2025 State and Local Tax Forecast: Key Issues Shaping the Year Ahead

As we step into 2025, the state and local tax (SALT) landscape is poised for significant developments, shaped by the lingering debates and trends of 2024.

From the revival of Mandatory Worldwide Combined Reporting proposals to the increased adoption of alternative apportionment methods, states are aggressively seeking ways to protect and expand their revenue bases. At the same time, taxpayers face new challenges brought by landmark judicial decisions, such as the Supreme Court’s rejection of the Chevron Doctrine, and evolving tax policies like pass-through entity tax regimes and digital activity guidance under PL 86-272. And of course, with a change in administration at the federal level, there are sure to be some surprises along the way.

Mandatory Worldwide Combined Reporting: Will More States Join the Push in 2025?

Rearing its ugly head once again in 2024 was the proposal of Mandatory Worldwide Combined Reporting (WWCR) for C corporations. Those in favor of WWCR claim abusive international profit-shifting is costing the states billions in tax revenues. The estimate of how much revenue is “lost” to profit-shifting is complex, and not all experts are in agreement as to the significance.¹ What most tax professionals can agree on is the challenges to adoption both from the taxpayer point of view as well as the state tax departments. Most recently, Hawaii, Maryland, Minnesota, Tennessee, and Vermont had legislative proposals for WWCR, and New Hampshire commissioned a case study on the viability of such regime. Each of these endeavors was abandoned. Thus, there are now 10 states in which WWCR remains an elective reporting format. It will be interesting to see what states jump on the WWCR train during the 2025 legislative sessions.

Alternative Apportionment: States Reassess Taxability in a Remote Business World

States aren’t just using WWCR to combat perceived losses of revenue. They have also been evaluating alternative apportionment methods. The idea of apportionment has long been the parameter used for determining the amount of income subject to tax in a respective state. When the Complete Auto case judgement came down in 1977, there was a four-prong test established to manage taxation on interstate commerce, with the second question being whether the income was fairly apportioned. Historically, the ratio of property, payroll, and sales in a state were generally used to determine whether income was fairly apportioned for all industry types. However, over the last 15 years states have been moving to utilize only the sales factor as the standard approach to determining taxability in a state. In the evolving economics of an often remote and virtual business environment, the general apportionment methods are interpreting an everchanging 4-D business climate from a 3-D perspective. To combat this statutory limitation, many states have offered up in their statutes that an alternative apportionment methodology may be required or requested to more appropriately reflect income attributable to a state.

For example, South Carolina, like many states, has had the option of alternative apportionment in their statutes for years. But in 2024, the South Carolina Department of Revenue provided the framework, through S.C. Code Ann. § 12-6-2320, where alternative apportionment could be required. This may result in modifying the sales factor based upon revenue type or customer type, revisiting the inclusion of property or payroll, or including other apportionment factors to adjust the standard formula to more closely align operations and taxation.

In addition to South Carolina, 2024 saw state departments of revenues both require the use of alternative apportionment in their favor and deny taxpayer’s use of alternative apportionment to more accurately reflect its business income in the state. In an ideal world, the use of alternative apportionment leads to representative taxation in a state, but it is clearly an extension of power that will need to be monitored.

Cross-Border Taxation and Remote Work: Zilka and Zelinsky Cases Spark Debate

Joining the race, individual taxpayers made a run at the U.S. Supreme Court in 2024 in Zilka v. City of Philadelphia, 304 A.3d 1153 (Pa. Nov. 22, 2023). Perhaps the winner of the worst SALT decision of the year, the Zilka case was denied review by the U.S. Supreme Court on Jan. 13, 2025, thereby allowing the Pennsylvania Supreme Court’s decision that Philadelphia’s denial of wage tax credit for Zilka’s Delaware state tax did not unconstitutionally discriminate against interstate commerce. Splitting hairs, the Zilka decision distinguished the local Philadelphia wage tax from the Maryland county tax, which the U.S. Supreme Court reviewed in Comptroller of the Treasury of Maryland v. Wynne, 575 U.S. 542 (2015) and held that the Maryland state and county tax regime discriminated against interstate commerce and violated the dormant Commerce Clause of the U.S. Constitution.

