Top SALT stories of 2024

An overriding theme of the developments that we have tracked from a state and local tax (SALT) perspective in 2024 has related to the scope of the state tax authority. Taxpayers and practitioners that concentrate on SALT matters understand that state tax authorities have a wide range of roles and responsibilities, and this was particularly true this year.

State tax authorities have an expansive amount of ground to cover. They are tasked with ensuring that the proper amount of revenue is being received through the generation of notices, performance of audits and collection efforts. Their organizational leaders are responsible for controversy defense when an audit fails to resolve a taxpayer matter. Since states and localities depend upon a disparate array of taxes, state tax authorities must be able to implement and administer several different tax regimes, and provide taxpayers with the apparatus to make the filing and payment process as efficient as possible. Beyond their dealings with taxpayers, state tax authorities typically weigh in on the effects of proposed tax legislation that the state legislature is considering. In some cases, they develop proposals that ultimately go through the state legislatures. And state tax authorities are doing all of this in an environment in which it is challenging for them to consistently obtain and retain qualified personnel.

While all these roles of the state tax authority are vital, we’ve left out an important one that has been a primary point of focus in 2024 — the very active role that a state tax authority takes in developing and adopting regulations and other guidance. The state tax authority sits at the intersection of the state legislature that drafts, amends and finalizes tax legislation signed by the governor, and the taxpayers that need to apply enacted tax legislation in determining their overall SALT liability. It comes as no surprise that tax legislation can be difficult to draft, is not always clear, and needs further interpretation and clarification along the way. The state tax authority is put into the role of front-line interpreter and clarifier. Of course, courts eventually have their day as well, when they are faced with live controversies between state tax authorities and taxpayers that require action. But the state tax authority usually gets the opportunity to act on what a tax statute means first. The question becomes how much deference should be given by the courts to the state tax authority with respect to the guidance that is issued. The development that we lead with this year squarely addresses that topic.

As we have historically done, our Grant Thornton SALT team in the Washington National Tax Office considered and then ranked the 10 most important stories of 2024 in order of perceived importance. While numerous SALT stories merited substantial consideration for the top spot this year, the U.S. Supreme Court’s decision in Loper Bright Enterprises v. Raimondo[1] carried great weight with our team, even though it is not a case that deals with a SALT statute, or even a tax statute. However, we think that the decision will have far-reaching effects on SALT matters in the years to come, particularly with respect to the future role of the state tax authority as chief regulator, and the ways in which taxpayers will defend their positions in SALT controversies.

We also note that many of the other developments on our list put the regulatory activities of the state tax authority in the spotlight. For example, several state tax authorities have faced challenges to their regulatory interpretation of a federal law, Public Law 86-272, inspired by the Multistate Tax Commission’s model guidance. Likewise, the New York State Department of Taxation and Finance’s rules relating to the convenience of the employer test are being challenged by numerous nonresident taxpayers. We can only imagine that moving forward, many taxpayers will argue that when any debatable regulatory provision is at issue, Loper Bright will somehow be implicated. It bears watching as to how vigorously the state tax authorities will respond to these arguments, and whether this issue affects how future regulatory guidance is developed and released.

1. Loper Bright decision and effect on state taxation   

The world of administrative law experienced a dramatic shift with the U.S. Supreme Court’s June 2024 ruling in Loper Bright Enterprises v. Raimondo. In a 6-3 decision, the Court overturned the 40-year-old Chevron doctrine, which had long required federal courts to defer to federal agencies’ interpretations of ambiguous statutes.² While Loper Bright addressed a specific provision under the federal Administrative Procedures Act (APA) and did not address a substantive tax matter, the decision nonetheless has the potential to significantly impact state taxation, particularly in those states that have adopted and follow similar agency deference standards to those announced in Chevron.

In Chevron, the Court held that an administrative agency’s interpretation of a statute administered by that agency should be given deference by a court if: (i) the statutory provision is ambiguous; and (ii) the agency’s interpretation of the statute is reasonable. Over time, Chevron has become one of the most important cases in modern public law, cited by federal courts more than 18,000 times. However, Chevron has come under pressure in more recent years, with opponents arguing that courts, rather than federal agencies, are better suited to interpret the meaning of ambiguous statutes.

While Loper Bright addressed the validity of a regulation promulgated by the U.S. Department of Commerce impacting commercial fisheries, the action directly challenged federal court deference to agency regulations under Chevron. In overturning Chevron, the Court held that the federal APA requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation of the law simply because a statute is ambiguous. Instead, the Court determined that the concept of deference to an agency’s reasonable interpretation of an ambiguous law “has proven to be fundamentally misguided.” The decision has the immediate impact of reducing the power of federal agencies to interpret the laws they administer.

