Episode 3: SALT Updates & Insights

In this week’s Tackling Tax, we’ll delve into state and local tax issues.

Episode Transcript

(00:00):
On this episode, we'll look into current events in the
world of state and local tax.
We welcome Lance Jacobs,
the SALT subject matter specialist here at Washington
National Tax Office. From your one stop
for tax updates and analysis. I'm Iris.
And I'm Devin. It's
Tuesday, June 10th, and this is Tackling Tax.

(00:41):
Welcome, everyone, to the third episode
of our video series Tackling Tax.
If you missed the first two episodes,
you can take a look at the previous
recordings on our website.
The first episode we dove into tariffs,
and the second we focused on the upcoming tax package.
Some really great insights there.
As a reminder, if you're new here,

(01:03):
Tackling Tax is our new show
where every other week we will start our episode
with a recap of what is going on in the tax world, followed
by various segments featuring guests speaking into some
of the most important and interesting topics in tax.
Well, with that, let's dive right into our Fast
Four stories of the week.

(01:28):
In a recent tax court decision in Soroban Capital Partners
versus Commissioner, the tax court held
that limited partners at Soroban were subject
to self-employment tax on the full amount
of their allocable income,
not just their guaranteed payments.
You see, generally, limited partners do not actively
participate in operations of a partnership,
and as such, their allocable income is not subject

(01:50):
to self-employment tax.
However, in the case of Soroban, limited partners
were actively participating in the firm's operations.
And so the tax court applied a functional analysis test
where they looked at the limited partner's day-to-day rules,
their decision-making authority
and minimal capital contributions
to arrive at their conclusion.

(02:12):
As for what this means? Well,
the ruling really reinforces a recent trend
of courts effectively saying that when it comes
to self-employment tax, they're going
to consider function over form.
Well, Devin, that's not the only activity we're seeing.
So that brings us to our second story.
In what's shaping up to be a showdown over trade policy,

(02:32):
the United States Court
of International Trade delivered a major ruling on May 28th,
blocking the so-called Liberation Day tariffs.
The court said the administration overstepped it authority
under the International Emergency Economics Powers
Act, or IEPA,
as you might have heard it called. The following day,
the US Court of Appeals for the Federal Circuit stepped in

(02:54):
and effectively hit pause on that ruling
by issuing an immediate administrative stay
and allowing the tariffs
to stay in place while the appeal plays out.
In a separate ruling, the US District Court
for the Northern District
of California dismissed a lawsuit brought by the state
of California against the aforementioned Liberation Day
tariffs, claiming the court does not have jurisdiction over

(03:16):
the case, allowing California
to appeal the ruling in the US Ninth Circuit
Court of Appeals.
Outside of the courts, though, steel
and aluminum tariff rates also increased following a
June 3rd proclamation from President Trump, rising from 25%
to 50%.

(03:36):
The Senate officially returned a session on June 2nd,
and it should come as no surprise that the tax bill,
which recently passed the house by one vote,
will be a priority for them.
Now, it's not likely to be a cake walk,
however, as the bill is facing opposition from key
Republican senators—including Rand Paul, Ron Johnson,
Rick Scott, and Mike Lee, to name a few—all

(03:58):
who currently oppose the bill due
to the projected debt increase if it were to pass
and be signed into law.
Now, the national debt is currently sitting at
36.2 trillion,
and the Congressional Budget Office recently revised the
debt increase from the bill from nearly 4 trillion to down
to about 2.4 trillion, which either way, that is a

(04:20):
7 to 10, or sorry, 7 to 12% increase
from this bill alone.
Either GOP senators remain critical
or are undecided due to concerns regarding cuts to Medicaid,
as well as the green energy tax credits.
And that brings us to our fourth and final story.
Speaking of the bill, one provision

(04:41):
that's recently fallen under scrutiny is Section 899,
which some have coined the "revenge tax,," viewing it
as retaliatory against inbound foreign investments.
So Section 899 comprises of two parts, one
of which includes an escalating tax
that ranges from 5% all the way up to 20%,
and it applies to returns on investment earned in the US

(05:03):
by foreign investors who are tax residents
of so-called discriminatory foreign countries.
This has been deemed as one of the biggest changes
to international tax policy in decades
as it could have a significant impact on asset management
and foreign investors. If enacted in its current form
by the end of September,
the increase withholding rates would apply
to payments made in 2026.

