California Office of Tax Appeals finds that divisions of a corporation were not engaged in a unitary business
In a pending precedential opinion, the California Office of Tax Appeals (OTA) held that a Colorado beverage distribution division of a Denver-based S corporation was not unitary with its other divisions, including an interstate trucking division operating in California. Gain from the division’s 2010 asset sale therefore was not apportionable to California.
California generally evaluates unitary business under two alternative standards: the three-unities test and the dependency-or-contribution test. The OTA analyzed the taxpayer's facts under both frameworks and concluded that neither the three-unities test nor the dependency-or-contribution test supported a finding that the beverage division and the remaining operations constituted a single unitary business.
Rather, the evidence supported that business operations remained decentralized. Specifically, division managers controlled day-to-day operations, hiring decisions, purchasing activities, sales functions and business strategy. Advertising and marketing activities were conducted separately within each division, and intercompany transactions were limited and conducted at arm's-length pricing. The OTA similarly rejected the Franchise Tax Board’s (FTB's) assertion that the chief executive officer’s authority to sell the beverage division’s assets demonstrated centralized management, concluding that such authority does not make each division of the corporation part of the same unitary business.
The opinion is currently designated as pending precedential, meaning taxpayers should monitor whether it ultimately becomes binding OTA precedent.
District of Columbia enacts temporary and permanent legislation decoupling from OBBBA provisions
On Aug. 13, 2026, the District of Columbia enacted emergency legislation B26-0724, without the signature of Mayor Muriel Bowser. B26-0724 decouples the District from certain provisions of the One Big Beautiful Bill Act (P.L. 119-21, OBBBA) for tax years 2025 through 2029, specifically:
- Section 163(j): Decouples from the definition of adjusted taxable income for purposes of the business interest limitation under section 163(j)(8)(A)(v), instead requiring the use of earnings before interest and taxes (EBIT). The legislation also provides that section 163(j)(9) shall not apply as it relates to the floor plan financing interest rules.
- Section 168(n): Decouples from the special depreciation allowance for qualified production property under section 168(n) for tax years beginning after Dec. 31, 2024 and before Jan. 1, 2030.
- Section 174A: Decouples from provisions related to domestic research and experimental (R&E) expenditures under section 174A for tax years beginning after Dec. 31, 2021, and prior to Jan. 1, 2028, in favor of capitalization and amortization ratably over a five-year period. The legislation also decouples from the federal treatment of transition costs under section 70302(f) of P.L. 119-21.
The emergency legislation will expire on Nov. 11, 2026; however, the District subsequently enacted permanent legislation, on Aug 14, 2026, also without the mayor’s signature. B26-0661 was transmitted to Congress on Aug. 20, 2026, triggering the 30-day congressional review period. B26-0661 mirrors the temporary legislation and continues the District's approach to decouple from the OBBBA under prior legislation B26-0458 enacted in December 2025.
North Carolina updates IRC conformity and decouples from provisions of the OBBBA
On July 2, 2026, North Carolina Gov. Josh Stein signed Senate Bill 595, updating the state's conformity to the IRC as in effect on July 5, 2025, from Jan. 1, 2023. The conformity update generally adopts federal tax provisions enacted as of July 5, 2025, including any provisions that become effective before or after that date.
However, the legislation decouples from the federal treatment of domestic R&E expenses under section 174A. Senate Bill 595 instead provides that taxpayers must add back to North Carolina taxable income 80% of the federal deductions under section 174A(a) and allows for a ratable deduction in the first four taxable years following the add-back. The decoupling adjustment also applies to transition costs incurred in tax years beginning on or after Jan. 1, 2022, for taxpayers making a retroactive election under section 70302(f) of P.L. 119-21. For taxpayers not making a retroactive election, the decoupling adjustment applies for tax years beginning on or after Jan. 1, 2025.
Massachusetts Appellate Tax Board rejects Finnigan adjustment involving P.L. 86-272-protected sales
On July 22, 2026, the Massachusetts Appellate Tax Board issued its decision in Smithfield Packaged Meats Corp. and Combined Affiliates v. Commissioner of Revenue, addressing the application of Massachusetts combined reporting and apportionment rules for tax years 2015 through 2017.
The taxpayer filed a Massachusetts corporate income tax return with its affiliates, which included both taxable (nexus) members and non-taxable (non-nexus) members. The group included both qualified manufacturers and sales companies. For tax years prior to 2025, Massachusetts required qualified manufacturing companies to use a single sales factor in lieu of the state’s three-factor double-weighted sales apportionment formula. On its returns, Smithfield applied a single sales factor for the manufacturing companies and the three-factor apportionment formula for the sales companies. One of the sales companies also claimed P.L. 86-272 protection as a non-taxable member of the group.
