The New Jersey Tax Court rejected the Division of Taxation’s application of a five-factor alternative apportionment formula as invalid rulemaking under New Jersey’s Administrative Procedures Act (APA). The Tax Court previously determined that an application of the statutory apportionment formula in effect prior to 2011 for companies without a “regular place of business” outside New Jersey did not fairly reflect the taxpayer’s in-state business activities and remanded the case to the Division so that other apportionment methods could be considered. The Division then proposed a modified five-factor formula. The Tax Court found that while the five-factor formula could be an acceptable exercise of the Division’s discretionary authority to adjust the taxpayer’s apportionment formula, it nevertheless constituted an impermissible “de facto rule-making” in violation of the APA.
The New Jersey Tax Court upheld the New Jersey Division of Taxation’s use of the 25/50/25 sourcing rule for “certain services” against a provider of mass messaging services by fax, email and voice. Specifically, the court upheld the Division’s determination of a 76% receipts factor, which consisted of 25% for all transactions originating in New Jersey, 50% for all transactions performed in New Jersey, and 1% for the percentage of transactions that terminated in New Jersey. Because the court determined that the taxpayer performed its service entirely in New Jersey, it stated that a 100% receipts factor could also have been appropriate under a cost-of-performance sourcing method.
In the midst of a budget showdown between New Jersey’s Legislature and Governor Murphy, on June 25, 2018, the Legislature passed a replacement bill that seeks to raise revenue with a temporary Corporation Business Tax “surtax” on corporations meeting certain income thresholds and by limiting New Jersey’s dividend exclusion. The Legislature also responded to the Tax Cuts and Jobs Act (TCJA) passed by the United States Congress late last year by decoupling from the IRC § 199A qualified business income deduction. However, the current version of the bill fails to address other TCJA provisions, such as the tax on global intangible low-taxed income and the foreign-derived intangible income deduction. With the Governor threatening to veto the bill, the Legislature and the Governor are expected to continue negotiations over the next few days as the end of June deadline for the budget approaches.
By Sam Trencs and Open Weaver Banks
The New Jersey Tax Court held that New Jersey could not impose corporation business tax on a foreign corporation’s foreign source income that was not included in the federal tax base because of a treaty benefit. Although New Jersey is permitted to adopt a legislative addback for exempt foreign source income, it did not, and therefore, it is presumed that federal taxable income is the starting point for computing New Jersey entire net income for purposes of the New Jersey corporation business tax. Infosys Limited of India, Inc. v. Director, Division of Taxation, Dkt No. 012060-2016 (N.J. Tax Nov. 28, 2017).
In a recent unpublished decision, Residuary Trust A v. Director, Division of Taxation (Kassner), the New Jersey Appellate Division relied on the “square corners doctrine” to hold that the New Jersey Division of Taxation was prohibited from imposing tax for the 2006 tax year based on a policy change not announced until 2011. In other words, even though the assessment may have been supported by the statute, the court determined that it would be unfair to assess the tax.
In their article for State Tax Notes, Sutherland attorneys Leah Robinson, Open Weaver Banks and Amy F. Nogid describe the New Jersey square corners doctrine, which prevents the government from achieving or retaining an unfair bargaining or litigation advantage.
View the full article reprinted from the September 14, 2015, issue of State Tax Notes.