(05:25):
So, all of that being said,
only time will tell if the Senate will address these
concerns, but it's definitely one to keep an eye out for.
On today's segment of the IRS with Iris,
we have Lance Jacobs here to talk about
what he calls "something SALTy."

(05:46):
Yep. He's a man who loves a pun
and also all things state and local tax.
He's going to go through three items top of his list
as most interesting in his field at the moment.
But first, let me introduce him.
Lance has over 30 years of experience as a state
and local tax professional working both
with both law and accounting firms.

(06:06):
He is a managing director in Forvis Mazars'
Washington National Tax Office.
He's also a three times Masters champion.
But Lance,
I don't see the green jacket. What's going on there?
No green jacket. I have to, I have
to admit the 30 years hurts a little bit, Iris.
I mean, 30 years wiser. Am I right?
I guess that's the positive spin

(06:27):
For sure. Well, welcome
to Tackling Tax, Lance.
The first topic
that I know we talked about going over maybe sounds not
so glamorous, but that's public law 86272.
Before we dive into that, could you kind
of take a step back, tell us what
that is in general, give us some background?

(06:48):
Sure. And and for me it's kind of
an interesting topic, but I could see
where it might be a snoozefest for other people, for sure.
So the law extends back
to the late fifties, early sixties.
There was a Supreme Court case that came out
that rendered someone who is manufacturing
or selling tangible personal property,
I believe in Washington state, taxable,

(07:10):
and Congress didn't like that.
So Congress passed a law,
it's codified at 15 USC 381, that's commonly referred to
as public law 86272, which
limits the state's ability to impose an income tax,
which is an important distinction, right?
Because there are all sorts of taxes that states impose,
be they property taxes, be they franchise taxes,

(07:33):
be they sales taxes, that are not constrained
by public Iaw 86272,
but public Iaw 86,272 limits the ability for a state
to tax a taxpayer whose only activity in the state
is the solicitation of sales,
of tangible personal property in the state.
And I would stress it's limited

(07:53):
to tangible personal property.
So for firms like ours, for example,
that are soliciting sales of services in a state,
we're not able to take advantage of that protection.
But if you're selling widgets
or whatnot, clearly if your activity is limited
to the solicitation of orders in a state,
the state's ability to tax you is constrained
by public law 86272.

(08:15):
And so when you say solicitation of orders,
like I'm envisioning someone coming in with, you know,
a little sales bill and saying, Hey, buy my thing.
Like what are we talking about with solicitation of orders?
So yeah, I think like when I think about the time
that this arose, I think about someone going door to door
to sell my grandparents a vacuum.
Right? Exactly. Right. Right.

(08:36):
But, um, uh, you know, it can get really esoteric as to
what constitute what constitutes
solicitation and what doesn't.
Probably the best example of of this is the one, uh,
seminal Supreme Court case that went, that went
to the US Supreme Court on this issue, which involved, uh,
Wrigley the gum people in Wisconsin.

(08:57):
So they went through a whole host of activities and,
and just going into the state
and soliciting, you know, stores to buy Wrigley gum.
Yeah, you're okay. But they said if you take back the stale
gum and you replace it with new or
or what they called agency stock checks,
that's exceeding the protections of public ID 6 2 72, and

(09:19):
therefore wiggly was taxable in the state.
Mm-hmm. There's another recent example that came out
of Oregon, which was a tobacco case.
Um, and tobacco, like alcohol is highly
regulated by the states.
So manufacturers can't sell directly to consumers.
They have to go, go through in-state wholesalers. Gotcha.
Um, and the, and this particular, uh, tobacco company sold
via two, uh, two mechanisms in state one where they,

(09:42):
they went in and solicited, uh, the actual retailer,
so the customer of the wholesaler,
and they left the sheet by which the, the retailer,
the stationary store or,
or, uh, the supermarket could place an order
and that was okay, that was mere solicitation,
but they also had, um, what they called prebook orders,
and that was basically almost an automatic contract that,

(10:04):
um, the wholesaler, they would leave that with the retailer
and the wholesaler really had no choice
but to accept that order.
And in order for your protections of public ID 6 2 72
to apply, the order has to be fulfilled from outta state,
and the acceptance of the order can't be in the state.
Hmm. And they said since it was basically automatic
that the in-state wholesaler was gonna accept the order,

(10:26):
they basically said that that was akin
to closing the sale in the state.
And it seemed the public I 86, 2 72 protection.
But you're right, it can get really, really esoteric as to
what is good and what is bad.
Right. From a public I 86 2 72 perspective.
Interesting. It's all in the details, huh?
But yes, it's old.
You mentioned it's back in the fifties, I think 1959.

