State tax update: NJ, CA and WA moves
What changed this week
| Development | Who it affects |
|---|---|
| New Jersey pauses letter ruling requests for 60 days starting October 1 | Any business planning a New Jersey filing position that turns on a novel fact pattern — reorganizations, cross-border sourcing, unusual sales-tax characterizations, credits and incentives — and any practitioner whose file has a New Jersey letter ruling request in flight or pending drafting. |
| California enacts SB 1349 — LAO to review R&D credit, water’s-edge election and other major tax expenditures | California business owners claiming the state R&D credit; multinationals making the water’s-edge election; families and businesses in inherited-property planning; owners planning like-kind exchanges in California; and cable operators using the special apportionment. |
| Washington Court of Appeals remands a B&O tax nexus case for a full evidentiary hearing | Out-of-state franchisors and licensors with Washington-based licensees; multistate service businesses with limited physical presence in Washington; and any owner defending a B&O assessment or preparing a refund claim on nexus grounds. |
New Jersey pauses letter ruling requests for 60 days starting October 1
The New Jersey Division of Taxation announced that effective October 1, 2026 it is pausing acceptance of letter rulings for 60 days so it can review the process. Requests received before October 1 will still be worked. Taxpayers and practitioners can continue to request general written guidance from the New Jersey Regulatory Services Branch, and the Division tells everyone to monitor its website for updates on the letter ruling process itself. During the pause you cannot lock in binding written treatment on a novel New Jersey position; you can still ask for general written guidance, but that is not the same shield in an audit as a letter ruling.
Who it affects: Any business planning a New Jersey filing position that turns on a novel fact pattern — reorganizations, cross-border sourcing, unusual sales-tax characterizations, credits and incentives — and any practitioner whose file has a New Jersey letter ruling request in flight or pending drafting.
What to do
If you have a novel New Jersey position that would benefit from a letter ruling, file the request on or before September 30 so it lands before the pause. If your window is longer, use the pause to consult the Regulatory Services Branch for general written guidance and to document your reasonable-basis position; watch the Division’s website for the reopening announcement.
Primary source: N.J. Division of Taxation — Letter Rulings page
California enacts SB 1349 — LAO to review R&D credit, water’s-edge election and other major tax expenditures
California SB 1349 was signed on September 20, 2026. It directs the Legislative Analyst’s Office (LAO) to comprehensively assess a defined list of California “major tax expenditures” and publish a separate report on each. The list includes: the water’s-edge election (Cal. Rev. & Tax. Code sec. 25110); credits for increasing research activities (secs. 17052.12 and 23609); the step-up in basis of inherited property (secs. 18031 and 24911); the exclusion for like-kind exchanges (secs. 18031, 18031.5, 24941, 24941.5); accelerated depreciation of research and experimental costs (secs. 17201 and 17201.1); and the special apportionment for qualified cable system operators (sec. 25136.1). Each LAO report must identify potential savings from reducing or limiting the expenditure and include recommendations. The first report is due by January 1, 2028, with a report every year until the final one on January 1, 2032.
Who it affects: California business owners claiming the state R&D credit; multinationals making the water’s-edge election; families and businesses in inherited-property planning; owners planning like-kind exchanges in California; and cable operators using the special apportionment.
What to do
Treat this law as an early warning: the LAO’s cost estimates and recommendations will shape what the Legislature revisits over the next five years. Document your reliance on these provisions now — R&D credit substantiation files, water’s-edge election worksheets, like-kind exchange trails, inherited-basis records — so you are not caught flat-footed if the Legislature moves. Ask your CPA to flag any multi-year planning that assumes today’s rules stay unchanged through 2032.
Primary source: California SB 1349 (leginfo.legislature.ca.gov)
Washington Court of Appeals remands a B&O tax nexus case for a full evidentiary hearing
In an unpublished Division Three opinion (Case No. 41068-4-III, September 22, 2026), the Washington Court of Appeals reversed a trial court’s summary judgment for the Department of Revenue in a business and occupation (B&O) tax nexus dispute involving an out-of-state franchisor and sub-franchisor of dentistry practices operating in several states, including Washington. The taxpayer argued that its Washington contacts did not meet the “substantial nexus” threshold and that no B&O tax was owed. The appellate court concluded that genuine issues of material fact remain and that summary judgment was improper. On remand, the taxpayer bears the burden of showing not only that the assessed amount is wrong but also the correct assessment, including the correct method of computing substantial nexus and the resulting B&O liability if any.
Who it affects: Out-of-state franchisors and licensors with Washington-based licensees; multistate service businesses with limited physical presence in Washington; and any owner defending a B&O assessment or preparing a refund claim on nexus grounds.
What to do
If you have a live Washington B&O nexus dispute, do not treat the trial court result as the final answer — this opinion resets the record. Rebuild your evidentiary file: contract terms with Washington counterparties, revenue attribution, employee travel, and any economic-nexus quantification. Prepare to prove both that the Department’s number is wrong and what the right number is, method included, before you go back to a Washington trial court.
Primary source: Washington Court of Appeals — Division Three, Case No. 41068-4-III (unpublished opinion)
What this means for your business
- If you need binding written guidance from New Jersey on a novel position, file before October 1 or plan to work with general written guidance until the pause ends.
- California’s LAO review is a five-year warning shot for the R&D credit, water’s-edge election and like-kind exchanges — get your documentation in order now.
- Washington’s appellate ruling restates who carries the burden on B&O nexus — the taxpayer must prove both the wrong number and the right number on remand.
- None of these moves changes what you owe this quarter, but each one changes how you plan and how you document.
This week in one line
New Jersey has paused letter rulings, California has queued the R&D credit and water’s-edge election for a five-year LAO review, and Washington has resent a B&O nexus case back to trial with the burden squarely on the taxpayer.
Frequently asked questions
Q. Can I still get any written guidance from New Jersey during the letter ruling pause?
Yes. The Division of Taxation says taxpayers and practitioners may continue to request general written guidance from the Regulatory Services Branch during the pause, and it will still respond to letter ruling requests it received before October 1. What you cannot do is start a new binding letter ruling until the pause is lifted.
Q. Does California SB 1349 change what I can claim on my California return today?
No. SB 1349 does not change any current rate, credit, deduction, election or apportionment rule. It only tells the LAO to review a defined list of major tax expenditures and recommend changes over the next five years. Treat it as an early warning for planning that runs beyond 2027, and document your reliance on today’s rules now.
Q. The Washington case is unpublished — does it still matter for my B&O position?
Yes. The opinion resets the record in that specific case and confirms how a Washington court expects a substantial-nexus challenge to be litigated: the taxpayer bears the burden of proving both that the assessment is wrong and what the correct assessment is, method included. If you are defending a B&O nexus dispute, rebuild your evidentiary file to match that standard rather than relying on the summary-judgment posture that was reversed.
