Q2 2026 State Corporate Tax Update: OB3 Conformity, Rate Reductions, and Key Court Decisions

This edition of our state and local tax updates covers the second quarter of 2026, dominated by states responding to conformity with the federal “One Big Beautiful Bill” (OB3) legislation. More than a dozen states — including Arizona, Florida, Hawaii, Kentucky, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, and Vermont — enacted legislation addressing how (and whether) they’ll adopt OB3’s changes to bonus depreciation, R&E expensing, the interest expense limitation, and international income provisions. This quarter also brought significant court decisions on apportionment, combined reporting, and nexus, along with several rate reductions and credit/NOL limitation changes. Below is a state-by-state summary of the key developments.

Please note that this information is for discussion purposes only and does not constitute specific tax advice.

Arizona passes legislation addressing conformity to OB3

• On June 13, 2026, Arizona signed into law HB 4168, updating the state’s I.R.C. conformity date to January 1, 2025 for tax years beginning on or after January 1, 2025 and ending on or before December 31, 2025, and to January 1, 2026 for tax years beginning on or after January 1, 2026. Arizona continues to disallow §168(k) bonus depreciation but adds a new explicit §168(n) addback for tax year 2026 and forward, with the state continuing to conform to §168(n) for tax year 2025. The state will adopt OB3’s §174A immediate domestic R&E expensing and the OB3 §163(j) EBITDA-based interest limitation. Although Arizona’s static conformity date of January 1, 2025 for tax year 2025 pre-dates OB3, the state incorporates OB3 provisions that are retroactively effective to January 1, 2025, so both tax years 2025 and 2026 follow the OB3 treatment of §§163(j), 174, and 174A. Arizona also updated its foreign-income subtraction to reference §951A net CFC tested income (NCTI), deleting GILTI terminology, retroactive to tax years beginning after December 31, 2024, while preserving Arizona’s existing subtraction treatment. For tax years beginning after December 31, 2025, the bill also makes various corporate credit repeals and modifications, including to the refundable portion of the R&D credit.

Arkansas: Non-Business Income Ruling and Corporate Rate Reduction to 4.1%

• The Arkansas Supreme Court held 4-3 in CV-25-395 that the gain on the sale of U.S. Beef’s Arby’s & Taco Bueno franchises failed the “functional” test under Arkansas’ UDITPA statute, because U.S. Beef was in the business of owning and operating restaurant franchises, and that disposing of them was not an integral part of its regular trade or business. The statute asks whether the acquisition, management, and disposition of the property were integral parts of the taxpayer’s regular trade or business, which is where the DFA’s position broke down. Because the gain is treated as non-business income for Arkansas purposes, real property gains are allocated to the location of the real property (Arkansas) and intangible personal property gains are allocated entirely to the seller’s commercial domicile (Oklahoma). The decision addressed Arkansas’ tax law as it existed prior to recent amendments effective for tax years beginning on or after January 1, 2026, which replace the term “nonbusiness income” with “non-apportionable income”; this terminology change could limit the decision’s applicability on a prospective basis. The case was decided on April 16, 2026.
• Additionally, on May 6, 2026, Arkansas signed into law HB 1001, decreasing the top corporate income tax rate to 4.1% from 4.3%, effective for tax years beginning on or after January 1, 2027. Under the resulting rate structure, taxable net income is taxed at 1% on the first $3,000, 2% on the next $3,000 (up to $6,000), 3% on the next $5,000 (up to $11,000), and 4.1% on amounts over $11,000.

