On January 9, 2020, the New Jersey Superior Court, Appellate Division, upheld a New Jersey Tax Court decision that income, or “receipts,” earned by a taxpayer from providing broadcast fax, email and voice messaging services were performed within New Jersey and thus the majority of such receipts were properly sourced to New Jersey for purposes of calculating the New Jersey Corporations Business Tax (CBT). The court held that the taxpayer’s services were primarily performed at its headquarters, using its hardware and proprietary software—not at the location of where the taxpayer billed its customers.

The taxpayer provides services for the broadcast of fax, email and voice messaging transmissions. Customers initially send contact lists to taxpayer’s headquarters and such lists are then uploaded into taxpayer’s proprietary software. Once contacts are uploaded, taxpayer’s customers can send a single transmission through taxpayer’s software to broadcast customized transmissions to multiple recipients. Taxpayer’s system optimizes routing, verifies required information and generates reports regarding receipt of transmissions and click-through rates.

For purposes of calculating its income subject to the CBT, the taxpayer sourced its receipts according to its customers’ billing addresses. The taxpayer relied on N.J.A.C. 18:7-8.10(a), which provides an example applicable to corporations that earn income from long-distance telephone calls. The example states that revenue from long-distance calls are to be allocated to New Jersey based upon the billings for calls originating in New Jersey. The taxpayer asserted that, similar to a long-distance telephone company, the taxpayer performs its services at the location where its customers receive the services, or where the customers’ transmissions originate.

The court disagreed. The court indicated that for CBT purposes, generally, a three-factor formula is utilized for allocating net income to New Jersey; only one of such factors is based on sales receipts from services performed within New Jersey. The court further held that the Director of the Division of Taxation (the Division) has broad authority to adjust an allocation factor if it does not properly reflect a taxpayer’s business activity attributable to New Jersey. In this case, the Division utilized a twenty-five – fifty – twenty-five allocation formula, according to the site of transmission origination (which was determined to be the taxpayer’s headquarters) location where services are performed (the taxpayer’s headquarters) and the site of termination (only a small percentage of which was inside New Jersey).

The court found that the taxpayer’s customers received services at taxpayer’s headquarters in New Jersey based on the fact that customers sent client lists to the headquarters prior to any transmission, and that taxpayer provided all its services of transmission processing, monitoring and reporting from its headquarters. The court also found that the Division had appropriately considered the taxpayer’s use of certain out-of-state equipment in providing its services and had devised a formula to fairly allocate income based on the realities of the taxpayer’s business. The court concluded that the Division’s allocation formula was within the Director’s discretion and supported by the record.

Xpedite Systems Inc. v. Director, Division of Taxation, No. A-0789-18T3 (N.J. Super. Ct. App. Jan. 9 2020).