Archive for the ‘New Jersey’ category

Recent Developments Regarding the “Throw Out Rule” by the New Jersey Tax Court and the Multistate Tax Commission

February 20, 2017

By Adam Koelsch

Recently, in Elan Pharm. v. Division of Taxation, the Tax Court of New Jersey issued a non-binding opinion that further limits the Division of Taxation’s enforcement of the controversial “throw out rule.”

Sometimes, when a multi-state taxpayer apportions its income, that taxpayer will source a receipt to a state in which the receipt is not subject to tax, either because the state has chosen not to tax it or because the state is not able to do so. One reason that a receipt may not be taxable, and a reason at issue in Elan Pharm., is P.L. 86-272 — a federal law that prohibits a state from taxing a business whose activities in that state are limited to the sale and/or the solicitation of sales of tangible personal property shipped from another state. This type of income sourcing creates “nowhere income,” that is, income that is not taxed by any jurisdiction.

In order to combat this, some states have employed a tactic known as a “throw out rule.” Under the rule, non-taxed receipts are ignored in calculating the state’s share of total receipts by subtracting the non-tax receipts from the apportionment denominator. As the Tax Court noted, “[b]y throwing out receipts from the denominator, the sales fraction always increases, causing the apportionment formula and the taxpayer’s resultant CBT [Corporation Business Tax] liability to New Jersey to increase.” The New Jersey throw out rule (former N.J. Stat. Ann. § 54:10A-6[B]), which was repealed by legislation in late 2008, continues to be enforced by the Division for the tax periods between January 1, 2002 and June 30, 2010.

Previously, in Whirlpool Properties, Inc. v. Director, Division of Taxation, 26 A.3d 446 (N.J. 2011), the New Jersey Supreme Court had held that, under the fair apportionment prong of the U.S. Supreme Court’s Complete Auto Transit test, application of the throw out rule to receipts sourced to states that simply choose not to impose a tax (as opposed to being unable constitutionally to impose a tax) is unconstitutional.

Recently, on February 7, 2017, the Multistate Tax Commission, in a staff comment regarding the operation of a proposed throw out rule in its Model Regulations, has suggested that the rule should apply only when a state cannot impose an income-based tax under the constitution or P.L. 86-272, and should not consider whether the state actually chooses to impose a tax.

In Elan Pharm., the taxpayer had filed income tax returns in six states, including New Jersey, for 2002. The taxpayer had received receipts from forty-four states in which it had claimed it was not taxable because the state lacked jurisdiction under P.L. 86-272. The taxpayer had property in thirty-nine states and payroll in forty-eight states. Nevertheless, the Division had included in the apportionment denominator only those receipts from the six states in which the taxpayer had filed, excluding the remainder of the receipts under the throw out rule.

The Tax Court, however, disagreed with the Division’s application of the rule. The Tax Court noted that several states in which the taxpayer conducted business (not just the six in which it had filed) had “throwback rules” — that is, a rule by which sales receipts are reassigned to the state from which goods are shipped when the purchaser’s state cannot impose an income or franchise under the constitution or P.L. 86-272. Thus, because certain receipts captured under the throwback rule could have been taxed by the shipping states, those receipts could not be excluded by application of the throw out rule by New Jersey.

In addition, the Court found that the presence of taxpayer’s property and/or payroll in many of the states from which excluded receipts had been sourced created sufficient nexus to render the receipts taxable in those states despite P.L. 86-272, and therefore could not be excluded using the throw out rule.

Despite its repeal, the throw out rule remains a subject of controversy which will continue to impact businesses operating in New Jersey. Indeed, understanding application of the rule is especially important to business entities that had never previously filed CBT returns in New Jersey — and therefore cannot benefit from the statute of limitations for the years that the rule was effective — because of their mistaken belief that their activities were insufficient to create nexus.