(10:49):
So why are we talking about this now?
Like what, what makes this a current event
worthy of tackling tax?
Sure. So, um, you know,
I don't know if you're aware in the nineties the internet
happened, so imagine
That.
Um, so basically what used to be done
by the vacuum cleaner salesman knocking door to door

(11:10):
to go visit my, my grandma
and grandpa is now being done over the internet.
Right? Sure. And this, this law, like a lot of state laws,
although this is a federal law,
hasn't evolved with technology.
So there is, uh, the multi-state tax commission, which is,
um, you know, a, uh, essentially a coalition of states, um,

(11:31):
has, and, and a handful of other states outside of
that have enacted certain provisions, um,
to address internet sales.
So, um,
and they've really limited the scope of
what's protected over the internet.
So virtually any cookie activity,

(11:52):
I'm not talking about like cookie monster
cookies I'm talking about.
Right. Uh, cookies, you log in, log in,
You say accept cookies. Yep. Correct.
Very, very few cookie related activities are protected
under a public ID 6 2 72 now.
Okay. According to the MTC.
So, um, you know, I think one of the ones that,
that they reference as being protected is,
I don't know if you, if you go online,

(12:12):
I went online yesterday to buy new running sneakers,
and I went away for a second and I got an email in my email
box saying, Hey, do you still want these?
Mm-hmm. Those types of, of, of activities are protected,
but any other sort
of cookie activity is unprotected under public I 86 2 72.
Basically any sort of web-based activity that goes
beyond a static FAQ on the website, um, you know,

(12:35):
a chat function is too much.
So Gotcha. Uh, if, if you, if you order,
if I order my running shoes
and I reach out to the running shoe company
and say, Hey, um, you know, I have flat feet,
I thought these were supposed to be good for me,
they're not good for me, and they respond
to me on either via live chat AI or,
or anything like that, that's too much.
And that's gonna cause them to be taxable in the state.

(12:57):
So that, that has, that has come about
with this new MTC policy paper that has been followed
by a bunch of states, including California, New York,
Massachusetts, maybe a handful of others.
New Jersey, um, California
adopted this without following its own
administrative procedures act.
So they, they took a temporary setback in court

(13:18):
by the American Catalog Mailers Association.
Um, the court basically said you didn't, you know,
they basically threw a penalty flag
and said you didn't follow your own rules
for promulgating stuff like this, so we're,
we're gonna invalidate it, but they'll go back
and do it the right way, I'm sure,
and then it, it will be ripe again.
And then, um, New York,
the American Catalog Mailers Association litigated this

(13:40):
issue in New York, and actually within the last couple
weeks, they lost the case substantively, they had one minor,
um, small win as a result of it.
Mm-hmm. But on the whole, I think if you're
soliciting sales over the internet via New York, you have
to consider this now, although I expect this will go all the
way up through the New York appellate process and,

(14:01):
and it seems likely to end up in the
Supreme Court of the United States.
Wow. So lots
of activity in the courts potentially the
highest court on this.
Correct. Correct. Yes. Okay.
So, you know, you mentioned that this was not,
this was brought up not only in the states,
but also at the federal level.
Um, how, how can that be if it's a state issue?

(14:24):
Like why are we talking about it in,
in this big beautiful bill that's in the Congress right now?
So the Commerce clause of the US Constitution gives,
um, the Congress the right
to regulate commerce between the states.
We call that the Interstate Commerce Clause.
Um, so if, if a state passes a law

(14:46):
that wholly regulates in-state activity mm-hmm.
And, and that activity doesn't cross state lines.
So, uh, if they taxed
a particular person only doing business in one section
of the state, just as an example, I'm not sure
that's a practical example,
but if it was limited to purely in state activity,
that doesn't implicate the Federal Congress clause.

