On January 10, 2011, the New Jersey Division of Taxation (the Division) started the new year off with a bang by issuing a Technical Advisory Memorandum (TAM), TAM-6 (Jan. 10, 2011) regarding the Division’s Corporate Business Tax (CBT) nexus policy. The issuance of this TAM sent both overt and subliminal messages to foreign corporations, particularly financial institutions.
The Division advised that for privilege periods and taxable years beginning on or after January 1, 2002, amendments to the CBT made it clear that foreign corporations are subject to the CBT “for the privilege of deriving receipts from sources within this state, or for the privilege of engaging in contacts within this state.” N.J. Stat. Ann. § 54:10A-2. In addition, the Division adopted the holding of Tax Comm’r of W.Va. v. MBNA America Bank, N.A., 640 S.E.2d 226 (W.Va. 2006), cert. denied sub nom FIA Card Services, N.A. v. Tax Commissioner of W.Va., 127 S. Ct. 2997 (2007), as the constitutional standard by which New Jersey’s nexus statute would be measured. Based on this foundation, the Division set stated: “taxpayers performing services and domiciled outside the State that solicit business within the state or derive receipts from sources within the State must file a [CBT] return” (emphasis added). The Division expressly targeted this nexus policy at financial institutions by stating that “a [financial institution] that has its commercial domicile in another state [is] subject to tax in this State if during any year it obtains or solicits business or receives gross receipts from sources within this state.”
The TAM is alarming for two important reasons:
- First, it purports to adopt an economic nexus standard for privilege periods and taxable years beginning on or after January 1, 2002. This creates an extended period for which the statute of limitations has not run for many taxpayers, particularly financial institutions, that continue to be of the view that the U.S. Constitution requires a physical presence in a state before a corporate income or franchise tax can be imposed.
- Second, given the generality of the TAM, it is unclear as to how broadly the Division will apply it. Will maintaining any collateral in the state or investing in certain securities subject an entity to the New Jersey CBT? This is particularly troublesome for financial institutions or other investors that own and trade securities that are related to underlying assets with ties to New Jersey. For example, is the TAM broad enough to reach entities that merely hold interests in Real Estate Investment Trusts (REITs) or Real Estate Mortgage Investment Conduits (REMICs) that may have New Jersey assets within their expansive portfolios?
The potentially broad application of this TAM as it relates to investments in the secondary market is contrary to positions taken in some other states. For example, in neighboring New York, merely holding a security interest in real or personal property in the state without otherwise doing business there is not sufficient to give rise to nexus. See NY. Comp. Codes R. & Regs. tit. 20, § 16-2.7(e). In addition, even after adopting an expansive financial institution economic nexus statute, Minnesota recognized the need to preserve the secondary market and carved out from the nexus-creating provisions certain investments in securities in which the underlying collateral may have been located in the state. Minn. Stat. § 290.015.Subd.2.(b).
Although this TAM has no precedential value, it provides a clear indication of the Division’s views on the issue. In addition, it states that the Division intends to promulgate regulations that will set forth the contents of the TAM. Thus, given the TAM, the regulations the Division intends to promulgate, and the Division’s consistent aggressive economic nexus stance, expect 2011 to be an active and interesting year for CBT economic nexus issues.