The New Jersey Tax Court ruled that the Division of Taxation (“Division”) properly required a foreign (non-New Jersey domesticated) corporation to file corporation business tax (“CBT”) returns reporting licensing revenue from its parent attributable to New Jersey, based on New Jersey’s economic presence nexus standard, despite the parent’s royalty expense addback in computing its CBT liability. The licensing subsidiary filed CBT returns before New Jersey’s enactment of the addback provision; once the parent corporation became obligated to add back the royalty expenses to its income, the licensing subsidiary ceased filing CBT returns, asserting that the parent’s royalty expense addback captured the income. In rejecting the subsidiary’s position, the court explained that the subsidiary was taxable under New Jersey’s CBT subjectivity provisions (specifically, the economic presence nexus standard), and that such provision and the royalty addback provision do not operate in the alternative, as neither provision contains a cross-reference to or an exception with respect to the other provision. The court also rejected the argument that requiring the subsidiary to file a return when the parent had already added back the royalty payments it made to the subsidiary would result in unconstitutional double taxation. The court explained that statutory and regulatory mechanisms existed to eliminate the possibility of double taxation, including the payor’s ability to assert relief under the unreasonableness exception to the addback statute and the Division’s “subject to tax” exception, as well as the payee’s ability to request discretionary relief from the Division (“Section 8” relief). Failing to take advantage of any of the relief mechanisms made the subsidiary’s claim of unconstitutional double taxation “questionable.” The court, nevertheless, left open the possibility for Section 8 relief once the subsidiary filed the returns and emphasized that the Division must ensure that it taxes such income only once. Spring Licensing Grp., Inc. v. Dir., Div. of Taxation, No. 010001-2010 (N.J. Tax Ct. Aug. 14, 2015).
The New Jersey Division of Taxation has issued a technical advisory memorandum (TAM) explaining New Jersey’s tax position that transactions involving convertible virtual currency— “electronic/digital money” with an equivalent or substitute value in real currency, such as bitcoins—are subject to state tax liability, including sales and use tax, corporation business tax and gross income tax. For purposes of the sales and use tax, the Division of Taxation will treat convertible virtual currency transactions as barter transactions, where both transacting parties give something of value to the other in order to receive something in value in return. As such, sales or use taxes will be due from both parties to the transaction. For purposes of the corporation business tax and the gross income tax, New Jersey is following the Internal Revenue Service’s lead towards treating convertible virtual currency like property, such that taxpayers will realize gains or losses on sales or exchanges of convertible virtual currency. The full New Jersey TAM can be found here.
New Jersey law contains a little-known, one-sentence provision with substantial implications for companies contesting corporate tax assessments in the New Jersey Tax Court: Filing a Tax Court complaint for one tax year causes the statute of limitations period for assessing additional tax for all subsequent open years to remain open—with no defined closing date—for any issues contested in the Tax Court complaint.
In their article for State Tax Notes, Sutherland attorneys Leah Robinson and Open Weaver Banks discuss how New Jersey corporate taxpayers may inadvertently waive the statute of limitations period for assessment by filing a Tax Court complaint. They also review implications for the law and suggest ways it could be best applied.
View the full article.
Sutherland and the Tax Executives Institute (TEI) are pleased to present this first ever full-day program dedicated to the “Theory, Strategy and Practice of State Tax Controversy” in San Francisco, California on May 21. Topics covered will include:
The New Jersey Tax Court held that a corporation was not required to add back electric utilities taxes paid to North Carolina and South Carolina to determine the corporation’s entire net income subject to the New Jersey Corporation Business Tax (CBT). The Tax Court concluded that the electric utilities taxes paid by the corporation are not taxes “on or measured by profits or income, or business presence or business activity” within the meaning of New Jersey tax law and are not, therefore, required to be added back to the corporation’s federal taxable income for CBT purposes. The Tax Court reasoned that the legislative history of the applicable law clearly indicates that the add back provision is intended to capture only taxes paid to other states on a taxpayer’s net corporate income, and that the electric utilities tax paid by the corporation do not fit into this category. The Tax Court’s conclusions comported with its recent holding in PPL Electric Utilities Corp. v. Director, Division of Taxation, 28 N.J. Tax 128 (N.J. Tax Ct. Oct. 2, 2014), in which it determined that federal deductions for a corporation’s payments of Pennsylvania gross receipts tax and Pennsylvania capital stock tax are not subject to add back in New Jersey. Duke Energy Corp. v. Dir., Div. of Taxation, No. 010448-2008 (N.J. Tax Ct. Dec. 2, 2014).
View Sutherland’s full Legal Alert regarding the Tax Court’s decision in PPL Electric and the refund opportunities associated with the deductibility of other states’ taxes.