Zilka is not alone in its fight against cross border taxation of individuals. Professor Edward Zelinsky, a tax law professor at Yeshiva University ‘s Cardozo School of Law in New York, has renewed his initial 2003 challenge against the New York “convenience of the employer” rule, which affects the taxation of nonresident employees working for New York based employers. The Zelinsky case is currently pending before the New York State Tax appeals Tribunal.

The increase in remote work arrangements appears to be here to stay, which means the debate surrounding cross-border taxation will persist.

Digital Activities Under PL 86-272: States Expand Jurisdiction Over Online Businesses

In other departmental administrative extensions of power, the Multistate Tax Commission’s revised 2021 guidance on the application of PL 86-272 to digital activities gained some traction among the states in 2024, bringing the long-standing taxpayer protections under attack. California, New York, and New Jersey have begun redefining “unprotected” activities, especially concerning internet-related operations.

California, the first to adopt the Multistate Tax Commission’s revised language, faced a setback when its Technical Advice Memorandum and Franchise Tax Board guidance were invalidated for violating administrative procedural requirements. Meanwhile, New Jersey and New York have integrated similar guidance, targeting activities such as post-sale customer assistance via chat or employment applications through websites.

These shifts signal a trend among states to modernize tax laws, expanding jurisdiction over remote and internet-based business activities. There is no doubt that taxpayers, tax practitioners, state and local tax agencies, and state administrative and judicial bodies, will continue to engage in a tug-of-war over the scope of taxation within developed constitutional standards.

Pass-Through Entity Tax (PTET): The SALT Cap Workaround at a Crossroads

PTET continued to be at the forefront of SALT chatter in 2024. PTET regimes were born as a bypass to the federal state and local tax deduction cap (SALT cap) by allowing pass-through entities (such as S corporations, partnerships, and LLCs) to pay state income taxes at the entity level. Of the 41 states that impose an individual level income tax, all but six have adopted a PTET. There were some technical corrections and administrative changes in 2024, but nothing groundbreaking. Speculation about the future of the SALT cap under the new federal administration has already become a “hot topic” in 2025. Even if the new president does not address it directly, the impending sunset scheduled for Jan. 1, 2026, will undoubtedly spark discussions about the future of PTET regimes.

Loper Bright and the End of Chevron Deference: Implications for SALT Professionals

Coming in as perhaps the hottest tax topic in recent memory: the evolution and impact of judicial deference, particularly focusing on the Supreme Court’s overruling of the Chevron Doctrine in Loper Bright Enterprises v. Raimondo (2024). Historically, the Chevron Doctrine mandated courts defer to administrative agency interpretations of statutes if Congress had not clearly addressed the issue – and the agency’s interpretation was reasonable. However, in Loper Bright, the Court ruled that ambiguities in legislation do not inherently grant agencies the authority to resolve interpretative questions, emphasizing that agencies should persuade through technical expertise rather than control through deference.

This decision significantly reshapes the balance of power among the legislative, executive, and judicial branches, curbing agency autonomy and altering strategies for tax advisors and legal practitioners. The shift underscores the judiciary’s exclusive role in statutory interpretation, harking back to foundational principles established in Marbury v. Madison, 5 U.S. 137 (1803). While the Loper Bright decision has provided endless discussion for SALT professionals, it is a federal judicial doctrine that is not automatically appliable at the state level. Like most state and local issues, the impact at the state and local level will vary widely from jurisdiction to jurisdiction.

Federal Partnership Audits: States Brace for Complexity in Reporting Requirements

The IRS partnership audit regime, enacted under the federal Bipartisan Budget Act of 2015, seems to be picking up steam. In 2024, the IRS announced that it established a passthrough exams unit within its Large Business and International Division. The Service then opened 76 audits focused on partnerships, averaging more than $10 billion in assets. A state’s response to a federal audit is complex because the pass-through entity may not be treated as a taxable entity at the state level, and there may not be a partner-level amended federal return allowed or required. Thus, the IRS reporting may not trigger a state notification.

Entering 2025, nearly half of the states have adopted legislation outlining the reporting requirements for taxpayers in response to the IRS partnership audits, but there are still many questions to be answered.

KSM closely follows state, local, and federal legislative activity across the country. Thus, if you have questions about these or other tax issues, contact us via the form below.

---

¹ https://itep.org/tag/worldwide-combined-reporting/
  https://www.cost.org/globalassets/cost/state-tax-resources-pdf-pages/cost-studies-articles