The problem is the way it is being phrased or looked at.
Certain states do not look at accrued market discount as "interest income derived from investment in Federal obligations". They look at that portion, because it is derived from a transaction with an individual, as NOT income related to the Federal obligation. Therefore taxable at the State level.
When I first commented on this I conferred with the individual who used to do my taxes (in CA). They said exactly what I said above and it was taxable at the CA State level. It was not an answer I wanted to get as it massively increased my taxes.
But other states may vary. I only live in CA so my investigation stopped there. And I have zero CA statutes or CA tax code references I can provide.
