Multistate tax practice is always evolving. The Catalyst state team stays on top of trends, frequently consulting with SALT practitioners on the front lines and incorporating their insights, along with our in-depth analysis, into Checkpoint Catalyst topics that integrate into CoCounsel Tax. This Multistate Tax Trends Q&A series for Checkpoint News delivers quick, actionable insights from some of the practitioners our team follows most closely.
This installment features Jennifer Karpchuk, a partner with Holland & Knight who serves as co-chair of the firm’s state and local tax team. Jennifer represents companies and individuals in all aspects of SALT litigation, controversy, compliance, and planning. Based in Philadelphia, she has extensive experience with corporate income taxes, franchise taxes, gross receipts taxes, sales and use taxes, and business privilege taxes in the Mid-Atlantic and beyond. Jennifer has also advised the Catalyst team on nexus and Public Law 86-272 strategy.
Here Jennifer and Catalyst’s Rebecca Newton-Clarke discuss emerging issues in SALT practice, including market-based sourcing frictions, P.L. 86-272 uncertainty, digital ad taxes, OBBBA conformity gaps, Philadelphia’s unique local tax structure, the rise of worldwide combined reporting, and multi-jurisdictional audit risks.
Your practice concentrates on the Mid-Atlantic, where you navigate states like New York and New Jersey that have officially adopted the MTC’s approach to P.L. 86-272, alongside states like Pennsylvania whose position is less explicit (though Department guidance suggests a fairly strict interpretation of protected activities). From your perspective advising clients with remote contacts in states without clear guidance, what’s your framework for assessing risk and making compliance decisions?
In states without explicit adoption of the MTC’s revised P.L. 86-272 guidance, we evaluate a taxpayer’s risk based on their activities and the state’s law and authority. While we may disagree with a state’s ability to enact the MTC’s approach, there is a strong preference that states are explicit in doing so. States that lack clear guidance not only expose themselves to increased litigation risk but also create uncertainty for taxpayers. This can result in otherwise compliant taxpayers being caught off guard during audits and may lead companies to perceive the state’s tax environment as unpredictable and unfriendly to business.
With most Mid-Atlantic states using market-based sourcing nowadays, are there particular types of transactions or business models where you tend to see friction with state tax agencies over sourcing determinations?
Although market-based sourcing was initially touted by many states as an easier approach than cost-of-performance sourcing, it has proven to have its own challenges and is creating friction in a number of areas. Some of the most frequent areas of controversy revolve around questions over where the benefit was received, what the benefit is, and who the customer is. For instance, digital services and platforms often may disagree about where the “benefit is received” for SaaS, data analytics, and platform access, particularly where users are mobile or customers are multi-state. Additionally, we often see arguments by both taxing authorities and taxpayers to “look though” to the customer’s customer in a market-based sourcing analysis.
Pennsylvania legislators are actively mulling a digital advertising tax gross receipts proposal that would target Big Tech’s gross receipts from digital advertising platforms. The constitutional questions raised by these kinds of taxes are underscored by all the litigation around Maryland’s tax. Even so, the taxes seem to be gaining momentum. Several states are mulling similar proposals this year, and Utah passed a targeted advertising tax that was signed into law at the end of March. Any forecast on where things are headed in Pennsylvania and beyond? And in states that do enact these taxes, what immediate compliance challenges should businesses anticipate?
While there was a bit of a lag in states jumping on Maryland’s bandwagon, recent momentum has shown that Maryland’s litigation has not deterred states. Instead, it has helped refine legislative approaches to digital advertising taxes. Washington and Utah’s recent laws and Pennsylvania’s proposals suggest continued interest, particularly as states seek non-traditional revenue sources targeting large digital platforms.
Some compliance challenges in states that do enact these taxes are issues over whether the tax can be shifted or passed through to the customer, how to attribute revenue by jurisdiction, what data and data sourcing methodologies are available, and audit support and risk related to data sourcing methodologies.
