2023 was a year of brisk activity in the state tax world. States remained focused on the digital economy, with numerous new tax proposals being offered in legislatures. Departments of Revenue were also busy issuing regulations and guidance—and in the case of New York’s corporate tax reform regulations, almost a decade in the making. State litigation dockets also continued to be active as they worked through heavy caseloads, issuing numerous income tax and sales tax decisions.

Throughout the year, the Eversheds Sutherland SALT team continued tracking and summarizing SALT developments – nearly 200 items were posted to this site. In addition, we continued discussing key cases and SALT trends through our SALT Shaker Podcast. (You can catch up on 2023 episodes here, and if you would like to receive all of our updates by email, please register here.)

The following selected developments exemplify interesting 2023 SALT trends. While the digital economy continued to take center stage from both a legislative and tax administration perspective, income tax disputes, and apportionment specifically, continue to remain a focal point of state tax controversies.

Digital Economy Tax Proposals

As with 2022, 2023 was yet again a busy legislative year with numerous jurisdictions discussing new ways to tax the digital economy, such as digital advertising taxes and social media taxes.

• Digital advertising and data tax proposals introduced in Connecticut and New York
• Indiana bill would adopt social media tax
• More digital advertising and data tax legislation introduced
• New Jersey Division of Taxation hints at possible cloud computing tax
• New York proposes adding a $3 delivery surcharge on online sales delivered within New York City
• D.C. Tax Revision Commission considers digital advertising tax and data mining tax

Digital Economy Sales Tax Decisions

It was not just the legislatures in 2023 focused on the digital economy, as several states issued decisions addressing the continually expanding digital environment in which we live.  We expect as many or even more of these type of decisions in 2024 as disputes work their way through litigation.

• Massachusetts Supreme Judicial Court holds Massachusetts could not enforce pre-Wayfair computer cookie use tax collection law
• The New York Division of Tax Appeals finds vendor management fees are taxable sales of pre-written software
• Meter madness: Washington Court of Appeals holds company’s meter-reading services are non-taxable data processing services
• North Carolina Department of Revenue rules seller platform administrator not a marketplace facilitator
• Louisiana Board of Tax Appeals holds Internet Tax Freedom Act prohibits New Orleans tax on online storage service

Regulations and Department Guidance

2023 was a busy year for Departments around the country as they promulgated and finalized long-awaited regulations, including the Texas Comptroller amending its sourcing regulations in light of the Texas Supreme Court’s 2022 decision in Sirius XM v. Hegar, and the New York Department of Taxation and Finance finally adopting regulations implementing the state’s 2015 corporate tax reform.

• Legal Alert: Texas Comptroller finally gets serious; proposes amendments to franchise tax sourcing in light of Sirius XM
• Texas Talks: Comptroller incorporates federal statutes and regulations to Texas R&D credit incentives
• Legal Alert – Tax ins and outs of the New York State budget: Legislative amendments made to Governor Hochul’s Fiscal Year 2024 Executive Budget
• Illinois DOR issues guidance on taxability of computer software licenses and maintenance agreements
• Texas Talks: Texas Comptroller amended franchise tax sourcing rules is now final
• Washington Department of Revenue issues emergency remote sellers’ sales and use tax and B&O tax regulations
• New Mexico updates guidance regarding marketplace sales
• Legal Alert: New York moves to finalize corporate franchise tax regulations
• Michigan updates sales and use tax guidance on computer software and digital goods
• Legal Alert: New York adopts final business corporation franchise tax regulations

Income Tax and Apportionment

In 2023, income tax controversies continued to occupy a central role in state tax litigation around the country. Specifically, cases regarding apportionment, from cost of performance disputes to look through sourcing, highlighted litigation dockets. We do not anticipate this trend slowing down in 2024. 

• More COP sunshine: Florida gets it, Pennsylvania doesn’t
• Washington Court of Appeals holds pharmacy benefit provider meets B&O Tax insurance business exemption
• Virginia Court Sauers on Department of Taxation’s position on electing the manufacturer’s apportionment method
• Colorado Department of Revenue issues ruling that infrequent sales of real property are excluded from Colorado apportionment factor
• California Office of Tax Appeals finally drops the beet, holds that activities related to deductible income included in apportionment factor
• South Carolina Court upholds Department’s use of combined reporting under alternative apportionment statute
• Fashion faux pas: Ohio Board of Tax Appeals rejects apparel wholesaler’s appeal
• Sourcing: The CAT receipts are in Ohio if the patient is in Ohio
• What the doctor ordered: Maine court apportions drug company’s income on a “market member basis”
• Pennsylvania BF&R rejects request to calculate sales factor by looking through to customers’ sales

Sales and Use Tax Cases

Sales and use tax cases continued to maintain its status as a leading focus of state tax disputes. 2023 also saw the role of class-action sales tax disputes and qui tam cases continue unabated.     

• Massachusetts Supreme Judicial Court holds Massachusetts could not enforce pre-Wayfair computer cookie use tax collection law
• The New York Division of Tax Appeals finds vendor management fees are taxable sales of pre-written software
• Louisiana Board of Tax Appeals holds Internet Tax Freedom Act prohibits New Orleans tax on online storage service

Constitutional Issues

In 2023, multiple jurisdictions issued decisions in favor of taxpayers on constitutional grounds, reinforcing the importance of raising constitutional claims during litigation.

• Virginia’s top court strikes down county tax relief program as unconstitutional
• Alabama Court of Civil Appeals affirms that telecom dealer was not subject to tax on the sales of prepaid wireless-service plans
• Time’s up: North Carolina DOR’s failure to timely issue required written statement invalidates assessment