs include (1) site preparation, (2) building construction or renovation, (3) machinery and equipment acquisition and installation, (4) utility infrastructure, and (5) environmental compliance systems. Qualified project costs do not include any costs incurred by a qualified company using a contractor unless certain criteria are met. The tax credit is not refundable, but it can be sold, transferred or otherwise assigned. A taxpayer may carry forward the credit for up to 10 years. The law describes the application process for the credit. The credit program sunsets on December 31, 2036. Mo. Laws 2026, SB 1553, signed by the governor on July 13, 2026.

Missouri: New law (SB 913) extends the sunset date of the following tax credit through December 31, 2033 (from December 31, 2028): (1) the meat processing facility investment tax credit, (2) the higher ethanol fuel tax credit, (3) the biodiesel retail sale tax credit, (4) the biodiesel production tax credit, (5) the urban farms tax credit, (6) the rolling stock tax credit (extended from August 28, 2028), (7) the agricultural production tax credit, and (8) the specialty agricultural crops tax credit for lenders. The sunset date of the wood energy tax credit is extended through June 30, 2033 (from June 30, 2028). The law creates the railroad infrastructure tax credit, which will be available for tax years beginning on or after January 1, 2027, with a sunset date of December 31, 2032. SB 913 took effect on August 28, 2026. Mo. Laws 2026, SB 913, signed by the governor on July 9, 2026.

Missouri: New law (HB 3231) creates several tax credits, including a tax credit for creating or retaining jobs and making new capital investments in the state, a new Missouri innovation zone program, an employer retention and reinvestment incentive, an employer relocation incentive, an office-to-residential conversion incentive, the Missouri opportunity zone program, and the Missouri Angel Investment Incentive.

Beginning January 1, 2027, the law creates a tax credit for a qualified company that creates or retains jobs and makes new capital investments in the state. To be eligible for the credits, a qualified company must agree to expend at least $30 million in new capital investments for the project within two years of the notice of intent if the project is located in a certified Missouri innovation zone, increased to at least $50 million if the project is located outside the zone. A data storage center is not eligible to be a qualified company for purposes of this credit. Credits under this provision are capped at 2.5% of new capital investment made at the project facility during the three-year period beginning upon the date of the notice of intent.

The law creates the Missouri innovation zone program under which designated zones may participate in state-authorized economic development and incentives. Available incentives include the employer retention and reinvestment incentive, the employer relocation incentive, the office-to-residential incentive, the Missouri opportunity zone tax deferral, and the Missouri Angel Investment incentive. Data storage centers are not eligible for this credit. Property located in a certified Missouri innovation zone is eligible for property tax abatement and tax increment financing under chapters 99 and 353.

The law establishes an employer retention and reinvestment incentive under the Missouri Works program that is available for tax years beginning on or after January 1, 2027. The credit provides withholding benefits, either in the form of a withholding tax credit or an authorized retention of state income tax withholdings, to qualified companies that maintain a continued presence in a Missouri innovation zone and reinvest in their operations. To be eligible for the credit, among other requirements, the company must employ at least three covered employees at the certified zone location. The company cannot relocate, consolidate or transfer business operations from another Missouri location into the certified Missouri innovation zone such that it results in a material reduction of payroll to the original Missouri location. The benefit may be carried forward for up to five years; it is not refundable and it cannot be assigned, transferred, sold or otherwise conveyed.

For tax years starting on or after January 1, 2027, the law creates an employer relocation incentive under the Missouri One Start Program for companies that create eligible relocated jobs or new jobs within a certified Missouri Innovation Zone. The credit, which can be claimed against the tax due under the income tax or the tax on financial institutions, is equal to the eligible relocation expenses on behalf of an eligible relocated employee who relocated from a location outside the state to a new job located in a Missouri Innovation Zone. The credit may not exceed $5,000 per year per eligible relocated employee. This credit may be carried forward for up to five years; it is not refundable and it cannot be assigned, transferred, sold or otherwise conveyed.

The law establishes an office-to-residential conversion incentive, for such conversions within a certified Missouri Innovation Zone. The credit, which applies to tax years beginning on or after January 1, 2027, is equal to 25% or 30% of the qualified conversion expenditures, depending on where the property is located. Such expenditures only include costs for rehabilitation, reconstruction or adaptive reuse of an existing structure; it does not include acquisition costs, expenditures attributable to the enlargement of an existing building, or tax-exempt properties. The amount of credit that exceeds the taxpayer's state tax liability can be carried forward for up to 10 years. Tax credits may be transferred, sold or assigned; multiple transfers are allowed.

Lastly, the law creates (1) the Missouri Opportunity Zone program within the certified Missouri Innovation Zone, which allows the payment deferral of Missouri income tax liabilities when such amounts are reinvested in qualifying property or businesses; and (2) the Missouri Angel Investment Incentive, which starting in 2027, provides a tax credit ranging from 40% up to 60% of the investor's cash investment in the qualified securities of a qualified Missouri business, depending on where the business is located.

These credits have various sunset dates, restrictions and caps. HB 3231 took effect on August 28, 2026. Mo. Laws 2026, HB 3231, signed by the governor on July 13, 2026.

CONTROVERSY

New Jersey: The New Jersey Division of Taxation (NJ DOT) announced that effective October 1, 2026, it is pausing the acceptance of letter rulings for a 60-day period "so that the process can be reviewed." The NJ DOT said that it will respond to ruling requests received before October 1. N.J. Div. of Taxn., Publication: "Update on Letter Ruling Process" (September 11, 2026).

