Looking Ahead: Predictions on Upcoming State Tax Legislation
Key drivers are state economy and gubernatorial election cycle

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With the turn of the new year and a new decade, it is only natural to try to predict what state tax legislation may become law in 2020. Many factors can affect the nature and pace of state tax legislation, but perhaps the two leading drivers are the state economy and the state gubernatorial election cycle. It is safe to say that state economics have significantly stabilized, and many states have even seen gains.1 On the political front, 2020 will see eleven gubernatorial contests, with ten incumbents seeking reelection.2 In a presidential election year with high turnout expected, the gubernatorial elections in the states in play are not deemed to be high-risk. That said, one can never predict how elections will play out. One thing to be said about gubernatorial elections is that no governor wants to be on the record as having raised taxes in an election year.

Barring economic meltdowns and mutiny in the eleven states where the governor’s seat is up for election, it’s likely that other forces will drive state legislation this year. Ferreting out what they are and predicting what legislation we will see in the coming year are daunting tasks. However, one’s chances of accurately predicting what lies ahead can often be improved by examining past legislative trends. Hence a brief look back at the past twenty years is worthwhile.

Looking Back

Early in the twenty-first century, state taxing authorities were still preoccupied with closing down intercompany licensing and lending practices that generated tax benefits through increased deductions to the tax base. The states attacked these perceived gratuitous planning schemes in three ways: 1) states enacted economic nexus provisions to impose tax on the affiliated member in the group that was recognizing the income (e.g., licensing revenue or interest income);3 2) states enacted expense add-back provisions designed to deny the deductibility of certain purely intercompany transactions (e.g., intercompany loans of funds with no infusion of funds from third-party lenders);4 and 3) states enacted combined or unitary filing regimes to solve the problem more simply and assuredly through the principles of intercompany eliminations.5

Then we witnessed a shift in strategy whereby states went on the offensive. To encourage in-state businesses to stay and expand their operations, states began to enact statutes that shifted the burden of taxation historically borne by in-state companies to out-of-state companies. States largely accomplished this by enacting factor presence nexus standards, single sales factor apportionment, and market-based sourcing.

These laws passed in state legislatures with relative ease as they shifted the burden of taxation to out-of-state companies which, coincidentally, were not part of the states’ electorate. Further fueling the widespread adoption of these strategies was what we’ll call “state paranoia” or the “lemming effect.” In short, states often looked to neighboring states’ tax policies to ensure that they were keeping competitive, or at least not being left behind. Hence, by the end of 2019, nearly thirty states had enacted some form of economic nexus law, thirty-five states had enacted single sales factor methodologies, and twenty-five states enacted market-based sourcing provisions.

Last, since 2017 two events have significantly influenced state tax legislation and will likely continue to do so well into 2020. They are the enactment of the Tax Cuts and Jobs Act (TCJA)6 and the Supreme Court’s holding in the South Dakota v. Wayfair case.7

Looking Forward

With that backdrop, a look to what may be on the state tax legislation horizon is in order. But for a few outlier states, most state legislatures are going into legislative sessions in January or February 2020.8 Often tax legislation originates from the governor’s proposed budget but can also emerge from the legislative branch through various finance or ways-and-means committees.

Whatever the source of the legislation, we believe that we are likely to see the legislation outlined below in 2020. We will start with the low-hanging fruit, then move toward the more challenging issue of predicting legislation. All the while we recognize that predicting state tax legislation is often akin to predicting the direction of the wind during a winter snow squall.

Updating Conformity to the Internal Revenue Code

Since many states require taxpayers to compute their state corporate income tax using federal taxable income as a starting point, it’s important to understand what version of the IRC is being used. The IRC is a living, breathing document that is routinely amended. To keep current, states adopt the IRC in generally one of three ways.