The New Jersey Tax Court opinion can be found here

Weekly Update for 3/16

March 19, 2012

 by Jennifer Weidler

ARIZONA

Arizona Court Holds that Cooperative Direct Mail Advertising is Not Subject to Use Tax

The Arizona Appeals Court held that cooperative direct mail advertising was not subject to the state’s use tax, since the dominant purpose of the taxpayer’s business was to obtain nontaxable design, mailing and printing services, and not tangible personal property.

INDIANA

Indiana Legislature Passes Bill to Phase Out Inheritance Tax

The Indiana General Assembly has passed legislation, SB 293, which will phase out the state’s inheritance tax, gradually reducing the rate until it hits zero during 2022.   The phase out would be retroactive to January 1st.

KANSAS

Kansas House Approves Bill to Alter State Income Tax Structure

The Kansas House approved legislation, SB 177, which would make several modifications to the state’s income tax structure.  The legislation includes changes to the state’s sales tax exemption and business income exemption provisions, formulaic individual income tax rate reductions, Rural Opportunity Zone expansions, tax credits and more.

MARYLAND

Maryland Senate Approves “Amazon” Law

The Maryland Senate has approved legislation, SB 523, which includes an “Amazon” law and an income tax increase.  The bill would add three additional tax brackets and rates and would impose a flat tax on those filers making more than $500,000.  The bill also contains affiliate nexus/”Amazon” language.

MICHIGAN

Michigan Court of Appeals Finds Taxpayer Could Not Collaterally Attack Underlying Assessment

The Michigan Court of Appeals held that a taxpayer could not appeal a use tax assessment, as the sole shareholder and responsible corporate officer of a retailer, where the taxpayer’s appeal was untimely and where he was statutorily precluded from collaterally attacking the underlying assessment.

NEW JERSEY

New Jersey Legislature Passes “Amazon” Law

The New Jersey Assembly has passed legislation, A 2608, which would give Amazon.com a temporary sales tax collection exemption in exchange for job creation.  Pursuant to the bill, those retailers that make capital investments of at least $130 million and create at least 1,500 full-time jobs in the state would not have nexus until July 1, 2013.

New Jersey Legislature Passes Bill Expanding State’s Nexus Rules

The New Jersey Assembly passed legislation, A 2608, which would expand the state’s nexus rules by creating nexus for sellers that use in-state affiliates to perform activities to aid in business development or to maintain a New Jersey business market.  Moreover, the bill would create nexus for out-of-state businesses with distribution centers or subsidiaries in the state.

PENNSYLVANIA

Philadelphia DOR Releases 2012 KOZ Booklet

The Philadelphia Department of Revenue has released its 2012 Philadelphia Keystone Opportunity Zone Programs Booklet, which provides guidance on calculations, credits, two-factor apportionment formula, and more.

TENNESSEE

Tennessee General Assembly Approves Bill to Exempt Amazon from Tax

The Tennessee General Assembly passed legislation, HB 2370, which would temporarily exempt Amazon.com from collecting state sales tax.  Pursuant to the legislation, Amazon.com will build new facilities in the state and create thousands of jobs, in exchange for sales tax exemption through January 1, 2014.  The bill is now awaiting the Governor’s signature.

TEXAS

Texas Announces Amnesty Program Slated for June 2012

Texas has announced that it will offer a tax amnesty program for businesses, during which it will waive all interest and penalties for taxpayers that file or amend delinquent tax reports and pay all taxes due.  Reports originally due prior to April 1, 2012 are eligible, and the amnesty program will run from June 12 through August 17, 2012.

Weekly Update for 3/9: Arizona Rejects Amazon Legislation, While New Jersey Considers Implementing Amazon Law; Missouri Considers Amnesty Legislation; Pennsylvania Considers Closing the “Delaware Loophole”…and more.

March 12, 2012

 by Jennifer Weidler

ARIZONA

Arizona Senate Rejects Proposed Amazon Legislation

The Arizona Senate rejected proposed Amazon legislation, SB 1338, which would have broadened Arizona’s definition of retailer to include any company with a warehouse in the state.