California: Alternative Apportionment, Credit Cap Extension, Minimum Tax Relief, and SB 122 Digital Products Tax

• A California Superior Court ruled in Smithfield Packaged Meats Corp. v. FTB, No. 21STCV39637 that the taxpayer could use a three-factor apportionment formula instead of California’s standard single-sales factor, finding the single-sales method overstated CA income by more than six times actual in-state activity, attributing 6.6% of Smithfield’s income to California against roughly 1.02% of its actual in-state activity. The Court held on three independent grounds: Smithfield qualified as an agricultural business under CRTC §25128(b) based on the nature of its activities rather than its end products; FTB Regulation 25128-2 was invalid as inconsistent with the statute; and alternative apportionment under §25137 was warranted because “business activity” includes property and payroll, not just sales. Implications extend well beyond agriculture to capital-intensive and manufacturing businesses, agribusinesses selling processed products, life sciences and pre-revenue companies, and taxpayers in other single-sales-factor states (e.g., PA, NJ). The decision, issued April 28, 2026, is a final statement of decision, though it remains subject to potential appeal by the FTB; taxpayers should evaluate open tax years given California’s generally four-year refund statute of limitations, consider prospective petitions before filing, and preserve alternative apportionment arguments as potential audit offsets. See our more detailed discussion of the matter here.
• Additionally, on June 29, 2026, California signed a budget trailer bill into law (SB 122), extending the state’s $5 million business-credit cap through 2029, including an irrevocable election to refund limited credits, and then imposing a permanent cap of the greater of $5 million or 70% of tax beginning in 2030. As with the current credit limitation, the new law provides that the new permanent limitation should be evaluated in the aggregate for combined taxpayers. While the bill extends the credit limitation, the 2024 NOL suspension was not extended beyond 2026.
• The budget trailer bill also provided temporary relief to the minimum tax imposed on certain taxpayers. Specifically, LPs, LLPs, and LLCs with a first taxable year beginning in 2027-2029 will have their first-year annual tax cut from $800 to $400, with the standard $800 annual tax resuming from year two forward. The change does not affect the LLC gross receipts fee or the $800 minimum tax otherwise due from corporations.
• California’s budget trailer bill also extended its sales and use tax to digital products; see our detailed discussion on the matter here.

Colorado enacts more changes to combined reporting

• For tax years beginning on or after January 1, 2027, Colorado overhauls its combined reporting framework under HB 26-1289, requiring worldwide combined reporting while adding an elective 10-year water’s-edge regime, which must be elected on an original, timely filed return and automatically renews. The new water’s-edge group includes: U.S. corporations, without regard to the prior domestic 80/20 exclusion; non-U.S. corporations with 20% or more of their property and payroll in the U.S.; entities formed in a listed tax-haven jurisdiction; and DISCs and export trade corporations. The act also repeals the §280C wage/salary subtraction and revises the tax-haven “listed jurisdiction” roster, effective tax year 2027. The bill was enacted June 3, 2026.

Connecticut decouples from various OB3 provisions

• On May 26, 2026, Connecticut signed into law Senate Bill No. 1 / Public Act No. 26-68, which decouples the state from several OB3 provisions. The state decouples from §168(n) for tax years beginning on or after January 1, 2026. The state conforms to the TCJA treatment of §174 for tax years beginning on or after January 1, 2022 and before January 1, 2026 (thus decoupling from OB3’s § 70302(f) provisions); and decouples from §174A for tax years beginning on or after January 1, 2025 and before January 1, 2026. The state provided that interest and penalties on any resulting underpayment are waived for income years beginning before January 1, 2026, provided the tax is paid by the later of November 15, 2026, or the return’s original due date without regard to any filing extension. The bill was enacted May 26, 2026, and effective dates vary by provision.

Florida passes legislation addressing conformity to OB3

• On June 11, 2026, Florida signed into law HB 7031, rolling the state’s I.R.C. conformity to the federal I.R.C. as amended and in effect on January 1, 2026, with explicit exceptions that decouple the state from OB3’s core corporate provisions. Modified conformity exists for §§168(k), 174(a), 163(j), 274, and 179, as those provisions are included as amended and in effect on January 1, 2025, while §§168(n) and 174A are decoupled from entirely. Florida’s existing bonus depreciation recapture schedule remains intact, independently stripping any bonus that flows through and spreading the proforma TCJA §168(k) deduction over seven years. The OB3 relabeling of international adjustments (§951A GILTI to NCTI, §250 FDII to FDDEI) did not affect Florida’s legacy treatment of these adjustments. The bill is effective January 1, 2026.
• H2: Georgia: Corporate Tax Rate Cut to 4.99% with Annual Reduction Path to 3.99%On May 11, 2026, Georgia signed into law HB 463, decreasing the top corporate income tax rate to 4.99% from 5.19%, effective for tax years beginning on or after January 1, 2026. The bill also allows for annual reductions to the top corporate rate of 0.125% per year, beginning January 1, 2027 and subject to economic targets, until the rate reaches 3.99%. These reductions are not automatic, so the go-forward rate should remain 4.99% until the state explicitly announces further updates.