(15:08):
But once you start crossing state lines
that implicates the commerce clause.
So con uh, Congress in 1960
or 1959 when it passed public, I 86 2 72 used its power
to regulate the commerce among the states under the
Constitution to pass public I 86 2 72.
Uh, similarly now, uh, under the, uh,

(15:32):
the house budget bill that just passed, um, uh,
there is a provision in the, in the title that the,
that the judiciary committee passed
that would expand the definition of solicit
or would extend protection to solicitation of order orders
for any activity that occurred in the state that might have,
that would still be ancillary or related to solicitation,

(15:54):
but might also have an, uh, an independent business purpose.
And you remember I was talking about
that Wrigley case a few minutes ago.
Right. This would basically overturn that Wrigley case.
So anything that had an independent business purpose,
like replacing stale gum,
or there was a case, uh, that was decided two years ago
or a year ago in Minnesota where, um, a company was,

(16:15):
had its sales reps doing independent market research
and sending it back to the home office.
Hmm. That would now be protected
because it would be an in, you know, potentially protected
because it hadn't, even though it exceeded the definition
of solicitation because it had an independent business
purpose, it was still related to solicitation.
Gotcha. Wow. So, you know, we'll see what happens.

(16:38):
I mean, do you have any indication about whether that's,
you know, a big important thing that might just squeak
through or do, does the Senate have a huge opinion
on it? Do we know yet?
So it seems like in light of everything else
that's going on in the budget bill, um,
it seems like this is a fly under the radar issue.
Yeah, I think the, the one potential, uh,

(17:01):
fly in the ointment to bring back the fly again, is, um, uh,
is that it may be a problem from a reconciliation
perspective because as, as I'm given to understand it,
everything has to have budgetary, has
to have a direct budgetary effect under
The front rule, Correct.
Right. And this, and this will have a budgetary effect,

(17:23):
but it's a little bit attenuated.
Right. So if, if
companies are now paying less state tax, generally speaking,
as a result of this new iteration of the rule there,
and we'll, we can talk about this in a bit,
their corporate state
and local tax deduction, at least the corporate state
and local tax deduction will go down, which means

(17:45):
that federal revenue should go up,
but that may be too attenuated Got it.
To qualify for the bird rule.
So we'll see, I think, you know,
reading the tea leaves a little bit,
I think the Senate might be ready to, um, um,
you know, be aggressive with the application
of the Bird rule and the parliamentarian
and the CBO based upon what I've seen and heard.

(18:07):
Nice. Well, exciting news. Let's, let's see what happens.
Um, let, let's keep along this budget reconciliation
strand for a little bit.
We heard on the last episode of Tackling Tax,
mark Gerson talk about
how the salt cap was really a sticking point
to getting the house bill through.
I mean, obviously it did eventually,
but there was a moment there

(18:27):
where there was some debate going on
and, um, you know, we thought it might have gotten
through even quicker than it did.
So, um, do you have, can you talk about a little bit more?
I mean, you're the salt guy, right?
So what ended up in the house bill
with relation to the salt cap?
So I, two things happened with respect to the salt cap,

(18:48):
which was, um, the, the Salt Caucus,
you know, the Mike Lawers, the, um, uh, the Tom Keens
who represent, uh, for Republicans representing
districts in high-tech states like New York
and New Jersey were adamant
that the SALT cap be raised.
So it was,

(19:10):
and I'll just use it with reference,
it's a little more complicated than this,
but I'll just use as our benchmark
the SALT cap on people who were married filing jointly.
So, it was $10,000
under the old regime.
And now I think
it's going up significantly.
I don't forget, 40, I think, right? Yeah, yeah, yeah.

(19:31):
That sounds about right. Under the new regime,
and, but there's a phaseout, right?
It phases out. It goes back to the 10.
If you're adjusted, if you're modified adjusted gross
income, which is essentially adjusted gross income minus a
couple things, or plus a couple of things,
exceeds $500,000, it's going to drop

(19:52):
by 30% of that excess until it hits
that bottom floor again. Okay.
It's also to the 10,000 again. Okay. Correct.
So everyone will get 10,000,
some will marry filing jointly, could get up to 40.
Correct. It also is indexed for inflation,
partially indexed for inflation,
because it grows by 1%, both the caps.