PAYROLL AND EMPLOYMENT TAX

Multistate: The chart in Tax Alert 2026-1857 (updated as of August 28, 2026) contains links to the most recent income tax withholding formulas/tables published by the states and US territories, information concerning their respective highest income tax withholding rates (based on their percentage method of withholding) or flat tax withholding rates, and, if applicable, their supplemental withholding rates.

Alabama: The Alabama Department of Revenue (DOR) has published updated employer guidance concerning the income tax withholding obligations for the wages of nonresident employees. Of significant note, employers are instructed that, notwithstanding the Alabama Tax Tribunal's ruling in Bollinger v. State of Alabama Department of Revenue (Dkt. No, 22-390, March 8, 2023), employers should withhold nonresident Alabama income tax only from those wages that are attributable to services physically performed within the state. The guidance also reminded employers about the 30-day safe harbor rule exempting Alabama earnings from taxation for certain out-of-state workers performing services in Alabama for 30 or fewer days in a calendar year. For additional information on this development, see Tax Alert 2026-1919.

MISCELLANEOUS TAX

San Francisco, CA: A California Court of Appeal affirmed a trial court ruling that the City of San Francisco's Proposition M (approved by voters in November 2022), which starting in 2024 imposes a vacancy tax on the owner of a building keeping certain residential units vacant for more than 182 days, whether consecutive or nonconsecutive, in a tax year, is unconstitutional. The trial court determined that Proposition M violates the Takings Clause of the Fifth Amendment, is preempted by the Ellis Act,⁸ and violates the property-owners constitutional right to privacy under the California Constitution, among other reasons. The trial court prohibited the City from administering or enforcing Proposition M. In affirming the trial court, the Court of Appeal held that Proposition M is preempted by the Ellis Act; it did not address the constitutional issues. Debbane v. City and County of San Francisco, Case No. A172067 (Cal. App. Ct., Div. One, September 11, 2026).

Delaware: New law (HB 468) increases the monthly 911 surcharge from $0.60 to $0.90, effective October 1, 2026. Del. Laws 2026, HB 468, signed by the governor on June 30, 2026.

GLOBAL TRADE

Canada — Federal: On August 25, 2026, the Minister of Finance and National Revenue announced that following the United States (US) decision to impose a new 50% tariff on CA$27.6b of Canadian goods effective August 22, 2026, Canada will match the US tariffs dollar for dollar, rate for rate, with additional Canadian tariffs on US goods. Canada announced that it will impose counter-tariffs covering CA$27.6b in imports from the US, effective September 8, 2026, with a focus on sectors that are most impacted by US tariffs. The government also announced the introduction of a CA$7.5b package of new support measures for Canadian workers and businesses, particularly small and medium-sized businesses, in sectors most affected by the new US tariffs. For additional information on this development, see Tax Alert 2026-1859.

Federal: On September 2, 2026, United States (US) Customs and Border Protection (CBP) published an Advance Notice of Proposed Rulemaking titled "Heightened Import Disclosures for Supply Chain Visibility." The notice is the first step toward the implementation of Section 3 of Executive Order 14411, titled "Strengthening Customs Enforcement," which directed the Department of Homeland Security and CBP to establish heightened import disclosure requirements and obtain additional information regarding foreign exporters, supply chains and imported merchandise. Consistent with the Executive Order, CBP is evaluating measures that would require disclosure of detailed supply chain information, collection of foreign export documentation and expanded identification of the parties involved in the manufacture, production, movement and exportation of goods imported into the United States. The notice does not impose new obligations. Rather, it signals the data collection, recordkeeping and compliance requirements that CBP may pursue in a future proposed rule, and the breadth of the questions posed suggests that changes could reach importers, brokers, manufacturers, foreign suppliers and logistics providers across a wide range of industries. For more on this development, see Tax Alert 2026-1886.

Federal — Canada: On September 8 2026, the United States (US) President signed five proclamations under Section 338 of the Tariff Act of 1930 (Section 338) escalating the US response to Canadian measures affecting US alcoholic beverages, dairy products and motor vehicles. Three proclamations prohibit importation of specified Canadian-origin goods currently subject to the additional 50% Section 338 duties, effective for covered products imported on or after 12:01 a.m. Eastern Time (ET) on September 29, 2026. Two proclamations modify the scope of the products subject to the 50% duties, removing goods such as rock salt and cement and adding others, including all-terrain vehicles (ATVs) and additional dairy products, effective September 15, 2026. Covered products imported before September 29, 2026 but not yet entered for consumption, or withdrawn from warehouse for consumption, remain subject to the 50% duty rather than the prohibition. For additional information on this development, see Tax Alert 2026-1925.

UPCOMING WEBCASTS

Tuesday, October 13, 2026. Business and trade policy update - How companies are adapting to shifting geopolitics and ongoing complexity (1:00-2:00 p.m. ET New York; 10:00-11:00 a.m. PT Los Angeles). US trade and tariff policies continue to shift, creating new considerations for companies across industries. Companies that proactively adapt their operating models can better manage uncertainty, capture opportunities and advance their broader strategic objectives. Join us for a timely webcast examining how geopolitical realignment, evolving trade policies, recent tariff actions and ongoing legal challenges are reshaping the business environment. Our panelists will provide an overview of the latest trade developments and share practical steps companies can take to strengthen their resilience. Topics to be discussed include: (1) changing geopolitical dynamics that are reshaping global supply chains, investment decisions and trade flows; (2) the latest developments in trade policy, tariffs and related litigation, and what they may mean for companies going forward; (3) ways companies are adapting their operating models to a more complex trade environment; and (4) enforcement trends, the state of tariff refunds and practical actions companies can take to help address risk and recover value. 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.