INSIDE SALT

California SB 711: Closing the conformity gap with the IRC

by Charles Moll, III, Troy M. Van Dongen and Elle Kaiser | Oct 21, 2025 | California, Federal Tax, Franchise Tax, Incentives, Income Tax

After nearly a decade of lagging behind federal tax updates, California has finally hit “refresh.” Signed into law on October 1, 2025, Senate Bill (SB) 711 delivers the most sweeping overhaul of California’s tax conformity rules since 2015.

The legislation advances the state’s conformity to the Internal Revenue Code (IRC) from January 1, 2015, to January 1, 2025, for taxable years beginning on or after that date, thereby bringing California into line with hundreds of federal tax changes made over the past decade. This alignment is designed to simplify compliance and reduce costly inconsistencies between federal and state returns. But conformity also comes with caveats, and taxpayers will need to understand where California continues to chart its own course.

The major changes introduced by SB 711

Updating California’s IRC “conformity date” to January 1, 2025, the bill incorporates several federal amendments enacted during the last decade. For example, one major innovation in SB 711 is the overhaul of California’s research credit. Starting in 2025, taxpayers may use the Alternative Simplified Credit method under IRC § 41(c)(4), which was adjusted with lower state percentages for qualified research expenses (3% and 1.3% instead of 14% and 6%). Other notable modifications include conformity to federal limitations on IRC § 1031 exchanges to real property and the elimination of the deferral for exchanges of certain non-real property.

Of course, many instances of nonconformity to recent federal enactments remain, including:

Corporate alternative minimum tax (CAMT). SB 711 continues to exclude the new federal CAMT, created by the Inflation Reduction Act of 2022 (IRA), from conformity.
Renewable energy credits. SB 711 does not adopt the clean energy credits added under the IRA.
Net operating loss rules. California continues to diverge from federal carryback and carryforward limits.
IRC 163(j). SB 711 continues nonconformity to interest expense limitations under IRC § 163(j).
One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). Because SB 711 conforms to the IRC as of January 1, 2025, it does not include changes made under the OBBBA, which was signed by US President Donald Trump earlier this year.

Preparing for the transition

SB 711 applies to both the personal income tax and corporation tax regimes for taxable years beginning on or after January 1, 2025. Taxpayers should begin modeling how the new conformity affects their liabilities and planning strategies. Key steps include:

Reviewing federal provisions now incorporated into state law.
Identifying exceptions and modified rules applicable to your business or filing type.
Consulting tax professionals to evaluate the impact on research and development incentives, loss carryovers, and credit eligibility, among others.
Monitoring California Franchise Tax Board guidance as the agency clarifies implementation details over the coming months.

Bottom line

SB 711 represents California’s latest move to more closely synchronize its tax code with the modern federal landscape. The reform promises greater clarity, fewer compliance headaches, and a more innovation-friendly framework. Yet, with selective decoupling and transitional complexities, taxpayers will need to remain vigilant. In short, California may finally be closer to being in sync – but [...]

Continue Reading

Decoupling from DC: How HB 4961 redefines Michigan’s tax base

by Elle Kaiser and Mary Kay McCalla Martire | Oct 20, 2025 | Federal Tax, Income Tax, Michigan, Nationwide Importance, Tax Base

At the tail end of the 2025 – 2026 legislative session, Michigan’s Legislature moved swiftly to enact House Bill (HB) 4961, which decouples from five federal tax benefits enacted earlier this year under the federal One Big Beautiful Bill Act (OBBBA).

Given that many of the OBBBA’s provisions – particularly those expanding tax deductions or credits – will reduce taxable income and state revenue, Michigan is one of many states assessing the impact of the OBBBA’s changes. Earlier this year, the Michigan Department of Treasury estimated that following the OBBBA’s changes to Internal Revenue Code (IRC) Sections 174A, 168(k), 168(n), 179, and 163(j), state revenues would be reduced by approximately $540 million in Fiscal Year (FY) 2025 – 2026 and by more than $2 billion through 2030. While the state’s decision to decouple comes as no surprise for businesses operating in Michigan, this move eliminates – or significantly reduces – the state-level benefit of the following five federal tax changes made in the OBBBA.

Key decoupling provisions

IRC § 174A: Domestic R&D amortization

OBBBA: Under the OBBBA, Section 174A allows full expensing of domestic research or experimental expenditures incurred in taxable years beginning after December 31, 2024. The OBBBA also permits taxpayers to alternatively elect to amortize such expenses over five years.