The looming question is whether and to what extent Loper Bright impacts state tax policy and rulemaking authority, including the level of deference given to state taxing authorities responsible for administering state tax laws. Although Loper Bright is a federal case addressing a federal regulation, many states have incorporated elements of Chevron into their rules of statutory construction over the years. The states fall into three distinct groups with respect to their approaches to state agency deference. The first are the “strong deference” states that have adopted rules similar to the Chevron doctrine.³ The second group are the states taking a “hybrid” approach to agency deference, relying on blended elements of Chevron and an older U.S. Supreme Court case known as Skidmore v. Swift & Company.⁴ The third group are the states that do not allow deference to be given to state agency interpretations, either through the enactment of statutory provisions⁵ or court decisions.⁶ While Loper Bright is less likely to impact those states that have already done away with judicial deference to agencies, courts in the “strong deference” states will now need to consider the effect of Loper Bright in examining challenges to administrative interpretations of ambiguous tax statutes.

While it can be argued that Loper Bright should not have any impact on state taxation because it is a federal case, the rejection of Chevron deference may have significant implications for state tax administrative rulemaking and judicial review, particularly in those states that have adopted some form of Chevron deference. From a legislative perspective, state legislatures may be less inclined to draft legislation that defers to state tax agencies the ability to address the statutory gaps via regulation or administrative guidance. As a result, state tax legislation may become more complex in order to avoid the requirement for agency interpretation, unless the legislature explicitly delegates discretionary authority to the state taxing agency and requires the agency to promulgate interpretative regulations and/or administrative guidance.

Meanwhile, taxpayers are likely to use Loper Bright to their advantage in challenging existing state tax regulations and administrative guidance that contradict their tax positions, given that many state courts may adjust their deference standards post-Chevron. Taxpayers that may have been reticent to challenge conflicting administrative positions in regulatory guidance could be more emboldened to do so now given that agency rulemaking is likely to undergo a more rigorous judicial review. In the longer term, it remains to be seen how effective these taxpayer arguments will fare before the courts.

To be sure, the Loper Bright decision raises more questions than answers on the role of state tax agency expertise in interpreting state tax laws. If anything, the decision is likely to continue the trend of states to move away from adopting Chevron deference in tax cases through judicial rulings or legislation in order to satisfy separation-of-powers concerns raised by the Court. For the states that have adopted agency deference standards similar to Chevron, they may need to reassess such standards in the case where long-standing state agency interpretations face increased judicial scrutiny. On the brighter side, Loper Bright may provide an opportunity for state legislatures, tax agencies, and taxpayers to work more closely together to consider and draft effective tax legislation and interpretive guidance that provides a greater level of certainty for everyone.

2. P.L. 86-272 litigation and decisions 

The interpretation of Public Law 86-272 (P.L. 86-272) continued to make news during the past year, with several developments focusing on the broader issue of how much power state tax authorities may have to interpret this federal law. In California and New York, there has been litigation concerning the states’ adoption of the revised statement issued by the Multistate Tax Commission (MTC) in 2021. In addition, the top state courts in Minnesota and Oregon addressed the protection provided by P.L. 86-272 in traditional sales representative situations.

P.L. 86-272, a federal law enacted in 1959, limits the state and local taxation of income from sales of tangible personal property if the taxpayer’s only business activities in the state are the solicitation of orders that are approved and shipped from outside the state.⁷ In 2021, the MTC adopted a revised statement interpreting P.L. 86-272 as it applies to the modern economy and internet transactions.⁸ Several states, including California, New Jersey and New York, have taken action to adopt the MTC’s revised statements in some form. However, the actions in both California and New York have been challenged.

California was the first state to address the MTC’s revised statement on P.L. 86-272 protection. In 2022, the California Franchise Tax Board (FTB) released guidance, Technical Advice Memorandum (TAM) No. 2022-01,⁹ and revised FTB Publication 1050¹⁰ to address the application of P.L. 86-272 to companies with internet transactions. The FTB’s guidance did not explicitly adopt or reference the MTC’s revised statement, but the guidance generally was consistent with the positions set forth in the statement, by addressing the same internet activities outlined in the MTC’s statement and reaching the same conclusions. On Dec. 13, 2023, the California Superior Court for San Francisco County struck down the guidance because it constituted a regulation that was not promulgated in compliance with prescribed administrative procedures.¹¹ The American Catalog Mailers Association (ACMA) successfully argued that the FTB’s two guidance documents were void as “underground” regulations for failure to comply with the requirements of the California Administrative Procedure Act (APA). In response, the FTB removed the guidance documents from its website, leaving many to wonder whether the FTB is continuing to follow this guidance informally when auditing businesses, or whether such guidance is no longer being followed at all.

