One Big Beautiful Bill, Many State Tax Headaches

The One Big Beautiful Bill (OBBB), recently passed by the House of Representatives and now under Senate consideration, not only proposes significant federal income tax reforms but also has substantial implications for state income taxation. As no surprise to those following state tax law, the key areas of impact include:

• Adjustments to the state and local tax (SALT) federal deduction cap and associated state level workarounds
• Changes affecting state conformity to federal income tax in areas like bonus depreciation, research and development (R&D) expensing, and international tax provisions
• The hotly debated definition of “protected” and “unprotected” activities under Public Law 86-272

Adjustments to SALT Deduction Cap and Workarounds

The SALT deduction cap introduced during President Trump’s first term is once again under negotiation. The OBBB proposes raising the cap from $10,000 to $40,000 but with new limitations that add complexity. This change, combined with proposed restrictions on the eligibility for state Pass-Through Entity Tax (PTET) workarounds, creates uncertainty around the continued value of making state-level tax elections. Additionally, PTET regimes vary significantly by state, with differing conformity rules, sunset provisions, and alignment with the original framework established in the Tax Cuts and Jobs Act of 2017.

While few things are certain, one remains clear: PTET elections are not a one-size-fits-all solution. Taxpayers and their advisors must carefully reassess which PTET options align best with the taxpayer’s overall income profile in order to optimize filing decisions.

State Conformity Challenges: Bonus Depreciation, R&D Expensing, and International Provisions

The most impactful provisions for taxpayers – and those who prepare their returns –  are those affecting state tax modifications and conformity to the internal revenue code. The OBBB proposes reinstating 100% bonus depreciation for qualified property placed in service after Jan. 19, 2025, through Dec. 31, 2029, and allowing immediate expensing of domestic R&D costs for tax years 2025 through 2029. While these provisions aim to stimulate investment, they may pose conformity challenges for states that have decoupled from federal bonus depreciation rules or have different treatments for R&D expenses.

Additionally, the bill seeks to change the current provisions for Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII), which could affect state tax bases depending on each state’s conformity to federal international tax provisions. With many states’ legislative sessions already adjourned for the year, uncertainty arises over how and when states will align with the federal changes, complicating return preparation and planning.

Expansion of Public Law 86-272 Protections

Perhaps most intriguing to state tax professionals is the OBBB’s proposed expansion of PL 86-272. While the expansion is unlikely to have an immediate practical effect, it may introduce significant confusion and administrative challenges in the short term. Public Law 86-272 is a 1959 federal statute that prohibits states from imposing income taxes on businesses whose only in-state activity is the solicitation of sales of tangible personal property. The definition of what constitutes “solicitation of sales” has long been a point of contention and frequent litigation, keeping state tax professionals busy.

As the sales landscape has evolved from door-to-door salesmen to e-commerce platforms, states such as California, New Jersey, New York, and most recently Massachusetts have issued guidance that narrows PL 86-272 protections, particularly in the context of internet-based activities. While the OBBB does not explicitly address digital commerce, it proposes to extend protection to any business activity that facilitates the solicitation of orders, even if that activity also serves as an independently valuable business function. Though well-intentioned as a clarification, this language may invite further debate over what constitutes “facilitating” solicitation without crossing the line into taxable business activity, potentially leading to new complexities in state tax administration and enforcement.

What’s Next?

The One Big Beautiful Bill may be a federal tax package at its core, but its ripple effects on state taxation are far-reaching. If enacted, the OBBB will demand a strategic reassessment of state tax positions, especially where conformity is unclear or shifting. For taxpayers and practitioners alike, this is not a “wait and see” moment – it’s a call to stay engaged, proactive, and prepared. Because in the world of state taxation, the end of the federal calculation is only the beginning of the story.

KSM’s state tax professionals are actively tracking developments and are available to help you understand how this evolving legislation may affect your specific situation. For guidance, contact your KSM advisor or fill out the form below.