On audit, the Massachusetts Department of Revenue applied the "combination provision" of the state’s combined reporting regulations, which governs how a nonmanufacturing member of a unitary group determines its apportionment formula when it sells to an unrelated third party a product purchased from a manufacturing member of the group. The combination provision requires the activities of both the manufacturing companies and sales companies to be considered together in determining whether the sales company is required to use a single-sales-factor apportionment formula. This resulted in a sales company of Smithfield being required to use the single-sales-factor apportionment.
The Board upheld the regulation and its application to the taxpayer, finding that it reasonably harmonized Massachusetts’ combined reporting rules with the statutory apportionment provisions for manufacturers. Because intercompany sales by the manufacturing members were eliminated from the apportionment factor, the Board found it reasonable to attribute those members’ manufacturing activities to the sales companies when the products were ultimately sold to third parties.
Separately, however, the Board rejected the department’s application of the Finnigan-based "reallocation" rule. Under the reallocation rule, each taxable member of a unitary group is required to increase the numerator of its sales factor by its proportionate share of the aggregate Massachusetts sales of nontaxable members of the group. In the case of Smithfield, the nontaxable member of the group claimed protection under P.L. 86-272. The Board determined that the reallocation of sales to taxable members indirectly subjected income protected by P.L. 86-272 to Massachusetts tax and therefore violated the Supremacy Clause of the U.S. Constitution.
New Hampshire increases BET filing threshold and provides a contingent rate reduction
On July 10, 2026, New Hampshire Gov. Kelly Ayotte signed House Bill 155https://www.ncleg.gov/BillLookUp/2025/sb595, increasing the annual gross receipts threshold for requiring businesses to file the Business Enterprise Tax (BET) return to $400,000. The legislation also lowers the BET rate, contingent upon meeting a certain BET surplus. To the extent the threshold is met and certified, the BET rate shall be reduced by 0.05% for tax periods beginning on or after Jan. 1 of the calendar year immediately following the calendar year in which the surplus is certified. The rate shall not be reduced below 0.25% under this provision, and these changes are effective Jan. 1, 2027.
Pennsylvania provides guidance on the corporate net income tax treatment of section 163(j)
On Sept. 10, 2026, the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2026-01, revising guidance on the treatment of section 163(j) for Pennsylvania corporate income tax purposes. Effective for tax years beginning on or after Jan. 1, 2025, Pennsylvania requires that taxpayers must calculate "adjusted taxable income" for purposes of determining the business interest expense limitation under section 163(j) as it was in effect on Dec. 31, 2024 (prior to the enactment of the OBBBA). The bulletin clarifies that taxpayers generally must compute the limitation on a separate-entity basis, including intercompany and third-party interest, and apply relevant federal regulations in effect as of Dec. 31, 2024, in determining Pennsylvania section 163(j) limitations.
Bulletin 2026-01 also narrows the previous guidance from Pennsylvania that provided that a corporate taxpayer which files its federal return on a consolidated basis was not expected to limit its separate company interest expense deduction for Pennsylvania purposes in a given tax period unless the federal consolidated group reported an interest expense limitation on the group’s consolidated Form 1120. This change applies to tax periods beginning on or after Jan. 1, 2025.
The bulletin also addresses the interaction between section 163(j) and Pennsylvania’s related-party interest addback under 72 P.S. section 7401(3)1.(t). When interest is subject to both provisions, taxpayers should allocate the federal limitation proportionately between related-party and other interest and separately track carryforwards for future Pennsylvania addback purposes. Similar allocation principles apply to interest associated with nonbusiness income.
Pennsylvania decouples Philadelphia from select OBBBA provisions for purposes of the BIRT
On July 12, 2026, Gov. Josh Shapiro enacted Senate Bill 146, one of several bills implementing Pennsylvania’s 2026-2027 fiscal budget. Senate Bill 146 allows Philadelphia to decouple from provisions of the OBBBA in determining the City’s Business Income and Receipts Tax (BIRT). For businesses calculating the BIRT based on the net income method, the starting point is federal taxable income. Senate Bill 146 requires the calculation of federal taxable income for BIRT purposes to follow Pennsylvania’s decoupling provisions that were enacted under House Bill 416 in November 2025. This includes changes made to sections 163(j), 168(n) and the treatment of domestic and foreign R&E expenses under sections 59(e), 174, 174A and 481. The changes are retroactive to tax years beginning after Dec. 31, 2024.