New York was the first state to promulgate formal regulations that align with the MTC’s revised statement on P.L. 86-272. In late December 2023, the New York State Department of Taxation and Finance promulgated extensive corporation franchise tax regulations, including a regulation that addresses P.L. 86-272 protection, which generally are effective for tax years beginning on or after Jan. 1, 2015.¹² Consistent with the MTC’s position, the Department’s final regulation acknowledges P.L. 86-272 protections solely for corporations engaged in the solicitation of online orders in New York State for sales of tangible personal property where the orders are sent outside New York State for approval or rejection.¹³ The scope of P.L. 86-272 protection includes an out-of-state internet vendor presenting static text or images on its website.¹⁴ The New York regulation includes the examples from the MTC’s statement and reaches the same conclusions regarding whether each transaction is protected by P.L. 86-272.¹⁵

The ACMA has filed litigation challenging the portions of the New York regulation that relate to internet activities because they conflict with P.L. 86-272.¹⁶ In the alternative, the ACMA argues that any provision in the regulation deemed invalid may not be applied to any time period preceding its publication to avoid violating due process. As discussed above, the ACMA was successful in striking down the P.L. 86-272 guidance issued by the California FTB. The facts in the New York litigation differ from the California case because New York adopted the MTC’s guidance in a formally promulgated regulation. Taxpayers should closely follow this litigation to see what the New York court decides. Also, this litigation is noteworthy because it challenges New York’s ability to retroactively apply the regulation nine years prior to its final promulgation.

While the future of forward-looking P.L. 86-272 guidance remains in some doubt, two state supreme courts considered the extent of P.L. 86-272 protection and applied it to specific facts arising from more traditional operational models. In August 2024, the Minnesota Supreme Court held that market research reports prepared by a taxpayer’s sales representatives in Minnesota went beyond the “solicitation of orders” that are protected under P.L. 86-272.¹⁷ The court also determined that the reports were not a permitted de minimis activity because the representatives prepared over 1,600 reports during the two tax years at issue. As a result, the taxpayer was subject to Minnesota corporate income and franchise tax because its sales representatives engaged in activities creating sufficient nexus with the state. The court’s analysis should be useful in making P.L. 86-272 determinations in Minnesota, and potentially in other states, for businesses with physical presence limited to employees engaged in the sales process.

The Oregon Supreme Court determined in June 2024 that the activities of a tobacco company’s representatives in Oregon exceeded P.L. 86-272 protection because they went beyond the scope of soliciting orders.¹⁸ The representatives facilitated sales by taking “prebook orders” on behalf of Oregon retailers that contractually obligated wholesalers to accept and process the orders. The prebook orders that the representatives obtained from Oregon retailers exceeded the scope of the permitted “solicitation of orders” because they required the wholesalers to sell the products and facilitated those sales. In determining that the prebook orders were not protected de minimis activities, the court noted that the representatives obtained an average of more than 13 prebook orders per month from Oregon retailers. A consideration of the number of prebook orders combined with evidence showing the taxpayer’s strong emphasis on its representatives obtaining prebook orders convinced the court that the taxpayer’s activities were not de minimis.

3. Net operating loss legislation: Relief in some states, suspensions in others

The ability of taxpayers to utilize the state net operating loss (NOL) attribute received considerable attention in 2024. Some states enacted legislation providing for increases to existing NOL limitations or extending existing carryforward periods, while California enacted legislation temporarily suspending the use of NOLs in an effort to address continuing fiscal challenges. These NOL legislative changes expand and complicate the variety of approaches taken by the states in this area, many of which were taken in tandem with or in response to the 80% limitation on NOL deductions for federal income tax purposes enacted under the Tax Cuts and Jobs Act of 2017 (TCJA).¹⁹

Beginning with what can be described as legislation slightly modifying unfavorable NOL policy in a positive way, Illinois in June 2024 enacted legislation extending and raising its existing NOL deduction limitation for a three-year period.²⁰ For tax years ending on or after Dec. 31, 2024, and prior to Dec. 31, 2027, the NOL limitation for corporate taxpayers is increased from the current $100,000 to $500,000 of losses. Although the legislation originally was designed to make the NOL deduction limitation provision permanent, the legislature ultimately decided to impose the limitation for three more years, at which time the issue is likely to be reevaluated by the state. Illinois follows the trend of several large-market states that have imposed significant restrictions on utilization of their state NOL attributes.

Pennsylvania, another state that historically has had a very restrictive NOL deduction limitation policy, enacted omnibus budget legislation in July 2024. This legislation gradually increases the state’s existing 40% net loss carryover (NLC) limitation over a four-year period for corporate net income tax (CNIT) taxpayers.²¹ Beginning with the 2026 tax year, the NLC deduction limitation is increased in 10% annual increments through the 2029 tax year, to eventually align with the federal 80% limitation for tax years beginning in 2029 and after. In order to retain the previous 40% limitation for net losses incurred in pre-2025 tax years, the legislation provides a complex formula for calculating net losses incurred in both pre-2025 tax years and post-2024 tax years. Overall, the increased NOL limitation is designed to eventually make Pennsylvania more competitive with neighboring states in attracting and retaining corporate businesses. However, taxpayers will need to track net losses by year until pre-2025 losses are fully utilized, and consider the resulting financial impact for tax provision purposes.