CALIFORNIA

California Revises Publication on Internet Sales, Incorporating eBooks and Apps

The California State Board of Equalization revised Publication 109 regarding Internet Sales, in order to provide guidance on the tax treatment of eBooks and apps.  According to the Publication, the transfer of a downloadable file such as an eBook or app is not a taxable transaction, without purchasing any physical storage medium.

GEORGIA

Georgia House Approves Legislation to Establish Tax Tribunal

The Georgia House of Representatives approved legislation, HB 100, which would establish a state Tax Tribunal in the state’s judicial branch.

ILLINOIS

Illinois Releases Information Letter of “Deal-of-the-Day” Transactions

The Illinois Department of Revenue issued an Information Letter providing guidance on the treatment of “Deal-of-the-Day” transactions.  For more detailed information, see the Information Letter.

IOWA

Iowa Court Grants Refund Relief for Illegal Taxation

The Iowa District Court ordered a refund of franchise fees that were collected in excess of the amount determined to be allowable for which the City of Des Moines could impose.  The court found that the refund was a constitutional remedy for the illegal taxation of the city’s residents.  The fact that the funds gathered from the illegal taxation were used wisely, legally and with the best intentions was not a defense.

MISSOURI

Missouri House Approves Amnesty Legislation

The Missouri House has approved legislation, HB 1030, which would offer a tax amnesty period, slated to run from August 1 to October 31, 2012.  The amnesty program would cover all taxes administered by the Department of Revenue and would waive penalties.  The amnesty program is projected to raise $75 million for the state.

NEW JERSEY

New Jersey Finds Nexus Based on Telecommuting Employee

The New Jersey Superior Court upheld a Tax Court ruling, which found that a foreign corporation was subject to the New Jersey Corporate Income Tax because it regularly and consistently permitted one of its employees to telecommute from her New Jersey residence.  Her full-time telecommuting was viewed as doing business in the state, thereby requiring the payment of the tax as well as the filing of corporate income tax returns in New Jersey.

New Jersey Introduces Amazon Legislation

Legislation, S 1762, has been introduced in New Jersey that would grant Amazon.com a temporary state sales tax collection exemption if it builds warehouses within the state.   Pursuant to the bill, distribution facilities built in the state after January 1, 2012 would not create nexus with the state until July 1, 2013, provided that Amazon.com creates at least 1,500 full-time jobs in the state and makes a capital investment exceeding $130 million.

New Jersey Court Affirms Value of Residential Property Where Owner’s Evidence was Insufficient

The New Jersey Tax Court affirmed the value of a residential property established by the assessment after finding that the owner’s evidence regarding comparable sales was insufficient to establish the true market value of the property.  Although the owner overcame the presumption of validity attached to the assessment of his property, he was unable meet his burden of proof with regard to establishing the true market value of the property.

NEW MEXICO

New Mexico Governor Vetoes Combined Reporting Legislation

New Mexico’s Governor vetoed legislation, SB 9, which would have established combined reporting in the state.  The bill would have required combined reporting for multistate retailers with a 30,000 square feet or large facility in New Mexico.  Additionally, it would have lowered the top corporate income tax rate from 7.6 percent to 7.5 percent.

PENNSYLVANIA

Pennsylvania Considers Legislation to Allow Counties to Institute Local Taxes to Reduce or Eliminate Property Tax

The Pennsylvania legislature is considering legislation, HB 2230, which would allow counties in the state to institute a local sales or income tax in order to reduce or eliminate the property tax.  Pursuant to the bill, county governments could ask voters to approve a sales or income tax, which would ultimately provide property tax relief.

Pennsylvania Considers Competing Legislation to Close “Delaware Loophole”

During January, legislation, HB 2150, was introduced that suggested a close to the “Delaware loophole.” For previous coverage of that bill, please click here.  Competing legislation is currently being drafted that will seek to create a broader add-back provision than that contained in HB 2150.