Hawaii passes legislation addressing conformity to OB3

• Governor Green signed HB 2329 into law as Act 35 on May 26, 2026, advancing Hawaii’s I.R.C. conformity date from December 31, 2024 to December 31, 2025 for income tax, estate tax, and generation-skipping transfer tax purposes, for tax years beginning after December 31, 2025. The bill generally conforms to OB3, including §163(j), but decouples from §§ 174A and 168(n). The legacy Hawaii treatment continues for §§ 174 (TCJA), 168(k) (decouples entirely), 951A/78 (0% inclusion), and 250 (decouples).

Idaho addresses prior tax rate reductions for fiscal year-ended taxpayers

• The Idaho Supreme Court unanimously held in WAFD, Inc. v. Idaho State Tax Commission, Dkt. No. 52584 that WAFD could apply the reduced 6.5% corporate rate to its entire fiscal year 2021 (October 1, 2020 to September 30, 2021), because Idaho Code §63-3025(1) applies the rate to “taxable years commencing on and after January 1, 2001,” making rate blending or proration unnecessary once the statute became operative. The “2001” internal date defines the scope of covered years while the “2021” emergency clause sets legal operability; the Court rejected the Tax Commission’s argument that the 2022 and 2025 amendments “clarified” the 2021 version, since legislative amendments are presumed to change the law prospectively, not reinterpret prior versions. The case was decided on April 23, 2026.
• H2: Illinois: P.L. 86-272 Guidance, Permanent NOL Limitation, and QSBS DecouplingIn GIL IT 26-0001 (issued March 16, 2026), the Illinois Department of Revenue concluded that an out-of-state S corporation’s arrangement surpasses the activities which are protected by P.L. 86-272 and triggers Illinois income tax nexus. Specifically, the taxpayer retained ownership of inventory placed in an Illinois warehouse operated by an unrelated third-party contractor that bottles, packages, and ships the inventory to wholesale customers nationwide. The retained ownership of in-state inventory constitutes in-state property and an activity beyond mere order solicitation. The Department reiterated that P.L. 86-272 protections are narrowly construed in Illinois and that the de minimis safe harbor is narrow, meaning out-of-state sellers using Illinois-based third-party logistics, Amazon FBA-style fulfillment, or contract bottlers/packagers may now need to assume Illinois nexus regardless of their own in-state footprint.
• Additionally, on June 16, 2026, Illinois signed into law SB 3019, which for tax years ending on or after December 31, 2027 limits the Net Loss Deduction to the greater of $500,000 or a stated percentage of net income. The applicable percentages are 15% for tax years ending on/after December 31, 2027, rising to 30%, 50%, 65% a year respectively, and reaching 80% for tax years ending on/after December 31, 2031. Previously the NLD was capped only at $500,000 with no percentage limitation. The new limitation carries no sunset provision, and the same bill decouples Illinois from the QSBS exclusion under §1202 for tax years ending on or after December 31, 2026.

Iowa updates its laws to align its historic GILTI treatment with OB3’s NCTI

• Iowa passed SF 2492, which updates the state’s tax code to remove the language referencing “global intangible low-taxed income” from the statute, allowing taxpayers to take a full subtraction for any amounts included under §951A. Last year, the Iowa Department of Revenue announced that the state would not extend the state’s GILTI subtraction to NCTI absent legislative action since the statute explicitly referenced “global intangible low-taxed income under Section 951A”. The current legislative update aligns the statute’s wording with legislative intent, providing a subtraction for §951A. SF 2492 was enacted May 15, 2026 and is retroactively applicable to tax years beginning on or after January 1, 2026.