It should be noted that even as Pennsylvania set forth NOL legislative policy for the future, the Pennsylvania Supreme Court weighed in on uncertainties raised by the state’s historic NOL regime that will impact certain taxpayers that may have expected some form of retroactive relief. For many years, Pennsylvania’s NLC was limited to the greater of a fixed-dollar limitation or a percentage of the NOL deduction. Following a complicated set of three cases ultimately reaching the Pennsylvania Supreme Court, some level of clarity with respect to the treatment of the historic NLC limitation may finally be in order. In Alcatel-Lucent,²² the court addressed whether a taxpayer was entitled to a CNIT refund paid for the 2014 tax year, when the use of an NLC was limited by a percentage of NOL deductions. Specifically, the court had to decide whether the Nextel decision²³ (which struck down the fixed-dollar limitation on NLC deductions) applied retroactively to pre-2017 tax years in light of the court’s General Motors decision.²⁴ In General Motors, the court had applied Nextel on a retroactive basis in striking down the entire NLC deduction as applied to the 2001 tax year (when the NLC deduction provision contained only a fixed-dollar limitation). The court held that General Motors was incorrectly decided, meaning that the Nextel decision does not apply retroactively, and therefore Alcatel was not entitled to a 2014 refund of CNIT paid based on application of the NLC deduction provision for that tax year. In concluding that the General Motors decision was erroneous, the court essentially held that the Nextel decision should be applied prospectively and that its retroactive application in GM did not mean it should apply retroactively to Alcatel-Lucent.

Both Connecticut and Rhode Island enacted legislation extending their NOL carryforward periods in an effort to improve the ability of taxpayers to fully deduct their unused NOLs. Connecticut increased its NOL carryover period from 20 to 30 income years for NOLs incurred in income years beginning on or after Jan. 1, 2025.²⁵ Likewise, Rhode Island extended its NOL carryforward period from five to 20 years for tax years beginning on or after Jan. 1, 2025.²⁶

On the other hand, in response to a ballooning fiscal deficit, California enacted a revenue trailer bill²⁷ for its 2024-25 budget that suspends the use of NOLs for most corporate and personal income taxpayers for tax years beginning in 2024-2026, unless a limited small business exception applies.²⁸ In the event that the NOL utilization is suspended by the new law, a corollary extension of the NOL carryforward period is provided for each year of disallowance. The legislation follows a similar approach to legislation enacted back in 2020 that suspended NOLs for three years, although legislation was later enacted in 2022 providing that the NOL suspension did not apply to the 2022 tax year.²⁹ While the possibility exists that the NOL suspension will not apply for the 2025 or 2026 tax year in the event certain budget goals are met, the history surrounding California’s use of this provision and the uncertain economic landscape means that taxpayers cannot count on a repeat of the 2022 relief in 2025 or 2026. It is clear that the unpredictable nature of California’s NOL utilization policy from year to year makes it very difficult for taxpayers to gauge how much of their NOL attributes can be used, which could cause significant and unintended swings in their California corporation franchise tax liabilities.

4. The California Microsoft case and its aftermath       

Many taxpayers are deeply concerned by the controversial chain of events that began with a decision by the California Office of Tax Appeals (OTA) in re Microsoft Corp, and continued with legislation reacting to the decision, leading to legal challenges to the legislation itself. In Microsoft, the OTA held that a water’s-edge group could include the gross amount of repatriated dividends in the denominator of its sales factor without taking the 75% qualifying dividend deduction.³⁰ The OTA rejected Legal Ruling 2006-01 issued by the California FTB providing that the sales factor includes only the net dividends after applying the qualifying dividend deduction.³¹ The OTA’s taxpayer-favorable decision received considerable attention and undoubtedly encouraged some taxpayers to seek refund claims. However, obtaining these refunds became more challenging in April 2024 when the OTA decided to make the decision nonprecedential, essentially requiring taxpayers to apply for refund claims without the benefit of relying upon Microsoft as precedential authority.³²

As part of its state budget legislation, California soon enacted a statute effectively reversing the Microsoft decision for taxable years beginning before, on, or after June 27, 2024.³³ The legislation expressly provides that Legal Ruling 2006-01 applies to apportionment factors attributable to corporate taxpayers.³⁴ A transaction or activity, to the extent it generates income or loss not included in “net income,” subject to apportionment, is excluded from the apportionment formula.³⁵ This legislation permanently precludes refund opportunities by rejecting the OTA’s holding and reaffirming the validity of the FTB’s Legal Ruling 2006-01 providing that the sales factor includes only the net dividends after applying the qualifying dividend deduction. This provision is intended to prevent a negative revenue impact of up to $1.3 billion over multiple years based on similar filings from past tax years, and an estimated $200 million in potential refund claims generated in each tax year prospectively.³⁶ While there was some uncertainty concerning the current validity of Legal Ruling 2006-01, this legislation clarifies that the FTB’s ruling continues to be in effect. However, this legislation is of concern because the legislature decided to expressly reject the OTA’s holding in part due to its ramifications on the state’s budget.