VIRGINIA

Virginia Governor Approves Legislation Phasing in Single-Sales-Factor

Virginia’s Governor has approved legislation, HB 154, which creates a phase-in of single-sales-factor apportionment for retailers.  The bill requires retailers to begin utilizing a triple-weighted sales factor beginning July 1, 2012 and a quadruple-weighted sales factor beginning July 1, 2012.  Finally, a single-sales-factor would be implemented beginning July 1, 2015.

WISCONSIN

Wisconsin Rules that Individual is Responsible for Portion of Company’s Tax Liabilities

The Wisconsin Tax Appeals Commission held that an individual was responsible for a portion of a company’s sales tax and withholding tax liabilities.  The Commission reasoned that the evidence established that the individual maintained the title of president of the company, retained check-writing authority and participated on the board of directors.  As such the Commission found the individual to be a “responsible” person.

Weekly SALT Update – Jan. 13, 2012

January 13, 2012

 by Jennifer Weidler

ALABAMA

Alabama Retail Association Issues Letter Expressing Support for Alabama Streamlined Sales and Use Tax Commission’s Preliminary Report

The Alabama Retail Association addressed a letter on behalf of its 4,000 members,to the Alabama Streamlined Sales and Use Tax Commission.  The letter expressedthe Alabama Retail Association’s support for the Commission’s preliminary report and recommendations, stating its belief that simplifying the sales and use tax system would increase compliance and revenue. (more…)

2011 Year-End SALT Update

January 6, 2012

 by Jennifer Weidler

ARIZONA

Arizona DOR Finds Nexus for Sales Representatives Providing Customer Support and Training

Of course it had nexus: Arizona DOR rules that corporation has substantial nexus due to presence of sales representatives who provide customer support and training.

(more…)

New Jersey Issues Decision Finding a Lack of Nexus Regarding a Partnership Distribution to a Foreign Limited Partner

August 29, 2011

  by Stewart Weintraub and Jennifer Weidler

Earlier this week, the New Jersey Superior Court, Appellate Division, affirmed a decision of the Tax Court of New Jersey finding that a lack of nexus existed for distributions made to a foreign limited liability partner from a partnership with an in-state presence. See, BIS LP Inc. v. Division of Taxation, Docket No. A-1172-09T2 (NJ Super. Ct. 2011).

BIS, the taxpayer at issue, was a foreign corporation with no place of business, property, employees or agents in the state of New Jersey.  Its only interest was its ninety-nine percent (99%) limited partnership interest in BISYS Information Solutions (“Solutions”), which conducted business in New Jersey.  As a result of restructuring, BIS became a wholly owned subsidiary of a holding company, BISYS, Inc. (“BISYS”).  Pursuant to a partnership agreement, BISYS was a one percent general partner of Solutions and BIS was a ninety-nine percent (99%) limited partner of Solutions.  Furthermore, the partnership agreement gave exclusive control of Solutions to the general partner, and made clear that BIS would not have a right to partake – directly or indirectly – in the active management of Solutions.

BIS filed its 2003 New Jersey corporation business tax (“CBT”) return and contended that it owed no CBT because it did not have the nexus necessary to subject it to taxation in New Jersey.  The director rejected this assertion, claiming that CBT was owed because BIS had a unitary relationship with the business conducted by Solutions in New Jersey.

The Superior Court affirmed the Tax Court and held BIS lacked sufficient New Jersey nexus to subject it to CBT.  When so holding, the Court found:

The partnership interest was BIS’ only or most substantial asset, and it produced BIS’ income.  However, BIS was not in the same line of business as Solutions.  Nor, as we have stated, was there a ‘substantial’ overlapping of officers, and there was no sharing of offices, operational facilities, technology, or know-how.

The court found that while the two entities shared some corporate officers, that was insufficient, particularly compiled with the fact that BIS was not in the same line of business as Solutions and did not control Solutions.