Across the Mid-Atlantic region, as across the states as a whole, approaches to OBBBA conformity are shaping up to be a labyrinth. The District of Columbia, Maryland, and Pennsylvania have all decoupled (or in D.C.’s case, attempted to decouple) to varying degrees. For businesses operating across multiple states in the region, what are the most significant compliance traps you’re seeing around IRC sections 163(j), 174, or other provisions?
The biggest trap is assuming federal conformity where it no longer exists. Therefore, it’s important for companies and practitioners to understand the various provisions that states are decoupling from and conforming to. For IRC § 163(j), decoupling can create mismatches between federal and state interest limitations, requiring careful tracking of state-specific carryforwards and group-level computations. Meanwhile, states that decouple from IRC § 174, are creating a major pain point—especially for tech and life sciences companies with significant R&D spend. Such companies that are looking to expand will want to take a state’s position on IRC § 174 into account for purposes of modeling.
There’ve been several Pennsylvania proposals in recent years to shift to a worldwide combined reporting system. When you’re advising multinational clients on these kinds of legislative proposals—whether in Pennsylvania or elsewhere—how do you balance immediate planning with the uncertainty around whether the proposal will actually become law?
A company wants to ensure it has its data readily available—that it can identify foreign affiliates, intercompany flows, and jurisdictional profit profiles. Companies can engage in modeling exercises to quantify the potential impact under water’s-edge, worldwide, and hybrid regimes. Understanding that exposure early allows clients to react quickly if proposals do gain traction.
You’ve advocated for state legislatures rather than tax agencies to set sales and use tax policy around digital goods and services. We’ve seen some major laws on this front since late 2024, from Maryland to Louisiana and Washington (state), as well as some aggressive regulations out of Texas. How do you see this area shaping up?
State statutes are often slow to catch up to changes in technology. Therefore, there is often the issue of digital goods and services not fitting nicely within decades old statutes. We are seeing some continued movement on this front—whether through statutes or regulations—which I expect to continue. However, I also expect to continue to see disputes where statutes remain silent or ambiguous, but agencies assert broad interpretations.
Philadelphia imposes both the Business Income and Receipts Tax (BIRT) and the Net Profits Tax (NPT) on businesses—a relatively unique local tax structure. Are there any lessons from navigating Philadelphia’s complex local tax system that might benefit businesses dealing with other cities that impose local income or gross receipts taxes, such as New York City, San Francisco, or Portland?
Philadelphia’s structure reinforces a few broader lessons:
- Understand local tax nuances. Gross receipts and net income taxes require different data, calculations, and planning strategies. For instance, Public Law 86-272 will protect companies that qualify for its protections from the net income portion of the BIRT, but those companies could still be subject to the gross receipts portion of the BIRT.
- Apportionment and sourcing complexities can exist at the local level, not just the state level. Additionally, approaches may differ from state to locality. For instance, Pennsylvania is a market-based sourcing state. Conversely, Philadelphia is still a cost-of-performance jurisdiction. While the City passed legislation to move to market-based sourcing during 2022, that change requires enabling legislation from the Pennsylvania General Assembly, which has yet to pass.
- Administrative matters may differ. Local tax authorities often have distinct audit practices and guidance. Additionally, appeal processes often vary from state to locality.
These concepts translate well to other cities and localities and highlight the need for systems to track local sourcing and receipts independently of state filings.
States are increasingly partnering across federal, state, and local levels to share data and bolster compliance. From your perspective, how should businesses approach the risk of multi-jurisdictional audits, particularly when one jurisdiction’s audit findings might trigger scrutiny elsewhere?
With increased data sharing, companies are experiencing increased audits across jurisdictions. It’s important for companies to have centralized audit management, coordinating responses and documentation across jurisdictions. It’s also important to proactively assess risk and identify issues that could cascade if discovered in an audit. A single adjustment, particularly around apportionment or nexus, can trigger broader scrutiny. Companies should ensure they are staying up-to-date on trends by taxing authorities in audit positions and monitoring both proposed and enacted legislative changes across the states and localities.
Looking ahead three years, what do you think will be the most significant developments in state and local tax, and how should businesses and their advisors prepare?