Two separate lawsuits were filed during August 2024 challenging the legislation which effectively reverses Microsoft. Specifically, the National Taxpayers Union filed litigation arguing that the new statute is contrary to the OTA’s holdings and its retroactive application will violate the Due Process Clauses of the U.S. and California Constitutions.³⁷ The California Taxpayers Association (CalTax) also filed litigation challenging the constitutionality of the new statute.³⁸ But at least for the moment (and perhaps a while longer), taxpayers cannot rely on an OTA decision which was expected to result in reduced tax liability and substantial refunds for many taxpayers. It would not be surprising to see this story on next year’s list as the courts evaluate whether to invalidate the statute reversing Microsoft or to otherwise limit its applicability.

5. Combined reporting developments  

While no state completely shifted its corporation income tax filing method regime from separate reporting to mandatory combined reporting, in 2024, Colorado and South Carolina did enact significant legislation addressing standards governing combined reporting filings. Also, the South Carolina Administrative Law Court (ALC) considered whether the South Carolina Department of Revenue was justified in requiring combined reporting. Finally, the District of Columbia enacted legislation adopting the Finnigan methodology for combined reporting apportionment.

Colorado enacted legislation which significantly amends the state’s combined reporting provisions to adopt the MTC’s standard and to make then more consistent with the unitary business principle.³⁹ For the 2026 and subsequent tax years, all members of an affiliated group that are members of a unitary business must file a combined report.⁴⁰ Under existing law, a combined report is required to include only the affiliates that satisfy at least three of six specific unitary tests over three successive tax periods.⁴¹ Also, the legislation changes the way that the income or loss of affiliates is combined in the unitary business and apportioned to Colorado.⁴² This legislation, which is intended to implement combined reporting standards that are more consistent with the standards used in other states, could make it easier for some multistate taxpayers to determine what members should be in the combined group.⁴³ Given that the new legislation may substantially change the composition of the members included in a combined group, taxpayers need to thoroughly analyze these new provisions. However, as the provisions are not effective until the 2026 tax year, taxpayers will have an opportunity to examine the provisions prior to implementation.

Effective March 11, 2024, South Carolina enacted legislation providing the state’s Department of Revenue with procedures to follow in requiring taxpayers to use alternative apportionment or file combined returns to accurately reflect their business activity in the state.⁴⁴ The Department retains the authority to adjust income and require combined reporting, but these new requirements for the Department should make the process more equitable for taxpayers. Under the new procedures, if the Department finds that a combined return is necessary, the Department may, upon written notice to the taxpayer, require the taxpayer to submit the combined return.⁴⁵ The Department or the taxpayer may propose a combination of fewer than all members of the unitary group. Although the Department is authorized to consider whether the proposed combination is a reasonable means to redetermine state net income, the Department may not require a combination of fewer than all members of the unitary group without the taxpayer’s consent. The Department may require a combined return regardless of whether the members of the affiliated group are doing business in South Carolina.⁴⁶

In the past, the Department often used its broad discretionary authority to aggressively audit taxpayers and require combined reporting even though South Carolina generally requires taxpayers to file on a separate reporting basis. The Department is now required to follow specific procedural requirements before adjusting a taxpayer’s income or forcing a combined report. Also, the Department must provide taxpayers with notice and explain why an income adjustment or combined return is necessary. The legislation also specifies the type of review that the South Carolina ALC must perform when considering appeals of income adjustments or combined reports.

While the effective date of the South Carolina legislation is March 11, 2024, and the legislation applies to all open tax periods, there is an exception for assessments under judicial review on that date. One of those assessments not covered by the legislation involved a matter in which the South Carolina ALC endorsed the Department’s action to require a major multistate used car retailer to file a combined report.⁴⁷ According to the ALC, the taxpayer employed a corporate structure that used transfer pricing and a partnership to allocate income to western states to distort its business activity in South Carolina and artificially lower its tax burden in the state. Requiring combination in order to properly reflect income earned in the state was determined to be a reasonable and equitable alternative method to correct the distortion, resulting in a fair representation of the business income in South Carolina. However, the case was remanded to the Department because it did not apply the Finnigan method to apportion the South Carolina taxable income between the two unitary corporations.

Finally, as a means to enhance revenue over time, the District of Columbia enacted budget legislation that adopts the Finnigan method of apportionment for combined reporting.⁴⁸ For tax years beginning after Dec. 31, 2025, the District changes from the Joyce to the Finnigan method of apportionment for combined reporting.⁴⁹ Specifically, a combined group of entities will be treated as one taxpayer for purposes of sourcing unitary receipts, and the apportionment factor attributes in the numerator will be derived from all members of the combined group, regardless of whether a specific entity in the group has nexus with the District..