First, “rolling conformity” states automatically adopt the IRC as currently in effect.9 These states may then enact specific provisions decoupling from the IRC so as to avoid certain unwanted outcomes.10 Second, states that adopt a version of the IRC as of a certain date fall into the “static conformity” category.11 In static conformity, most states routinely adopt the IRC as in effect on the last day of the preceding year. However, some states have not updated their adoption date in several years.12 Third, those states that cherry-pick various IRC provisions that they deem favorable fall into what is generally referred to as “hybrid” or “selective conformity” states.13

In rolling conformity states, there is little to be done each legislative session other than to enact decoupling statutes for provisions they deem unfavorable. However, for static conformity states, each new legislative session generally begins with a bill to update the state’s conformity to the IRC. In most instances the bill will update IRC conformity as of the last day of the previous year or the first day of the current year. So, for the 2020 legislative session, a slew of bills will propose to update conformity to the IRC as in effect on December 31, 2019, or January 1, 2020. Given that very few amendments to the IRC in 2019 would impact the states, it’s likely that we will see broad-based adoption of the IRC through December 31, 2019, in most if not all static conformity states.

Adopting or Decoupling From the TCJA

Since the passage of the TCJA on December 22, 2017, state taxing authorities have scrambled not only to interpret the provisions but also, more important, to understand the fiscal impact that new provisions would have on their corporate tax revenues. For most rolling conformity states, the exercise has been not whether to adopt, since that has largely occurred by operation of law, but whether to decouple from particular provisions or to alter other state provisions to achieve a certain desired result. Although some states have gone through the formal legislative process to enact provisions, many states still defer to the taxing authorities to manage the outcome of the TCJA changes through policy. Deferring to the tax administrators is proving to be a poor means for providing taxpayers with the clear and consistent guidance that actual legislation offers.14

New York is one state that took the high road and invoked the legislature in its interpretation of the TCJA. New York is generally a rolling conformity state, in that taxpayers must start their corporate tax computation with federal taxable income. Hence, indirectly, New York adopted the TCJA at the same time it was formally enacted by the federal government.15 However, in an effort to mitigate the impact of this potential corporate income tax base expansion, New York ultimately enacted a law to limit the amount of global intangible low-taxed income (GILTI) that could be included in the tax base to five percent of the net GILTI amount computed under the relevant IRC Sections 951A and 250 and provided that the amount be included only in the denominator of the apportionment factor.16 Interestingly, New York City decided not to follow the state’s lead on this provision and continues to tax one hundred percent of the net GILTI amount. We can only hope that New York City thinks more clearly about this issue in 2020 and enacts a provision to bring much-needed consistency to taxpayers filing tax returns in both jurisdictions.

Although adoption of the TCJA has in many instances been achieved through the annual update process, some static conformity states have decoupled in whole or in part from various provisions of the TCJA. Florida is a good example. On June 28, 2019, the Florida legislature updated its adoption of the IRC through January 1, 2019.17 By such action it effectively adopted the TCJA. However, Florida also enacted a statute that effectively reduced the GILTI inclusion amount to zero and made it retroactive to tax periods beginning on January 1, 2018.18

Perhaps other rolling or static conformity states will be as enlightened as New York and Florida in the new year. However, irrespective of whether states continue to adopt the harsh realities of the TCJA, what is important is that they effectuate their decision through the legislative process. Although taxpayers may not like the results, having the legislature involved in the process at least gives taxpayers more certainty about what to expect.

We need look no further than New Jersey for an example of what can go wrong when interpreting and implementing federal tax laws (i.e., the TCJA) are left in the hands of tax administrators. Following the adoption of the TCJA, the state taxing authority, the Division of Taxation (DOT), issued guidance for apportioning GILTI. In short, the guidance, issued as a tax bulletin, advised taxpayers to apportion GILTI by computing a fraction, the numerator of which was equivalent to the New Jersey gross domestic product and the denominator of which was equivalent to the gross domestic product of all states in which the taxpayer had nexus.19

New Jersey’s proposed sourcing method was certainly unique. It was, however, wrought with many open-ended questions. Ultimately the DOT got wind of the many inherent defects in its unusual apportionment approach and scrapped it. In its place the DOT announced that taxpayers would be required to include the total net GILTI amount included in the tax base in their apportionment denominator and to include only that portion of the net GILTI amount in their numerator as dictated by their intangible sourcing statute.20 In effect, the DOT has replaced one confusing provision with another.