Kentucky passes legislation addressing conformity to OB3

• Kentucky passed HB 757, which rolls the state’s conformity to the I.R.C., for tax years beginning on or after January 1, 2026, to the I.R.C. in effect as of December 31, 2025, excluding amendments made after that date except those that merely extend provisions already in effect on December 31, 2024. HB 757 was enacted April 14, 2026, effective tax year 2026.
• As a result of the bill, corporations must add back amounts deducted under OB3’s new §174A and instead deduct only the amount allowable under §174 as it existed on December 31, 2024; while there was some ambiguity in the original bill, the state passed HB 869 (signed April 27, 2026) which clarifies that for tax years beginning on or after January 1, 2026, taxpayers may take a subtraction adjustment for the amortization of domestic R&D expenditures, determined under §174 as it stood on December 31, 2024.
• The new state laws keep the state’s conformity to §163(j) as in effect on December 31, 2024, exclusive of subsequent amendments, effectively staying with the EBIT limitation.
• Lastly, the state’s combined reporting DTL deduction was delayed by another two years, with the ten-year period now beginning January 1, 2028 rather than January 1, 2026.

Maine passes legislation addressing conformity to OB3

• On April 10, 2026, Maine signed into law LD 2212, rolling the state’s I.R.C. conformity date to December 31, 2025, from December 31, 2024. The state picks up all federal changes made through that date, then selectively decouples from various provisions.
• For R&E expenditures paid or incurred in tax years beginning after December 31, 2021 and before January 1, 2026, Maine allows taxpayers to claim the amortization deductions that would have continued under the pre-OB3 regime and does not allow acceleration under § 70302(f)(2). For R&E expenditures incurred after December 31, 2025, taxpayers must add back the §174A immediate deduction multiplied by an “applicable percentage” phasing from 70% in 2026 down to 0% by 2030, with a corresponding subtraction for amortization allowable ratably until 2030.
• The bill also updates references from GILTI to NCTI, and fully decouples from §168(n), requiring QPP to be depreciated over the standard 39-year life for Maine purposes. LD 2212 was enacted April 10, 2026, effective tax year 2025.

Maryland decouples from OB3’s §168(n) and modifies its bonus depreciation treatment for manufacturers

• For tax years beginning after December 31, 2025, Maryland decouples from OB3’s new §168(n) qualified production property depreciation. Under SB 284 (enacted April 8, 2026), the state also newly restricts §168(k) bonus depreciation for qualifying manufacturing entities to 20% of a qualified asset’s adjusted basis for Maryland purposes

Massachusetts passes legislation addressing conformity to OB3

• On June 12, 2026, Massachusetts enacted 5470, a supplemental appropriations bill with substantial corporate provisions. The state conforms to the TCJA treatment of §174 in 2025 but will change to OB3 treatment in 2026. Similarly, the state decouples from §174A for 2025 and will conform to it in 2026. The state temporarily conforms to the TCJA version of §179 in 2025 and 2026, decoupling from the OB3 increases for these years. For §168(n), the state conforms to the TCJA treatment in 2025 and 2026 before conforming to OB3 treatment in 2027 and onward. For §163(j), the state does not conform to the deduction to the extent that the definition of “adjusted taxable income” is modified by an amendment to §163(j)(8)(A)(v) in 2025 & 2026. From 2027 and onward, the state will conform to the OB3 treatment. The bill also adds G.L. c. 62C §90, which states that for tax years beginning on or after January 1, 2026, any individual I.R.C. amendment affecting the personal income tax or corporate excise base becomes automatically inoperative for the tax year in which it is federally enacted and all prior years, unless the Department of Revenue determines within 90 days that the amendment’s revenue impact, measured on a rolling three-year, inflation-adjusted average, is under $20 million.