6. The election — ballot measures and ramifications 

The elections held last month provided an opportunity for voters across the U.S. to cast ballots on a variety of important SALT issues and proposals.⁵⁰ The two most contentious and widely publicized state tax ballot issues in Oregon and Washington were soundly rejected by voters. Oregon’s Measure 118 failed by a substantial margin, with less than 23% support.⁵¹ If adopted, this measure would have raised corporate taxes through an enhanced corporate minimum tax, in exchange for rebates that would have been provided to individuals. In Washington, approximately 64% of voters rejected a measure that would have repealed the long-term capital gains tax imposed on individuals with capital gains over $250,000.⁵² With less than 1% of all Washington voters subject to the tax, and educational funding potentially at risk, voters had little trouble in deciding that the long-term capital gains tax should remain in effect. Beyond Oregon and Washington, voters in some of the other states that offered ballot initiatives also chose not to disturb the existing SALT policies adopted by governors and legislatures. For example, voters rejected proposals in South Dakota to prohibit the imposition of sales tax on groceries⁵³ and in North Dakota to eliminate property taxes.⁵⁴

Of course, there were some exceptions to the trend of voters deciding to reject changes to SALT policy this year. Georgia voters decided in favor of some property tax relief and approved the creation of a Georgia Tax Court to explicitly handle SALT controversies, in place of a tax tribunal.⁵⁵ In addition, voters in the city of San Francisco decided to overhaul the numerous city business tax regimes, resulting in major tax changes that will affect businesses with significant presence in the city.⁵⁶ However, one can infer that voters have concluded that at least in 2024, state legislatures and governors’ views on tax policy matters do remain relevant, and should remain relatively undisturbed unless economic conditions compel voters to force more dramatic changes.

Finally, the recent elections provided voters with an opportunity to determine political party control through gubernatorial and state legislative elections. Overall, party control in states remains very divided in the aggregate, and fairly stable from state to state with little change occurring in 2024.⁵⁷ None of the 11 gubernatorial elections resulted in a change in party control. Prior to the election, Republicans held trifectas in 23 states and Democrats had trifectas in 17 states.⁵⁸ The number of Democratic trifectas looks to have slightly decreased as the unofficial election results currently stand.⁵⁹

7. Remote work/convenience of the employer rule litigation ramps up 

The requirement that employees work remotely during the COVID-19 pandemic had a profound impact on personal income tax imposition and withholding requirements in many state and local jurisdictions during 2020 and 2021. As a result, state courts and administrative tribunals are now in the midst of considering nonresident taxpayer challenges to aggressive state efforts to tax employees working outside the borders of their jurisdiction. For example, taxpayers have challenged New York’s longstanding “convenience of the employer” rule. This rule provides that if employees work remotely for their own convenience, and not as a requirement of the employer, the employees are subject to New York personal income tax based on the employer’s New York location. New York’s aggressive enforcement of the rule has an amplified effect in an environment where out-of-state employees were unable to, or may no longer be required to, regularly commute into a New York office but are still “assigned” to that office in the absence of establishing a bona fide office at an out-of-state location.

A Connecticut-based law professor working for a New York law school directly challenged New York’s convenience rule in 2021, arguing that he was entitled to a refund of New York personal income tax for the days that the law school was closed during the pandemic and he could not physically commute work from his New York office.⁶⁰ However, the Administrative Law Judge (ALJ) unit of the New York Division of Tax Appeals (Division) denied the taxpayer’s request, finding that the taxpayer failed to meet his burden of proving that he worked outside New York due to his employer’s necessity.⁶¹ In denying the refund request, the ALJ reasoned that the fact that the taxpayer’s New York office was unavailable due to the pandemic did not mean that his remote work was performed for the necessity of the employer. Further, the ALJ concluded that the taxpayer maintained a “virtual presence” in New York when hosting Zoom classes and meetings with students, citing to the U.S. Supreme Court’s Wayfair decision⁶² authorizing sales tax collection and remittance requirements on remote sellers. The taxpayer appealed the decision to the New York Tax Appeals Tribunal, which heard the case on Nov. 21. A favorable ruling for the taxpayer could provide further clarity for similar legal challenges to the convenience rule.

The Division has consistently denied other nonresident taxpayer challenges to New York’s convenience rule in 2024. In one case, an ALJ determined that a Pennsylvania resident working for a New York-based employer was subject to New York personal income tax for days he worked remotely in 2020 while his employer’s office was closed during the pandemic.⁶³ In denying the taxpayer’s refund request, the ALJ concluded that the taxpayer did not work remotely out of his employer’s necessity because his employer did not specifically direct him to work from his Pennsylvania home. An ALJ similarly concluded that a vice president of an investment fund with a New York office owed New York income tax for days he worked from home in New Jersey in 2020 during the pandemic.⁶⁴ In denying the taxpayer’s request, the ALJ determined that as an essential business under New York guidance, the taxpayer’s employer was under no legal mandate to close its New York office during the pandemic. While the employer could have ordered its employees to report from specific locations for its own necessity, the ALJ reasoned, the taxpayer provided no proof supporting such an assertion.