While it’s understood that the legislative process is riddled with problems and that laws may contain the same troubling issues as tax policy, at least a law expresses the will of the people of the state, whereas a tax policy expresses the will of a tax administrator. A law is greatly preferred. We are hopeful that 2020 will bring new tax laws that directly address the various provisions embodied in the TCJA, including IRC Sections 163(j) and 199A.

Wayfair Nexus Standards for Corporate Income Taxes

In the wake of Wayfair, a number of states have proposed or enacted new economic threshold nexus standards that directly or indirectly relate to the standards set out in the South Dakota law. As a reminder, the economic nexus threshold standard established in Wayfair was $100,000 in revenue or 200 transactions in a twelve-month period. At first, we were surprised by the states’ activity in this regard, because it seemed that economic nexus had already taken hold in the United States following the holding in Geoffrey v. South Carolina.21 By the end of 2019, all but ten states had imposed a corporate income or franchise tax permitting taxation of out-of-state businesses without physical presence or, in many instances, any bright-line factor presence.22

What also was surprising here is that Wayfair is clearly a sales tax case, and for my [Freda’s] entire professional career, which began in 1996, I always believed that nexus for sales tax purposes differed from nexus for income tax purposes. There was a good reason for my belief and again it stemmed back to the 1993 holding in Geoffrey, and the holding a year earlier in Quill v. North Dakota.23 In the former, a state was able to extend its corporate income tax to a taxpayer that had no physical presence in the state. In the latter, the state was prohibited from imposing a sales tax collection/remittance obligation on an out-of-state company because it had no physical presence. That was, in my opinion, the paradigm that continues to be in effect today. So again, why are states enacting these bright-line economic nexus provisions?

States like Texas and Hawaii, both of which enacted new Wayfair-like statutes in 2019, have a plausible reason. Each previously either had statutes that required a physical presence or had generic nexus statutes that were ambivalent as to whether physical presence was required. But in states like Massachusetts and Pennsylvania, what prompted the need for either statutory or administrative policy change is a bit puzzling.

In any event, we believe that states with only generic economic nexus provisions will jump on the bandwagon in 2020 and we will see more legislation around this issue. It may not have the same tidal wave effect that we saw with the enactment of Wayfair standards for sales tax purposes, but I do predict we will see some activity on this front.

Market-Based Sourcing

From 2000 to 2019 there was a wholesale change across the states in the way they required corporate taxpayers to source income from services and/or intangibles. Previously, the prevailing rule for sourcing this type of income was based on the location where most of the costs or the relative portion of the costs were incurred to generate the revenue (collectively referred to as the “cost of performance” method). By the end of 2019, only about fourteen states still retained a cost-of-performance approach for sourcing receipts from services or intangibles. The overwhelming majority of states have adopted a market-based sourcing regime for sourcing such receipts.

The shift from cost-of-performance toward market-based sourcing coincided with, as discussed above, the states’ desire to provide relief to in-state businesses and to shift the tax burden to out-of-state companies. It also was part of the three-prong approach taken by the states. That is, for a taxpayer to expand its reach over out-of-state companies through economic nexus, it should source more service revenue to its state by implementing a market-based sourcing regime and elevate the sales factor by removing property and payroll factors.

The most notable states that have yet to shift to market-based sourcing include Arizona,24 Florida, Kansas, and Virginia. Statistically it seems plausible that we will see states that are currently still locked on cost of performance enact a market-based sourcing regime in 2020.

Unitary Filing

It’s safe to say that since 2000 there has been another wholesale change with regard to states that permit some form of combined or unitary filing. From 2000 to 2019 the number of states that required unitary businesses to be filed on a combined/unitary basis increased from 16 to 29.25 As discussed above, much of the impetus behind the move to unitary filing was driven by states’ desire to shut down corporate intercompany planning strategies.