And the adjusted gross income cap increased

(20:14):
by 1% a year to 2034, and then
after that, they kind of punted into the future
to adjust for inflation. So that's kind of, but
it's permanent.
It is permanent, I believe. Okay. Yes.
Interesting. So,
and then the second thing is a lot of states
created a workaround, which was enabled

(20:36):
by an IRS notice that came out in 2020 whereby
pass-through entities, so partnerships, LLCs, taxes,
partnerships, or S corporations, could,
those owners could basically get an unlimited deduction
for state and local taxes and via
their ownership, right?

(20:57):
Correct. Of the entity.
Correct. And it was basically
by electing what we call the pastor entity tax, which was
the tax would be basically be imposed on the entity at the
entity level, and then pass through the owners in a way,
in such a way that they were entitled to get a deduction.
So, the House bill

(21:19):
changed the allowance for that.
And it seems to, it's highly technical,
it's exceedingly complex,
and the provision, I think, needs
to be cleaned up a little bit.
Mm-hmm. But essentially that,
kind of workaround will be limited to those businesses
that are not in

(21:40):
what is defined under the Internal Revenue code
as a specified service trader business.
So not those, if you're in a specified service trader
business, if more than 75%
of your gross income comes from a specified service trader
business, you are out.
You can't get the benefit.
But, so Forvis Mazars, for example. Yes. Right? Yes.
The architecture firms, the accounting firms,

(22:01):
the law firms, the doctor's offices, all of those kinds
of businesses are what you're talking about.
So I'm gonna,
I think architecture firms aren't considered a specified
service trade business under the code.
That's right. And I actually, I had the inverse,
so let me correct myself
and say if more than 25% of your gross receipts are,
you know, so that you below, you're below the 75% threshold.

(22:23):
Got it. You know that you're,
that is from a specified service trader business,
then you're, then you're kind of outta luck.
Well, we'll see if anything gets tweaked on that.
It sounds, I mean, I read the bill
and I didn't, I couldn't quite understand that piece of it,
so thank you for explaining that to us.
I did wanna shift gears a bit.

(22:43):
This is our third sort of topic that you had
as our current event go-tos right now for SALT,
or something salty, if you will.
But the third, it, it sort of serves
as an undercurrent for a few things.
It's actually the First Amendment, so yes.
The freedom of speech.
How in the world does that tie in?

(23:04):
I mean, I, okay, I need to brag on you just for a minute.
What was it, a couple of weeks ago, maybe a month ago. Yeah.
You were sworn in to the Supreme Court bar,
which is really cool.
Yes. And I know, you were messaging me kind of
during it, but you were able to attend the hearing
for the Catholics Charities Supreme Court case.

(23:25):
So, you were there in person
and able to sort of hear what was being said about that.
So, how was that experience?
Tell us about the case
and sort of how that ties in to the First Amendment
and state and local tax.
Yeah, it was, I mean,
it was a fun experience.
I had to go the week before to get sworn in,
and then I went to the case a close friend

(23:45):
of mine who's a tax practitioner
was, you have to have a sponsor.
So she got up in open court
and made a motion to Judge Roberts.
I love it. Or Justice Roberts, I should say.
As a member of the Supreme
Court bar, you'd think I'd know that.

and then, you know, to hear, upon her motion,
you know, Justice Roberts said upon her motion that,

(24:06):
and he said, my name is a, it was a cool experience.
But anyways, I love it.
So, I went the next week
to hear the actual case
and the case involved Catholic Charities,
which is a subsidiary of essentially a subsidiary of the,
of a diocese in Wisconsin.
Its eligibility or to opt out

(24:28):
of the unemployment tax regime
of the state of Wisconsin.
And, it really was kind of almost a niche issue,
because as we all know, the First Amendment,
the First Amendment prohibits discrimination
on the basis of religion.
Right? Sure. So,

(24:50):
and it also prevents states from
meddling too much
because there is some degree of meddling that are allowed
to do, but meddling altogether too much
in the operation of religion.
And so the idea was that this was a charity
of the Catholic Church,
and that by forcing

(25:14):
the Catholic charities to adhere to
the unemployment scheme in Wisconsin, it was
interfering with the free exercise of religion.
And it really spun on some really,
some minutiae.
Right. So, it came out during the hearing that

(25:39):
because of Catholic philosophy, I'll say
the charity itself was not allowed to proselytize,
but if it had been allowed to proselytize,
it seemed pretty clear that it would've been entitled
to this exemption from the unemployment taxes.
So there was a lot of time spent on,