The rationale behind the New Jersey Superior Court’s reasoning is in stark contradiction to a Kentucky court’s decision last year involving the same issue.  In Revenue Cabinet v. Asworth Corp., Docket No. 2007-CA-002549-MR (Kentucky Ct. Appeals 2010), Asworth owned a ninety-nine percent (99%) limited partnership interest in Conwood Company, LP, a Delaware limited partnership which conducted business in Kentucky.  Apart from its limited partnership interest in Conwood, Asworth had no other connection to Kentucky.  Based upon an audit of Asworth, the Revenue Cabinet determined that Asworth owed additional taxes.  Asworth appealed arguing that it lacked the requisite nexus with the state of Kentucky to be subject to tax.  The court found that:

While the Corporations do no business in Kentucky, at various times they have owned up to a 99% limited and/or general partnership interest in, and have received distributive shares of partnership income from the profits of, a partnership which does business in Kentucky.  Such a partnership unquestionably has received protection and benefits from Kentucky, thereby enabling the distribution of income to the Corporations.  We hold that this connection gives rise to a substantial nexus with, and/or a physical presence within, Kentucky.

Earlier this year, the United States Supreme Court denied Asworth’s petition for certiorari.

Thus, while based upon similar facts, the courts in New Jersey and Kentucky came to strikingly different conclusions.  However, upon closer analysis, this apparent contradiction appears to be primarily due to the statutory language enacted in each state to address the facts at issue.  In New Jersey, a foreign corporate limited partner is only considered to be doing business in the state and, therefore, subject to CBT, if:

  1. The limited partner is also a general partner of the limited partnership;
  2. The foreign corporation limited partner, in addition to the exercise of its rights and powers as a limited partner, takes an active part in the control of the partnership business;
  3. The  foreign corporate limited partner meets the criteria set forth in N.J.A.C. 18:7-1.9 or 1.6 (relating to criteria assessed for “doing business” in the state); or
  4. The business of the partnership is integrally related to the business of the foreign corporation.

N.J.S.A. 18:7-7.6.

Because the New Jersey Superior Court found that BIS did not meet any of the aforementioned criteria, liability for the tax was not imposed on the foreign limited partner.

Conversely, in Kentucky, the statute expressly provides for liability for a nonresident limited partner receiving distributions from a partnership with an in-state presence.  Specifically, the statute states:

Nonresident individuals and corporations which are partners in a partnership or shareholders in an S corporation which does business within and without Kentucky are taxable on their proportionate share of the distributive income passed through the partnership or S corporation attributable to business done in Kentucky. KRS 141.206(3)(b).

As such, in New Jersey and Kentucky, based upon each state’s statute addressing almost identical facts, the courts reached different conclusions; the New Jersey court holding the taxpayer lacked sufficient nexus with New Jersey to be subject to CBT while the Kentucky court held the taxpayer had sufficient nexus with Kentucky to be subject to Kentucky corporate income tax.

Whirlpool Secures Partial Victory in New Jersey Supreme Court Case: “Throw-Out” Rule Unconstitutional When Applied to Sales in States without Income Tax

August 4, 2011

 By Paul Masters

The long-contested constitutional issue concerning the New Jersey throw-out rule has finally culminated in a New Jersey Supreme Court decision recognizing the general constitutionality of the rule, but for its application to sales receipts attributable to states that choose not to impose an income tax. But first, we summarize what this decision did not do. The decision did not address in any significant way the current challenges to nexus that the states confront. Rather, the decision reaffirmed existing federal law, 15 U.S.C.A. §§ 381-84 (commonly referred to as “P.L. 86-272”), and looked to well-grounded constitutional law by the United States Supreme Court. Cases regarding nexus continue to move forward, with KFC reaching an unfavorable decision at the Iowa Supreme Court, on petition for a writ of certiorari at the United States Supreme Court, and Texas also in that mix with the current Taco Bell litigation (examining whether Taco Bell has nexus with Texas by sending a third-party to inspect its Texas franchisees). However, the decision does push back against state attempts to expand its tax base, by placing a firm limit on expansion where a state is able to claim and tax revenue from another state because such state, such as Nevada, has elected not to impose an income tax on activities in which the constitutional nexus standard has been reached.

