This Week in State Tax

The Illinois Department of Revenue has issued draft proposed rules addressing application of the state's new digital asset tax, enacted in June as part of the state budget for FY 2027. The Digital Asset Tax Act imposes a tax on the privilege of receiving digital asset business activity by an Illinois customer. The tax is equal to 0.2 percent of the value of the digital asset to which the activity relates and responsibility for collecting the tax is imposed on the digital asset broker. Under the draft rules, a taxable transaction must include receipt of digital asset business activity by an Illinois customer, be in exchange for valuable consideration, and be conducted by a digital asset broker. An activity must also be denoted by an entry on a blockchain, and internal ledger adjustments producing no movement on the blockchain fall outside the tax. Stablecoins, memecoins, and blockchain-based central bank digital currencies are considered digital assets, while non-fungible tokens, tokenized securities and commodities, rewards balances, in-game currencies, and prepaid cards are not.

“Digital asset business activity” means any single occurrence of exchanging, transferring, or storing a digital asset as part of a business or on behalf of a customer who has entered into an agreement with a business for those services. Covered transactions may include spot trading, on-ramping and off-ramping, bridging, physically delivered derivatives settlement, cash-settled derivatives settled in stablecoins, and transfers between two wallets owned by the same customer. “Digital asset brokers” include centralized exchanges, decentralized finance platforms collecting protocol fees, custodians, broker-dealers, and digital payment processors. Excluded from this definition are peer-to-peer platforms collecting only liquidity-pool swap fees, entities offering services solely through a third party, issuers of digital assets who create only newly minted digital asset stock, and Illinois retailers accepting digital assets as payment. Under the Act, a broker maintaining a place of business in Illinois must collect and remit the tax, and the broker remains liable whether it collects the tax from the customer or not. Out-of-state brokers are liable for collection of the tax if the broker’s gross receipts from the sale of digital asset business activity to Illinois customers exceed $100,000. As to sourcing, sales are sourced to the location of the customer receiving the digital asset business activity. In-person sales are considered in Illinois if occurring at a physical location in Illinois. For sales made electronically or by phone, there is a rebuttable presumption that the customer is in Illinois if the contact information for the account or device that is available to the broker is a home, business, or mailing address, IP address, or place of primary use in Illinois.

The Department is accepting comments through October 30, 2026. The tax had been scheduled to take effect on January 1, 2027, but because of several legal actions contending that the tax contravenes federal law and discriminates against digital assets, the Department recently agreed to a court motion to delay the effective date of the tax to July 1, 2027.

Contact Drew Olson with questions about the Draft Proposed Rules for the Digital Asset Tax Act.

A state court has ordered the New York City Department of Finance to withdraw approximately 17,000 notices issued under the city's new pied-à-terre property tax surcharge and to remove a published list of over 900,000 properties and owners used in the tax rollout. The court concluded that the Department’s implementation process was arbitrary, capricious, and violated affected homeowners' due process rights. The decision emphasized that the city must make an individualized determination that a property is subject to the surcharge before requiring an owner to contest that determination. The ruling addresses only the administration of the tax and does not invalidate the surcharge itself.

As covered in prior TWISTs, the pied-à-terre property tax surcharge generally involves the phased implementation of higher property tax rates on certain high-value New York City residential properties that are not used as a taxpayer's primary residence. The taxpayers challenging the rollout argued, among other things, that the city improperly shifted the burden to homeowners to demonstrate that their properties were exempt. Agreeing with those concerns, the court directed the city to cancel previously issued notices and begin the process anew using determinations based on information available to the Department before contacting taxpayers. The same judge previously issued a temporary restraining order barring further implementation of the tax while this case was being heard; that order was lifted by a state appellate court. News reports indicate that the City has appealed the new decision as well.

Meanwhile, a pair of taxpayers filed a separate lawsuit in state court seeking to overturn the tax in its entirety. The plaintiffs, both of whom reside outside New York but own residences in New York City, allege that the tax unconstitutionally discriminates against nonresidents.

Please contact Alec Schwartz or Jennifer White with questions about the New York City pied-á-terre property tax surcharge.

In a recent opinion, the Tennessee Court of Appeals affirmed that a business owner who knowingly retained sales tax collected from customers was personally liable for the unpaid tax as well as penalties and interest. The Tennessee Department of Revenue audited the taxpayer’s restaurant for 2016 through 2018 and assessed the business for underreported and unpaid sales tax. After the business failed to pay, the Department sought to hold the taxpayer personally liable under Tennessee law. The taxpayer challenged both her personal liability and the timeliness of the Department’s collection efforts. A trial court granted summary judgement to the Department, and the taxpayer appealed. On appeal, the taxpayer argued that the statute required “willful” failure to pay, and said that required some form of “deception, concealment, or deliberate misapplication of funds” before she could be made personally responsible for the unpaid tax.

The appellate court first noted that no Tennessee case had construed the applicable responsible person requirements, and ultimately adopted the test used by federal courts under a similar federal statute. Under that “functional” test, a responsible person is determined based on the individual’s influence and control over the business’s financial affairs, including the authority to direct payments to creditors. The taxpayer jointly owned the business, managed its day-to-day operations and financial affairs, could sign checks and enter into agreements, prepared sales tax returns, and had authority to remit the collected tax. The court determined she qualified as a responsible person. The court then concluded that the taxpayer acted willfully because she materially and knowingly participated in diverting collected sales tax to a source other than the state. The taxpayer admitted that the business’s point-of-sale system calculated the sales tax collected from customers, but she reduced the amount remitted by amounts attributed to waste, loss, and uncompensated meals. Although she argued that she reasonably believed the deductions were permissible, the court held that Tennessee law did not require proof that she knew her conduct created tax liability. The court further concluded that her failure to review the tax law or seek tax advice constituted deliberate or reckless disregard, rather than mere negligence. Finally, the court rejected the taxpayer’s challenge of the timeliness of the Department’s collection action, holding that the Department commenced a collection proceeding within the applicable six-year period when it filed its countercomplaint. Because the countercomplaint was timely, the court did not address whether the Department’s earlier personal assessment letter also constituted a collection method.

Please contact Justin Stringfield and Christopher Geer with questions about Terri Gang v. Department of Revenue (No. M2025-00854-COA-R3-CV).

The Common Cents Act, which recently passed both houses of Congress, requires the U.S. Mint to cease production of the penny for general circulation, and provides acceptable rounding procedures that may be used in cash transactions as an alternative to providing the exact change using pennies. Although sellers and purchasers are not required to follow the suggested approach, transactions conducted in accord with the rounding provisions in the Act cannot be considered to violate state, local or tribal law, regulation or standard. This could affect policies and legislation adopted earlier by states in anticipation of the penny’s retirement as they may differ in some regards.

Under the Act, the final digit of the transaction price (including taxes) or the amount of change due a customer may be rounded as follows: rounded down to zero, if the final digit of the amount is one or two; rounded up to five, if the final digit of the amount is three or four; rounded down to five, if the final digit is six or seven; and rounded up to zero, if the final digit is eight or nine. In the case of small transactions in which the exact total (not merely the final digit) is one cent or two cents, or in which the change due a customer is one cent or two cents, the amount may be rounded up to five cents. A person may also adopt a general policy of always rounding up or down to the nearest five-cent-increment, provided the rounding always favors the person’s customer (e.g., a person selling may always round the price down to the nearest five-cent-increment; while a person buying may always round their purchase price up to the nearest five-cent-increment.) 

The bill awaits the President’s signature. Please contact Jeff Cook with questions about H.R. 10167.