(25:59):
and Justice, or Justice Kagan spent a lot of time saying,
so if you were able to proselytize through this,
then it would be exempt.
But
because you can't, it's not exempt,
which seems like an artificial distinction.
Right. It also,
there's a principle in the Catholic Church called
Subsidiarity, which basically meant that this had to operate

(26:22):
as a subsidiary rather than be incorporated in the church.
The church itself is clearly exempt
from the unemployment tax laws.
And if the subsidiary, if instead
of it being in a subsidiary, if it had been carried out
within the church itself,
like it might be in other religions like Judaism
or whatever it is, clearly it would be exempt.
So it seems like, you know, something
that we talk about a lot in tax, a lot

(26:44):
of form over substance type of issues.
Right, right. Sure.
From the flip side, from the state, I thought
the state's argument, which didn't seem
to go very far,
and the justices seemed to not be having it, was
this, there's a so-called ministerial exemption, which it's

(27:05):
outside of the tax context,
but allows the labor laws of a state to
regulate how a religious organization treats an employee
so long as that employee isn't high enough up in
the religious hierarchy.
So you can't regulate a minister or a priest or a rabbi,
but maybe the administrative assistant

(27:27):
that works in that office could be covered
by those state laws.
And it seems like the same type of thing here.
Reading the tea leaves, you know,
this decision will be out before the end of the month
because all the opinions
of the Supreme Court will be coming out.
The next opinion day is this Thursday,
so three days from now.
So we could see it as soon as then. Um, wow.

(27:47):
I think everyone's anticipating the Catholic Charities
will win, and that will, you know,
trigger off a chain reaction of other effects.
I think, you know, this Catholic, this charity in particular
was, it helped
developmentally disabled adults.
So if you're a, you know,

(28:09):
if the First Amendment, you know, allows the free exercise
of religion, it also can't establish religion.
Now if you're a secular charity that does the same thing,
I think there's probably a strong argument
that you may be entitled to the same exemption
that Catholic Charities is.
So, this can trickle out outside of just, you know,
a religious organization.
You're saying that this could have implications

(28:30):
to nonprofits in general?
Correct. Yeah. I think that's fair.
And, we're seeing, you know, we're seeing more
and more of the First Amendment in other contexts too.
There's a federal case involving
Maryland's digital activity tax.
Or digital advertising tax, excuse me.
They also just passed a digital activity
tax, so it's a little confusing.
Okay. But the digital advertising tax,

(28:52):
and it had to do with whether the state,
the law itself banned the, you're allowed
to pass it on to the customer,
but you're not allowed to separately state it on the bill.
And the Comcast
and the other big advertising companies that are,
that have a lot of revenue from this type

(29:14):
of advertising are saying
that violates their First Amendment rights.
So we're seeing it there.
There's a,
I was reading this weekend about a Texas film tax credit,
that in order to qualify has to
or trade taxes in a favorable way, does that impact the
First Amendment?

(29:35):
That may or may not be,
because you could probably argue that Texas has
a legitimate state interest in making sure that it will be
presented favorably.
But there's also some
of the legislation has an added incentive
for faith-based films.

(29:55):
So, I think that's a little more problematic.
So we're seeing more and more of it.
It's certainly an interesting thing for
practitioners like myself.
I'm not necessarily sure it's a good thing from
a wider policy perspective,
but the upshot is that state tax in the First Amendment,
that's two things that might be said in the same breath
coming up,

(30:16):
I think at least in the near term.
And,
practitioners like myself are always looking for new
and creative ways to challenge state
tax statutes potentially.
And this may be a new frontier.
I love it. Well, Lance, thank you so much for your time.
I know we really appreciate discussion
and, of course, your puns.
It is so great to have you here,

(30:37):
and I hope to have you back soon.
Thanks, Iris.
Each episode, we will bring you
what we call a focused FORsight of the Week.
If you found today's discussion interesting,
then you'll wanna take a look at this one.
This week's Focus FORsight is about public law,
86-272, and the New York Court decision.

(31:00):
It builds off our discussion with Lance
and drives further into its implications for your business.
And you can always access our FORsight on the WNTO website
listed here, or the Forvis Mazars website more broadly.
And that's our show. Thanks for joining. Until next time.