Minnesota passes legislation addressing conformity to OB3

• Minnesota’s I.R.C. reference moves from May 1, 2023 to May 1, 2026 under HF 2438, picking up OB3 by general conformity but with significant decoupling for tax years beginning after December 31, 2025. HF 2438 was enacted May 27, 2026, effective January 1, 2026.
• For §174A, 80% of the domestic R&E deduction is added back and recovered as a subtraction in equal 25% installments over the four following tax years; this treatment is functionally similar to the old five-year §174 amortization without the half-year convention. The §70302(f)(1) retroactive 2022-2024 election is subject to an 80% addback recovered ratably over four years, retroactive to tax years beginning after December 31, 2021. The §70302(f)(2)(A) acceleration election requires a full addback recovered over the original amortization period.
• The legislation replaces GILTI references with NCTI, defined as §951A income minus the QBAI subtraction as in effect May 1, 2023. As a result of the law change, MN-specific NCTI is treated as dividend income eligible for Minnesota’s 50% DRD, and the pre-OB3 QBAI carve-out is preserved.
• The bill also decouples from OB3’s changes to Subpart F under §951, requiring taxpayers to compute Subpart F income as though OB3 had not made the look-through rule permanent, and treats Subpart F income as a dividend eligible for Minnesota’s 50% DRD.

New Jersey enacts net operating loss deduction limitation

• On June 30, 2026, New Jersey signed into law A5322, imposing a NOL cap for certain CBT privilege periods. For privilege periods ending on or after July 31, 2026 but before July 31, 2030, a taxpayer’s aggregate NOL deduction cannot exceed $1,000,000 in computing taxable net income. This limitation is applied to the combination of NOLs and prior NOL conversion carryovers, and in conjunction with the state’s existing I.R.C. §172(a)(2) limitation (which potentially is more restrictive than the $1 million cap). For privilege periods ending on or after July 31, 2030 but before July 31, 2032, a taxpayer whose NOL deduction was limited by the $1 million cap may deduct the amounts that remained unused due to the cap, subject to a limitation that the NOL deduction may not reduce allocated entire net income by more than 75 percent for the period. Any NOL deduction left unused due to these limitations gets its carryforward period extended by six additional privilege periods beyond when it otherwise would have expired, and there is no interest or penalty for underpayment of an estimated-tax installment due after December 31, 2025 but before January 1, 2027, to the extent the underpayment results from the new cap.

New Mexico’s AHO rules on ability to adjust NOLs in years closed for amendment

• The New Mexico Administrative Hearing Office ruled in Case No. 25.02-003O, D&O No. 26-002 that a taxpayer could not use a timely amended return for an open year to effectively revise apportionment factors and NOL attributes for years already closed to amendment. Once the amendment window closes for a loss year, the apportionment factors and NOL amounts for that year are final. The decision distinguishes itself from federal law (under IRC §172, federal courts allow recomputation of closed loss years for purposes of an open year) on the ground that New Mexico’s statute uses materially different language tying the carryover to legally effective reporting. The decision was issued February 27, 2026.
• H2: New York State and New York City: OB3 Conformity, Surtax Extension, and QETC RulingNew York passed its FY27 budget under A10009-C on May 27, 2026 (enacted May 28, 2026), containing numerous state and city income tax updates. The changes, retroactively applicable to 2025, impact the State’s and/or City’s treatment of IRC §§ 168(n), 174, 174A, 163(j), 179 and 951A. Here is a summary of these changes, noting that the State and City’s treatment may not align.