Outside New York, taxpayers have challenged similar pandemic-era teleworking rules imposed by several municipalities. In February 2024, the Ohio Supreme Court sustained a temporary state law in effect during the pandemic requiring workers to pay municipal income tax based on their “principal place of work” rather than the municipality where they actually performed the work.⁶⁵ In affirming the state appeals court, the state supreme court found that the emergency legislation⁶⁶ satisfied the Due Process Clause of the U.S. Constitution, finding that the extraterritorial taxing authority granted to municipalities under the law was a valid exercise of the state legislature’s constitutional authority. An Ohio resident sought a refund of taxes withheld by Cincinnati in 2020 for days when he worked outside the city during the pandemic. The taxpayer argued that the Due Process Clause forbade a municipality from taxing a nonresident for work performed outside its local jurisdiction. In upholding the state law, the state supreme court determined that Ohio had a rational basis in enacting the law and a legitimate interest in ensuring that municipal revenues remained stable amidst the rapid switch to remote work in 2020. The decision may be contrasted with an Ohio appeals court ruling that invalidated Cleveland’s attempt to tax a Pennsylvania resident for days worked outside Ohio during 2020.⁶⁷ Finding a due process violation in this case, the court found that the Ohio legislature could not expand the taxing power of a municipality to Ohio nonresidents for work performed outside the state.

In another local tax telework case, the Missouri Court of Appeals ruled that the city of St. Louis’ earnings tax ordinance does not permit the city to assess its 1% tax on nonresidents for work performed in other municipalities.⁶⁸ The ordinance authorizes the city to tax nonresidents “for work done or services performed or rendered in the city.”⁶⁹ St. Louis assessed earnings tax on city nonresidents who worked for city-based employers in 2020 and 2021, regardless of whether the employees worked in the city or remotely outside the city. The employees subsequently submitted refund requests for the number of days they worked remotely outside the city for each calendar year. Finding that the earnings tax does not apply to nonresidents for work performed outside the city, the appeals court noted that St. Louis could not rewrite the ordinance to tax work or services “performed or rendered into the city” via telecommuting. Although these cases address pandemic-era teleworking fact patterns, they may yet have important ramifications for states and localities that seek to tax employees working outside their borders in hybrid and full remote work arrangements on a prospective basis.

8. Wayfair prompting transaction threshold laws, marketplace facilitator cases

More than six years after the U.S. Supreme Court’s landmark decision in South Dakota v. Wayfair Inc, states continue to adjust their economic nexus provisions for remote sellers in an effort to address compliance burdens for small business remote sellers. While a majority of state remote seller provisions use only a dollar threshold to determine whether a remote seller has established economic nexus with their state, many states still include an alternative transaction count threshold in their provisions that is not necessarily simple to calculate and can ensnare businesses. The transaction count is commonly set at 200, mirroring the original South Dakota law that was approved in Wayfair. However, states have more recently soured on the use of transaction thresholds, in part due to concerns raised by small business sellers engaging in low-dollar sales transactions. The use of transaction count thresholds often results in an increased compliance burden for smaller retailers generating minimal revenue in these states.⁷⁰

In response to these concerns, states including South Dakota have eliminated the transaction count thresholds from their remote seller provisions, signalling that the existing dollar thresholds are a more accurate measure of economic activity in their states. In 2024, Indiana, North Carolina and Wyoming continued the trend of states enacting legislation to drop the 200-transaction counts from their economic nexus provisions while retaining the $100,000 sales thresholds.⁷¹ The eliminated transaction counts are equally applicable to the states’ marketplace facilitator provisions. The amended provisions eliminate the need for remote sellers from having a registration, filing and remittance requirement if they do not meet the $100,000 sales threshold. While providing relief for small business remote sellers, the amended provisions also make it more feasible for the states to efficiently collect sales tax from remote sellers while encouraging increased remote seller compliance.

Meanwhile on the marketplace front, marketplace facilitators continued to challenge state efforts to impose sales tax remittance requirements for periods preceding the Wayfair decision and the enactment of state marketplace facilitator laws. In January 2024, the South Carolina Court of Appeals held that Amazon Services, a marketplace facilitator, was required to collect and remit sales tax for third-party sellers in 2016, prior to Wayfair and South Carolina’s enactment of marketplace facilitator legislation in 2019.⁷² In affirming the South Carolina ALC, the appeals court agreed that Amazon Services had a duty to collect and remit sales tax for third-party sellers under the 2016 law because Amazon met the statute’s definitional requirements of a business engaged in selling tangible personal property and having a physical presence in the state. In response to Amazon’s argument that the state legislature amended its sales tax law in 2019 to expressly include marketplace facilitators, the court determined that the marketplace facilitator legislation was merely a clarification rather than a new statutory obligation for marketplace facilitators to collect and remit tax. The decision is currently on appeal to the South Carolina Supreme Court.

