Experts from Ernst & Young LLP (EY) hosted their final domestic tax quarterly webcast for 2025 on December 17, providing commentary on the widespread impact of federal tax reform on state budgets, the progress of the Streamlined Sales Tax project, and novel tax challenges in California and Illinois.
States Grapple With Federal Tax Reform Amid Fiscal Pressures
States are facing a complex fiscal environment as they navigate the implications of the One Big Beautiful Bill Act (OBBB). EY State and Local Tax Policy Services Leader Scott Roberti explained that while state revenues continue to perform moderately well, the federal legislation has created considerable uncertainty.
“While states and governors and legislators were sitting down trying to put their balanced budgets together, they all had an eye towards D.C. and what was going to happen with the reconciliation bill,” Roberti said.
Many states must now decide whether to conform to or decouple from major federal provisions affecting business interest deductions under IRC § 163(j), bonus depreciation under IRC § 168(k), and the treatment of foreign income.
According to Roberti, the timing of the federal act, which was signed on July 4, presents a major challenge. “The bill gets enacted on July 4, effective for many of the provisions on January 1 of 2026, which is in the middle of the state’s fiscal year,” he noted, explaining that this will force many legislatures to take action to avoid unexpected revenue shortfalls. Already, about 13 states have issued legislative or administrative guidance in response.
Streamlined Sales Tax Project Aims for Uniformity
Much of the discussion covered the Streamlined Sales and Use Tax Agreement (SSUTA), a collaborative effort to simplify sales tax administration across states. EY Managing Director Mike Wasser explained that the project originated in the late 1990s as a response to the rise of e-commerce and the compliance burdens it created.
The project gained new urgency following the Supreme Court’s decision in South Dakota v. Wayfair (585 U.S. 162), which eliminated the physical presence requirement for remote seller nexus. Wasser noted that the Wayfair decision specifically called out South Dakota’s membership in the SSUTA as a key factor, recognizing that the system’s uniform definitions and simplified administration reduce compliance costs.
Fred Nicely, senior tax counsel with the Council on State Taxation, added that from a business perspective, uniformity is crucial. He explained that while there was frustration that remote seller collection authority came from a court decision rather than congressional action, the simplifications offered by streamlined states create a “win-win situation” for both tax administrators and businesses.
Guest panelist Craig Johnson, executive director of the Streamlined Sales Tax Governing Board, commented that participation in the project is completely voluntary and that the agreement does not override state law, but rather provides a framework for states to adopt. He encouraged businesses to get involved, stating it’s “a great way for building relationships between the states and the business community.”
California, Illinois Face Unique Sales Tax Challenges
California. The panel also drilled down into specific hot topics in several states. EY Managing Director Randy Ferris detailed ongoing developments in California concerning Technology Transfer Agreements (TTAs).
He explained that the California Department of Tax and Fee Administration (CDTFA) is proposing new regulations to codify court decisions in Nortel Networks Inc. v. SBE (191 Cal.App.4th 1259) and Lucent Technologies Inc. v. SBE (241 Cal.App.4th 19), which established that software can be an intangible part of a TTA.
The proposed rules would create pre-certification processes for OEMs to establish the nontaxable percentage of software embedded in their products.
Ferris also highlighted a major local tax dispute where the CDTFA has taken the position that online sales with no “genuine physical human interaction” should be sourced to the destination as use tax, a standard not codified in statute. The matter is now before the state’s Office of Tax Appeals.
Illinois. EY Senior Manager Emily Fiore provided an update on Illinois, which is offering a second amnesty program for remote sellers in 2026 with a simplified 9% tax rate for general merchandise. Fiore also noted that the state is seeing an “uptick with third-party auditors in small jurisdictions.”
She delved into Chicago’s personal property lease transaction tax and audit practices. She explained that “Chicago, being the largest jurisdiction in Illinois, is one that we regularly track,” and highlighted the city’s history of expanding the personal property lease transaction tax to apply to software-as-a-service (SaaS), which “is not taxed at the state level and is taxed only at the city level via this personal property lease transaction tax.”
The rate for this tax has increased over time, moving from 5.25% to 9% last year and then to 11% at the beginning of this year. Fiore noted that “the personal property lease transaction rate of 11% is on issue again, potentially increasing it up to 14%,” reflecting ongoing budget negotiations.
She also mentioned new tax proposals under consideration, including a “head tax,” which the mayor is “very pushing hard for,” as well as potential new taxes on online sports wagering and social media amusements. Fiore pointed out that from a controversy perspective, “the city continues to issue discovery audits,” targeting taxpayers not currently registered in Chicago, and that the city “defers to the state’s rules, so $100,000 threshold” for economic nexus.
Fiore emphasized that the city is “getting very aggressive as it relates to impositions,” especially regarding the personal property lease transaction tax, which is “by far one of their largest tax revenue sources.”
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