Most recently, unitary filing has come to the northeast, sucking in Connecticut, New York, and one state we never thought would fall, New Jersey. Interestingly, these new states to come online with unitary filing are adding innovative provisions as to who is included, excluded, or outright prohibited from joining in the unitary filing. Formerly, the unitary analysis as to group membership primarily focused on each entity’s embodiment of the three unities,26 but the newcomers have permanently altered that approach.

Take, for example, New York. Although the law allows for traditional entities meeting the three unities test to form a unitary group, it also permits a taxpayer to elect to include all its affiliated members in one single filing whether they are unitary or not.27 This elective “vortex”-type filing method is, as the regulations state, permitted only for the convenience of the taxpayer to relieve them of the difficulties in determining who is and who is not unitary. Similarly, New Jersey allows taxpayers to elect to include affiliated group members whether they are unitary or not. However, unlike New York, the entities must all be domestic companies.28

Currently the majority of states that still have yet to adopt unitary filing are concentrated in the southeast United States. Before Kentucky broke ranks in 2019 and transitioned to unitary filing, we did not see much hope that this block of states would change their position. However, given the herd mentality of the states, we think Kentucky may be the catalyst that changes the landscape in the southeast. Hence, we predict that at least one or more southeastern states will convert to unitary filing in 2020.

State Tax Deduction Workarounds

Almost immediately following the passage of the TCJA in 2017, states, mostly in the northeast, began enacting provisions to mitigate the harsh reality of the new $10,000 state tax deduction limitation. New York, New Jersey, and Connecticut were at the forefront of this movement and quickly enacted laws to circumvent the cap. For example, New York instituted a state charitable deduction fund in order to convert state tax payments into charitable deductions. New York also enacted an elective employer payroll tax and flirted with a new state-level unincorporated business tax. Almost immediately the Internal Revenue Service cautioned taxpayers against subscribing to these types of tax avoidance programs.

Connecticut, on the other hand, focused its efforts on a pass-through entity tax (PET).29 The purpose of this tax was to shift state tax liability down to a pass-through entity that then would issue a credit to the members as an offset to their state income taxes. If untouched by the IRS, then the Connecticut PET would achieve its goal to subvert the $10,000 state and local tax deduction cap.

Soon after the passage of the Connecticut PET, other states including Louisiana, Oklahoma, and Rhode Island followed suit and implemented their own version of the PET.30 Other states like California attempted to enact similar workaround provisions but failed. Fear of IRS retribution certainly could have played a role in why such workarounds did not pass in other states.

On December 13, 2019, the Treasury filed a proposed rule specifically admonishing programs allowing tax credits in exchange for charitable contributions (e.g., in New York and New Jersey). However, the regulation was silent on tax-shifting constructs like the Connecticut PET workaround. This silence suggested a tacit acquiescence to many in the state and local tax community and likely has given new life to PET-type workaround plans.

Accordingly, we predict that in 2020 we are very likely to see new state tax workaround legislation in high-income tax rate states.

Digital Goods

Thus far the predictions herein have centered on corporate income taxes. However, it is important to address what we believe to be a sleeping giant in the area of sales tax, specifically the taxation of digital goods. A recent survey of the states determined that only about seventeen states impose a sales tax on digital goods.31 Digital goods for the purposes of our discussion are limited to items like downloadable e-books, games, movies, music, and similar goods. In essence, these are items that we once purchased in tangible form at brick-and-mortar stores.

As more and more of our day-to-day goods become digital in nature, we don’t believe it’s a risky bet to say that at some point in the near future states will feel the loss of revenue if they don’t enact statutes that enable them to tax digital goods. The holding in Wayfair has already paved the way for pulling in vendors of digital goods within state sales tax jurisdictions. The next hurdle will be summoning the political will to do so.

As noted above, most states are feeling secure financially and have just received a shot in the sales-tax arm from Wayfair. However, our prediction is that at the next economic downturn we will see states rushing to the gate to enact sales tax laws enabling them to tax digital goods. Whether this happens in 2020 or later is unclear and will be driven by the overall health of the U.S. economy. Nevertheless, at some point we will experience a downturn in the economy and states will seek new revenue streams. It seems logical that taxing digital goods will be part of the solution.