Looking in my crystal ball, I think some of the significant developments we’ll see are: (1) an expansion of taxing the digital world – digital goods, services, advertising, etc.; (2) challenges and complexities around market-based sourcing; and (3) continued state attempts to erode P.L. 86-272 protections – with continued litigation and challenges by taxpayers.
To prepare, businesses should ensure they have sufficient data infrastructure and tax technology. Additionally, businesses should conduct regular nexus, apportionment, and sourcing reviews. Finally, it is important that businesses monitor legislative developments proactively – modeling potential impacts where applicable
Related Resources from Checkpoint News, CoCounsel Tax, and Checkpoint
- Checkpoint News subscribers:
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- Multistate Tax Trends: Q&A With SALT Expert Niki Ford on Nexus, Marketplaces, AI, and the Future, by Catalyst’s Rebecca Newton-Clarke
- Multistate Survey: Income Tax Immunity Erodes as States Follow MTC Statement on P.L. 86-272, by Catalyst’s Tom Cornett and Rebecca Newton-Clarke
- CoCounsel Tax Templates:
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- Indicate State’s Approach to P.L. 86-272 and Internet Activities
- Determine Corporate Income Tax Sourcing Rules for Receipts from Digital and Electronically Delivered Goods and Services
- Indicate State’s Approach to Economic Nexus for Corporate Net Income Tax Purposes
- To access CoCounsel Tax templates, log in to CoCounsel and click the CoCounsel Templates navigation link in the left panel.
- Checkpoint subscribers can dive deeper into apportionment, P.L. 86-272, and OBBBA conformity, and electronically delivered goods and services, with:
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- Nexus Assistant Charts: covering nuances of economic nexus, physical presence nexus, P.L. 86-272, and threshold computation
- Catalyst Topic # 1007, Sales Factor, providing in-depth state-by-state analysis of the sales factor for corporate income tax apportionment, including rules for sourcing receipts to a specific state jurisdiction
- Catalyst Topic # 1005, Allocation & Apportionment, providing in-depth state-by-state analysis of taxpayers subject to allocation and apportionment, the types of income allocated or apportioned, and each state’s standard apportionment formula, as well as industry-specific rules and alternative apportionment provisions
- Catalyst Topic # 1002: Corporate Tax Nexus, providing in-depth state-by-state analysis of corporate income tax economic nexus and P.L. 86-272 policies, as well as background context and insights
- Catalyst Topic # 1003, IRC Conformity, providing in-depth state-by-state analysis of each state’s conformity to the IRC, federal tax concepts, and major federal legislation from TCJA through the CARES Act and OBBBA, including conformity dates, the effect of federal tax elections, and agency guidance
- Catalyst Topic #1013, Combined/Consolidated Reporting, providing in-depth state-by-state analysis of the types of returns or reports required from multi-entity taxpayers, as well as the details of the applicable reporting methods
- Catalyst Topic #305, Limitation on Deduction of Business Interest Under IRC 163(j), providing in-depth state-by-state analysis of state conformity to the federal limitation on the deduction of business interest under IRC 163(j), breaking down variations in conformity, such as granular analysis of the state’s approach to changes enacted by TCJA, the CARES Act, and OBBBA
- Catalyst Topic # 403, Bonus Depreciation and Expensing, providing in-depth state-by-state analysis of each state’s conformity to bonus depreciation under IRC 168(k) and 168(n), and expensing under IRC 179, as affected by major federal legislation from TCJA through the CARES Act and OBBBA
- Catalyst Topic # 1051: Sales and Use Tax: Electronically Delivered Goods and Services, providing in-depth state-by-state analysis of electronically delivered goods and services, including SaaS and AI offerings, as well as bundled transactions, sourcing, threshold computation, and marketplace intermediary platforms such as online travel companies, meal-delivery platforms, and more
- Catalyst Topic # 1010: Corporate Tax: Electronically Delivered Goods and Services, providing in-depth state-by-state analysis of nexus and sourcing issues related to electronically delivered goods and services, including cryptoassets
- Catalyst Topic #1070 Gross Receipts Taxes, providing in-depth state-by-state analysis of broad-based and entity-specific gross receipts taxes imposed
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