Law change	New York State	New York City
IRC §168(n) qualified production property	Will not follow the federal election for tax years starting on/after 1/1/2025; depreciation is figured as though no §168(n) election had been made.	Same non-conformity as State, plus a City-only rule that the property is not treated as §1245 property.
IRC §§174/174A R&E (2025 & after)	Decouples from federal expensing; deduction for both U.S. and foreign R&E taken over five years (the §174A(c) approach), starting when the taxpayer begins to benefit from the outlay.	Decouples from §174A for U.S. R&E, requires domestic recovery over five years from the tax year’s midpoint; foreign R&E keeps its 15-year §174 life.
Pre-2025 R&E — catch-up (acceleration) election	Decouples from the federal catch-up of unamortized 2022–2024 U.S. R&E, whether taken fully in 2025 or spread over 2025–26 (§70302(f)(2)(A)); that deduction is added back and the pre-OB3 schedule continues (5-yr U.S. / 15-yr foreign, §174 as of 1/1/2022). The separate small-business retroactive election (§70302(f)(1)) is not addressed.	The legislation does not have an explicit reference to the catch-up or small-business retroactive elections, so arguably the City would conform.
IRC §163(j) interest limitation	No change enacted and thus follows federal.	City decouples from the OB3 treatment, requires ATI to be computed with regard to depreciation, amortization, and depletion (i.e., on an EBIT basis rather than EBITDA)
IRC §179 expensing	Follows the higher federal dollar caps.	Retains the pre-2025 dollar caps.
GILTI → NCTI	No change here. The State’s separate 95% CFC exclusion (and apport. reference) cross-references §951A(a) rather than the label “GILTI,” so OB3’s rename to NCTI needed no State fix.	Re-defines the corporate-tax factor references from GILTI to NCTI: the §951A(a) amount net of the §250 deduction stays out of the numerator but is kept in the denominator (and tax base).
2025 transition relief	Interest and penalties are waived on qualifying extended or amended 2025 returns that report nothing beyond these required changes.	Same waiver applies.

 

• Additionally, the top state corporate tax rate of 7.25% (the 0.75% surcharge for taxpayers with over $5 million business income base) was extended through tax years beginning before January 1, 2030, having been due to sunset January 1, 2027. The state’s capital/franchise tax was also extended on the same terms.
• Additionally, in DTA No. 850502 (decided on May 7, 2026), a New York ALJ held that the state’s analysis for QETC status for the reduced qualified-manufacturer franchise tax rate runs entity-by-entity within a combined group, not group-wide. The decision by the ALJ here is aligned with prior decisions by the state meaning that it appears to be well settled that one non-qualifying member will prevent the QETC rate benefit for the whole group. As such, for taxpayers with a group of qualifying and non-qualifying members, the only path to partial relief appears to be a properly filed discretionary adjustment request (noting that the request may not be granted).

Oregon decouples from IRC §§ 168(k) and 1202

• Governor Kotek signed SB 1507 into law, updating Oregon’s I.R.C. conformity date to December 31, 2025, from December 31, 2023. Oregon had prospectively adopted OB3 by incorporating the Internal Revenue Code as in effect for the tax year of the taxpayer, except where otherwise noted (“rolling reconnection”); this rolling reconnection generally remains unchanged. The new law decouples Oregon from the OB3 amendments to the federal bonus depreciation rules under §168(k); the state now requires that assets placed in service in tax years starting on or after January 1, 2026 must be depreciated according to §168(k) as it stood on December 1, 2017. For Oregon property placed in service in tax years beginning on or after January 1, 2026, the frozen pre-TCJA §168(k) has already sunset, so Oregon’s add-back effectively eliminates OB3’s 100% federal bonus depreciation (100% federal bonuss vs. 0% Oregon bonus). Note that there was no provision in the bill decoupling the state from §168(n), so the state will continue to conform to that change made by OB3. The bill also decoupled the state from the Qualified Small Business Stock (QSBS) exclusion under §1202. Governor Kotek’s Prosperity Council has recommended reinstating the exclusion, and Kotek herself signaled in late June that she would support reversing her own signature, though as of today no bill exists and the addback remains current law. The bill was enacted April 9, 2026, effective June 7, 2026, retroactive to January 1, 2026.