A Wisconsin trial court reached a different result in a marketplace facilitator case. The trial court determined that StubHub was not responsible for nearly $8.5 million in sales tax assessed by the Wisconsin Department of Revenue for pre-Wayfair years since it was not a seller of tickets and there was ambiguity in Wisconsin tax law regarding its status as a marketplace facilitator.⁷³ The Department assessed StubHub for transactions that occurred on its website during the audit period, arguing that StubHub met the definition of a “seller” under Wisconsin law because the company was considered to be selling retail admissions to entertainment events. The Wisconsin Tax Appeals Commission agreed with the Department that StubHub is a seller providing taxable admissions at retail and that its role was “not entirely passive” due to its additional roles in facilitating the ticket transactions. In reversing the Commission, the trial court concluded that reasonable persons could disagree whether terms like “selling” and “representing sellers” apply to running an online marketplace, and thus that Wisconsin’s marketplace law could not be unambiguously applied to the company prior to 2020. The case is currently on appeal to the Wisconsin Court of Appeals.

The different results reached by the South Carolina and Wisconsin courts are indicative of the difficulties of applying marketplace facilitator laws to marketplaces on a retroactive basis. Additionally, they illustrate the nuances of consulting the specific language in a state’s sales tax statutes in determining a marketplace facilitator’s tax collection obligations, particularly during pre-Wayfair periods.

9. Tennessee franchise tax reform 

Tennessee enacted legislation in May 2024 which eliminated the property measure for computing the Business Privilege Tax (franchise tax) for tax years ending on or after Jan. 1, 2024.⁷⁴ Prior to this legislation, the franchise tax was based on the greater of Tennessee apportioned: (i) net worth (assets less liabilities) computed on Schedule F of the franchise tax return;⁷⁵ or (ii) the book value (cost less accumulated depreciation) of real and tangible property owned or used in Tennessee computed on Schedule G of the return.⁷⁶ The tax rate is 0.25% of the tax base and the minimum franchise tax is $100.⁷⁷ The legislation repealed the property base for computing the tax. On returns filed for tax years ending in 2024 or subsequent years, taxpayers should omit Schedule G from their return and calculate franchise tax based on Schedule F (net worth).⁷⁸

The legislation allowed taxpayers that were required to use this method to file tax refund claims for the three prior tax years. Specifically, taxpayers who paid franchise tax based on the property measure could request a refund of franchise tax for tax years ending on or after March 31, 2020, for which a return was filed with the Tennessee Department of Revenue on or after Jan. 1, 2021.⁷⁹ The refund claims were required to be filed by Nov. 30, 2024 (though the Department accepted filings until Dec. 2, 2024).

The franchise tax legislation, which resulted from an internal consistency challenge against the Tennessee franchise tax filed in 2022,⁸⁰ created significant refund opportunities and should provide future tax benefits to many taxpayers. In fact, Tennessee has estimated that it ultimately will pay refunds of nearly $1.6 billion and experience a future annual tax revenue reduction of approximately $400 million due to this legislation.⁸¹ Because the net worth measure is now the sole method by which the Tennessee franchise tax is calculated, taxpayers should review the accuracy of their tax calculation, particularly the net worth adjustment for affiliated debt.⁸²

10. Property tax developments on vacant properties and pandemic-related access disruptions

In the world of property tax, 2024 was marked by unsuccessful efforts by taxpayers to reduce commercial property valuations for real property tax purposes during tax years where businesses were negatively impacted by business closures and other challenges resulting from the COVID-19 pandemic. In particular, courts in Oregon and Utah rejected taxpayer requests for valuation adjustments under the “dark store” and access interruption theories, respectively.

In December 2023, the Oregon Tax Court rejected a grocery store owner’s attempt to lower an occupied store’s real market value by considering comparable properties that were vacant under the “dark store” theory.⁸³ The taxpayer argued for a lower tax valuation of its grocery store property in a Portland, Oregon suburb for the 2020-21 tax years based on the theory that comparable stores should be valued as if they are vacant because they are built to suit an individual company’s specific needs. In rejecting this argument, the court reasoned that sales of commercial properties leased at market rents are better indicators of market value than are vacant buildings. The decision follows several state courts that have rejected the “dark store” theory as an argument in favor of pandemic-area property tax relief, with similar decisions reached in Wisconsin and Iowa courts.

In March 2024, the Utah Supreme Court denied a request by 21 businesses to have their property values adjusted under the state’s “access interruption statute” during the 2020 tax year, finding that the taxpayers could not invoke the statute to seek property tax relief because the law did not apply to the pandemic.[1] The access interruption statute allows for an adjustment of a property’s fair market value if access to the property is interrupted due to circumstances beyond the owner’s control. The taxpayers argued that the pandemic was an event similar to the 13 enumerated qualifying events under the statute because their properties experienced similar access interruptions during the 2020 tax year. In rejecting this argument, the court noted that the Utah Tax Commission did not promulgate an administrative rule adding the pandemic as a circumstance that would interrupt access to the property. The court’s decision is generally consistent with other state court decisions that generally have not allowed property tax reductions due to the pandemic.