Michigan: For tax years beginning after December 31, 2024, HB 4961 requires taxpayers to compute their Michigan income as if Section 174A were not in effect. This means that Michigan taxpayers will not receive a state-level benefit from the new research and development (R&D) amortization option. Research intensive businesses will also have higher taxable income.

IRC § 168(k): Federal bonus depreciation

OBBBA: The OBBBA permanently restores 100% bonus depreciation at the federal level for qualified property acquired after January 19, 2025. Prior to the OBBBA, bonus depreciation phasedown rules enacted under the Tax Cuts and Jobs Act of 2017 would have reduced bonus depreciation to 60% for property placed in service in 2024 and eliminated it entirely by 2027.

Michigan: Michigan has historically instructed taxpayers to compute their Michigan income as if Section 168(k) was not in effect, meaning that under Michigan law, any bonus depreciation claimed on a taxpayer’s federal return was not allowed for corporate income tax purposes. Under HB 4961, Michigan continues to decouple from Section 168(k).

IRC § 168(n): Disaster-area bonus depreciation

OBBBA: The OBBBA also introduces a new deduction under Section 168(n) for investments in qualified domestic factory property.

Michigan: HB 4961 does not recognize the new deduction under Section 168(n). Property that qualifies for bonus depreciation federally must be depreciated under regular Modified Accelerated Cost Recovery System rules for Michigan, leading to slower cost recovery and higher near-term taxable income.

IRC § 179: Expensing for small business property

OBBBA: The OBBBA enhances Section 179, which permits immediate expensing of certain equipment and software purchases (subject to federal dollar limits), by significantly increasing the expensing limit and phase-out threshold beginning in tax years starting after December 31, 2024.

Michigan: HB 4961 freezes conformity to [...]

Continue Reading

Washington DOR issues interim guidance on advertising services

by Stephen P. Kranz, Mark Nebergall and Jonathan C. Hague | Sep 19, 2025 | Local Tax, Nationwide Importance, Sales Tax, Washington

The Washington Department of Revenue (DOR) released an Interim Guidance Statement (IGS) on Advertising Services implementing Engrossed Substitute Senate Bill (ESSB) 5814 ahead of the October 1, 2025, effective date. In previous posts, we addressed the passage of ESSB 5814 and the sourcing rules.

The Advertising Services IGS is part of a broader rollout of interim guidance DOR is publishing before the effective date. Previous IGSs include guidance on Custom Website Development; Digital Automated Services (DAS) Exclusions; Information Technology Services; Live Presentations; Investigation/Security/Security Monitoring, and Armored Car Services; Temporary Staffing Services; and Existing Contracts (among others). We view this cadence as a positive sign of the tax policy team’s commitment to provide implementation detail ahead of the effective date of the new taxes.

Two categories the advertising services IGS addresses

In response to industry requests, the IGS addresses both “creative” or pre-dissemination services and “dissemination” services (i.e., advertising services involving the actual dissemination). The IGS states that it is responding to the need for clarity on both types.

Where the sale takes place

The IGS applies the destination-based sourcing statute and frames receipt as first use, guided by the Streamlined Sales and Use Tax Agreement’s concepts of where a purchaser (or donee) can first make use of the result of the service. For disseminated advertising services, including creative services bundled with dissemination, the IGS illuminates that “receipt occurs where the result of the advertising services is first used … which is the location where the advertising services are disseminated.” The IGS continues:

The location of dissemination may be indicated by, but not limited to: instructions as to where advertising will be placed for viewing, actual locations of placement, IP addresses of potential customers’ viewers of advertising, or other similar information about where the advertising is consumed.

For pre-dissemination (creative) services where the seller does not also disseminate, “receipt occurs where the purchaser reviews the advertising or related service prior to dissemination.” If the seller does not know the location of receipt at the time of charge, the IGS walks through the statutory sourcing hierarchy and cautions against “bad faith” address selection. In instances where the full address or ZIP+4 Code cannot be determined with due diligence, the use of Washington “pool codes” is permitted.

Illustrative examples highlighted in the IGS

Disseminated advertising: Washington-only, known viewer locations (Example 1). Source to specific ZIP+4 Codes tied to impressions; where matching isn’t possible, use Washington pool codes.
Disseminated advertising: Washington-only, viewer location unknown at payment (Example 4). Source to the purchaser’s Washington address (not an out-of-state address).
Disseminated advertising: Multijurisdictional, prepaid, viewer location unknown at invoice (Example 5). May source to the purchaser’s address unless the parties agree by invoice time to a reasonable, consistent multijurisdictional allocation.
Creative advertising (advisory only) (Example 7). Source to the purchaser’s review location (g., the client’s marketing office).

