I've done some research, and I think its a bit more complicated then that. The way I understand a repurchase agreements or in this case a reverse repurchase agreement, to work is that the money market fund actually buys the US Treasury and agrees to sell back the US treasury a few days later. While the MMF holds the UST is accrues interest. The price the counterparty pays to repurchase the UST is equal to the accrued interest on the UST +/- an amount such that the all in yield to the MMF is equal to repurchase rate agreed at the start of the repurchase agreement. Given where rates are a significant majority, if not all, of the income earned by the MMF is actually due to the accrued interest holding the UST. So I would think the MMF income on UST collateralized repos would be exempt from state tax. What do you think?
