@17499
I am not a lawyer. These are just my personal views after researching this topic the best I am able.
"So the US government is still paying you $20 while the seller is paying you $30. The $30 was not interest paid by the US government and therefore is not tax free in a state."
The reasoning is correct and the same reasoning I have used in other forums. However the conclusion that the AMD is therefore not state tax exempt is not necessarily correct.
You cannot necessarily conclude that because a particular argument seems logical that it means that state tax code is written that way or in fact is written on that topic at all.
Tax code is sometimes illogical and contrary to reason. Also there may be counter arguments to the reasoning above. It ultimately boils down to whether or not there is specific state level tax code addressing this matter and if not whether or not there are any court rulings on it.
In the absence of either, I think it is sensible to assume that exempting it from state interest is a good faith effort to comply with the rules since it is treated as interest for federal tax purposes. Although if it is challenged that may not help you escape paying it or paying interest and maybe even penalties as well unless you are willing to spend millions of dollars on legal fees to try to establish a precedent and then win the case.
To the best that I have been able to determine, NY tax code is silent on this issue and there are no court cases that address it. I don't know about other states.