Rhode Island enacts law addressing IRC conformity and establishes an amnesty program

• On June 12, 2026, Rhode Island passed 7127, a budget bill carrying substantial corporate income tax provisions. Rhode Island had proactively decoupled from OB3 deductions/allowances for tax year 2025 or earlier, but that automatic decoupling did not automatically extend to tax year 2026 forward. H. 7127 enacted the following decoupling provisions: For §174/§174A, Rhode Island continues to require pre-OB3 five-year amortization rather than OB3’s immediate expensing. For §163(j), Rhode Island requires an addback of the depreciation/amortization/depletion component, effectively computing the interest limitation on an EBIT rather than EBITDA basis, effective for tax years beginning on or after January 1, 2027. The bill also decouples Rhode Island from the Qualified Small Business Stock exclusion under §1202 for tax years beginning on or after January 1, 2027. Lastly, the bill sets a 75-day amnesty ending February 15, 2027, covering taxable periods through December 31, 2025 (including corporate income/BCT and sales/use), with a 100% penalty and prosecution waiver and statutory interest reduced by 25%.
• H2: South Carolina: Court Affirms Forced Combined Reporting Authority
• The South Carolina Court of Appeals affirmed the Administrative Law Court in Tractor Supply Co. v. South Carolina DOR, Case No. 2024-000013, upholding SCDOR’s authority to force unitary combined reporting as an alternative apportionment method, even though South Carolina is a separate-entity reporting state. The court agreed the tax administrator’s argument that the taxpayer’s intercompany transfer pricing distorted its South Carolina income. This is the first appellate decision affirming Department-initiated forced combination, giving SCDOR a citable precedent against substance-light intercompany structures. The taxpayer’s concession that its own transfer pricing study was unreliable was decisive in the court’s ruling’s contemporaneous, defensible arm’s-length study, backed by real functions and risks in the affiliate earning the margin, may have provided a stronger line of defense. The case was decided on June 17, 2026.

Tennessee court rules that certain software sales and licenses fall outside the Business Tax base

• The Tennessee Court of Appeals held in SAP America, Inc. v. Gerregano, M2024-01399-COA-R3-CV, that an out-of-state ERP vendor’s software sales and licenses fall outside the Business Tax base, because for TBT purposes those receipts remain intangible personal property rather than tangible property. However, receipts from cloud hosting and cloud-based services are taxable services for TBT purposes. The intangible-property characterization traces to a 1976 Tennessee Supreme Court decision, Commerce Union Bank v. Tidwell, which still controls for TBT purposes because the General Assembly’s later amendment reclassifying prewritten software as tangible personal property applies strictly to the sales and use tax statutes, not the Business Tax Act. On cloud hosting, the court rejected the argument that the arrangement was a nontaxable lease of out-of-state equipment, since a genuine lease requires handing possession and control to the customer, and the vendor here kept operational control of its servers. Taxpayers paying TBT on Tennessee software sales or licenses should consider protective refund claims, isolating software receipts from cloud hosting, support, training, consulting, implementation, configuration, and data migration fees, and remote sellers of cloud services into Tennessee should reassess their TBT exposure. The case was decided on May 13, 2026.

Texas adopts franchise tax I.R.C. conformity changes into its COGS rule

• The Texas Comptroller has formally adopted the franchise tax I.R.C. conformity changes into Rule 34 TAC §3.588 (COGS), as previously outlined in the Q1 2026 law-change updates. The regulation was adopted June 21, 2026, effective January 1, 2026.

Vermont passes legislation addressing conformity to OB3

• On June 18, 2026, Vermont signed into law 933, updating the state’s I.R.C. conformity date to December 31, 2025, for tax years beginning on or after January 1, 2025, along with updates to other corporate provisions. Vermont will conform to §174A immediate R&E expensing only for small businesses (large businesses keep five-year amortization under TCJA). Effective tax year 2027, Vermont’s R&D credit rises from 27% to 75% of the federal credit. The state conforms to OB3 updates on §179, §163(j), CFC pro rata rules, and corporate charitable changes, while decoupling from §250 (FDII/FDDEI and GILTI/NCTI), §168(n), and continues to decouple from §168(k). Vermont now taxes 100% of NCTI and allows no FDDEI deduction.

Wisconsin extends its carryover period for the R&D credit

• Wisconsin passed a law which extended the carryover period for unused research income tax credits from 15 to 50 years. This expanded carryover window applies retroactively to any previously claimed credits that, as of April 10, 2026, have not been applied against tax liability, refunded, or expired. This change was enacted under B 482 which was signed April 8, 2026, and is effective April 8, 2026.