Given that the focus will be on the presidential election this year, in conjunction with the fact that most states are not experiencing severe financial distress, it’s unlikely that we will see significant disruptive state tax legislation in 2020. What is more likely is that states will play catch-up on TCJA matters and enact legislation in line with the trends impacting nexus, unitary filing, and market-based sourcing.

Raymond J. Freda is a managing director and the state and local tax practice leader of the New York office of Andersen. Catherine L. Chiou is a director in the state and local tax practice of the New York office of Andersen.


  1. Barb Rosewicz, Joanna Biernacka-Lievestro, and Joe Fleming, “Each State’s Economy Posted Gains in First Half of 2019,” Pew Charitable Trusts, November 12, 2019, pewtrusts.org/fr/research-and-analysis/articles/2019/11/12/each-states-economy-posted-gains-in-first-half-of-2019.
  2. The National Governors Association reports eleven gubernatorial contests in these states in 2020: Delaware, Indiana, Missouri, Montana, North Carolina, North Dakota, New Hampshire, Utah, Washington, West Virginia, and Vermont.
  3. For example, Indiana. See Ind. Code Section 6-3-2-1(b).
  4. For example, New Jersey. See N.J. Rev. Stat. Section 54:10A-4.4.
  5. For example, Wisconsin. See Wis. Stat. Section 71.255.
  6. Tax Cuts and Jobs Act (Public Law 115-97).
  7. South Dakota v. Wayfair, Inc. 585 U.S. __.
  8. States with legislative sessions that do not begin in January or February include Arkansas, Indiana, and North Carolina. Montana, Nevada, North Dakota, and Texas have no regular legislative sessions scheduled in 2020.
  9. For example, Alabama, Connecticut, Illinois, and New York.
  10. For example, bonus depreciation is not widely permitted by the various states.
  11. For example, Georgia, Iowa, North Carolina, and Wisconsin.
  12. For example, Iowa, New Hampshire, and Texas.
  13. For example, Arkansas, California, New Jersey, and Pennsylvania.
  14. See New Jersey TB-85(R), replaced by New Jersey TB-92(R).
  15. Y. Tax Law Section 208(9).
  16. Y. Tax Law Section 208(6-a)(b), as amended by 2019 N.Y. A.B. 8433, effective for taxable years beginning on or after January 1, 2019; N.Y. Tax Law Section 208(9)(b)(25), as amended by 2019 N.Y. S.B. 6615, effective for taxable years beginning on or after January 1, 2019; N.Y. Tax Law Section 208(9)(b)(24); New York TSB-M-19(1)C (February 8, 2019); N.Y. Tax Law Section 210-A(5-a).
  17. See Fla. Stat. Section 220.03(1)(n).
  18. See Fla. Stat. Section 220.13(1).
  19. See New Jersey TB-85(R).
  20. See New Jersey TB-92(R), replacing New Jersey TB-85(R).
  21. Geoffrey, Inc. v. South Carolina Tax Commission, 437 SE2d 13, cert den, U.S. Sup. Ct. (1993) 510 US 992.
  22. The states’ ability to tax corporate taxpayers was founded either in statutes, regulations, administrative pronouncements, or rulings or through state tax jurisprudence.
  23. Quill Corp. v. North Dakota (1992) 504 US 298.
  24. See Ariz. Reg. Stat. Ann. Section 43-1147(B).
  25. For example, Connecticut, Massachusetts, New Hampshire, New Jersey, New York, and Wisconsin.
  26. Unity of ownership, unity of use, and the unity of operation.
  27. See N.Y. Tax Law Section 210-C(3)(a).
  28. See N.J. Rev. Stat. Section 54:10A-4.11(c).
  29. See Conn. Gen. Stat. Section 12-699.
  30. See La. Rev. Stat. Ann. Section 47:287.732.2; Okla. Stat. 68 Section 2358(A)(A.11); R.I. Gen. Laws Section 44-11-2.3.
  31. For example, Alabama, Colorado, Connecticut, New Jersey, and Ohio.

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