Generative AI chatbot service not subject to Indiana sales tax

by Stephen P. Kranz, Michael J. Hilkin and Mark Nebergall | Aug 28, 2025 | Indiana, Local Tax, Nationwide Importance, Sales Tax

In one of the first pieces of administrative guidance addressing the sales tax treatment of generative artificial intelligence (AI) services, the Indiana Department of Revenue (DOR) recently issued a revenue ruling confirming that charges for a generative AI chatbot service are not subject to Indiana sales tax. In reaching its conclusion, the Indiana DOR used the legal framework applicable to examining whether services involving software are subject to taxation (a framework we expect other state DORs to apply when examining services involving generative AI functions).

The Indiana DOR previously issued guidance confirming that software “remotely accessed over the internet . . . is not considered an electronic transfer of computer software and is not considered a retail transaction” subject to Indiana sales tax. In the case of the AI chatbot service, the “software that operates the chatbot is never downloaded onto a customer’s computer” but instead is accessed via a “website or free app.” As such, and consistent with its prior guidance addressing remotely accessed software, the Indiana DOR determined that the AI powering the chatbot service was merely “accessed electronically with no permanent ownership aspect” and therefore was not subject to sales tax.

We anticipate that, like the Indiana DOR, other state DORs will rely on their preexisting guidance addressing the taxability of software to determine the taxability of services involving generative AI functions. This means that, depending on a state’s preexisting law and guidance, state DORs will ask questions such as:

Whether generative AI functions are downloaded or accessed remotely
Whether generative AI functions are directly accessible by a customer or if such functions are used by a service provider in providing their services
Whether and to what extent the generative AI function(s) in a service are the “primary function”/“primary purpose”/“true object” of an underlying transaction.

Fourth Circuit strikes down Maryland’s digital ad tax “pass-through” ban

by Stephen P. Kranz, Mark Nebergall and Jonathan C. Hague | Aug 19, 2025 | Allocation/Apportionment, Constitutional Issues, Maryland, Nationwide Importance, Sales Tax, Tax Base

Maryland’s attempt to stop businesses from telling customers about a controversial tax has hit a constitutional wall. On August 15, 2025, the US Court of Appeals for the Fourth Circuit ruled that the state’s “pass-through” provision in its Digital Advertising Gross Revenues Tax violates the First Amendment.

In Chamber of Commerce et al. v. Lierman, Case No. 24-1727 (4th Cir. Aug. 15, 2025), a unanimous panel held that Maryland’s “pass-through” provision is facially unconstitutional because it restricts how companies can talk about price increases tied to the tax.

The provision at issue

Maryland’s first-of-its-kind digital advertising tax applies to large companies earning more than $100 million in global revenue from online ads. The controversial “pass-through” provision provided that those companies “may not directly pass on the cost of the tax … by means of a separate fee, surcharge, or line-item.” Businesses could still raise prices to cover the tax, they just had to do it without saying so.

The Fourth Circuit’s reasoning

Writing for a unanimous panel, Judge Julius N. Richardson opened the opinion with a striking historical parallel. Just as colonists objected to Britain’s Stamp Act of 1765, which taxed printed materials and chilled political expression, Maryland’s rule targeted modern equivalents: internet companies and their speech about taxation. “We agree,” Richardson wrote. “As much today as 250 years ago, criticizing the government—for taxes or anything else—is important discourse in a democratic society. The First Amendment forbids Maryland to suppress it.”

The Court found that the pass-through provision regulated protected speech – not conduct –because it dictated how companies communicate price changes attributable to the tax, forbidding certain methods while allowing others. This made the provision a content-based restriction subject to heightened constitutional scrutiny.

Maryland argued that the provision was designed to ensure companies bear the tax’s economic and legal burden, but the Court found that justification hollow. Since businesses could still raise prices silently, the law did nothing to prevent cost-shifting. It only restricted speech about it. Accordingly, the Court found that “[t]he pass-through provision of Maryland’s digital advertising tax is unconstitutional in all of its applications.”

What’s next

The Fourth Circuit reversed the district court’s ruling and remanded the case to determine the appropriate remedy, noting that recent Supreme Court of the United States precedent limits the scope of injunctive relief. The broader tax itself remains in effect for now, with separate challenges pending in the Maryland Tax Court.

For businesses, the ruling lifts Maryland’s ban on explicitly itemizing the tax on invoices or contracts and stands as a reminder that states can’t sidestep political accountability by limiting how regulated entities talk about their regulations. For Maryland and other states, the decision sends a clear message: Governments may tax, but they cannot silence the businesses they tax when those businesses tell customers what’s driving prices.