The throw-our rule that was challenged excluded certain income from the sales fraction’s denominator of the modified three-factor formula used by New Jersey, as provided for in New Jersey’s statutory scheme. N.J. Laws, L. 2002, c. 40, § 8.  The modified three-factor formula employed by this legislation weighed a taxpayer’s property, payroll and sales in the numerator, while the denominator was the taxpayer’s total taxed sales, as opposed to the general provision for taxpayers to use total sales. The non-taxed sales are thus “thrown out,” hence the name for the rule. The New Jersey legislature subsequently amended the statute to eliminate the throw-out rule, but only after the date of the operative facts in these cases. N.J. Laws, L. 2008, c. 120.

This decision is a partial affirmation of prior decisions by both the New Jersey Tax Court and the Appellate Division of the New Jersey Superior Court. In these prior decisions, both courts upheld the constitutionality of the throw-out rule. The courts looked to the constitutional standard provided in United States v. Salerno, 481 U.S. 739, 107 S. Ct. 2095, 95 L. Ed. 2d 697 (1987). Tax Court found three general circumstances where the throw-out rule operates constitutionally: (i) the income excluded from the denominator relates in whole or in part by activities in New Jersey, (ii) the application of the throw-out rule has no material effect on the sales fraction because the income in the non-taxing state is insignificant to the total income of the taxpayer, and (iii) the property and payroll fractions significantly temper the impact of the disputed sales fraction.

The Appellate Division agreed with the application of the Salerno standard, pointed to the lack of any case law in which an allocation formula was struck down as facially unconstitutional, and observed that it is unlikely that any person can actually demonstrate that “a given formula will yield allocations for most out-of-state taxpayers that are unconstitutionally disproportionate.” Because Whirlpool did not contest that it had nexus with New Jersey, and that sales to non-taxing states were not part of that business, the Appellate Division concluded the constitutional conditions were satisfied for application of the throw-out rule by New Jersey. The Appellate Division summarized that the throw-out rule does not result in double taxation, does not pressure taxpayers to increase their business activities in New Jersey at the expense of other states, and is thus facially constitutional.

The Supreme Court disagreed, in part. In doing so, the focus turned to four-prong approach used in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 1079, 51 L. Ed. 2d 326, 331 (1977). This four-prong approach will sustain a state’s formula apportionment methodology for income tax when the tax: (i) is applied to an activity with a substantial nexus with the taxing state, (ii) is fairly apportioned, (iii) does not discriminate against interstate commerce, and (iv) is fairly related to the services provided by the state. Complete Auto, 430 U.S. at 279, 97 S. Ct. at 1079, 51 L. Ed. 2d at 331. The Whirlpool court focused on the second prong: fair apportionment.

Fair apportionment has two requirements: (i) internal consistency and (ii) external consistency. Internal consistency is where an application of the formula by every state would result in no more than all the taxpayer’s business income being taxed. Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169, 103 S. Ct. 2933, 2942, 77 L. Ed. 2d 545, 556 (1983).  It is a hypothetical analysis of what the world would be like if every state had New Jersey’s throw-out rule. The second requirement is an actual analysis of whether the state’s reach goes beyond that portion of revenue that is fairly attributable to economic activity within the taxing state. Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 185, 115 S. Ct. 1331, 1338, 131 L. Ed. 2d 261, 271-72 (1995). In other words, whether New Jersey’s throw-out rule reasonably reflects the activity within its jurisdiction.

Whirlpool argued that by including out-of-state receipts in New Jersey’s tax base, New Jersey taxed more than its “fair share.” The New Jersey Supreme Court divided these receipts into two parts: (i) receipts from states that could not impose an income tax due the lack of nexus in that state, and (ii) receipts from states that chose not to impose an income tax. As to the first, the Court ruled that the throw-out rule was constitutional, but as to the latter, the answer is “no.”

The reasoning as to the former is that another state’s decision tax, or not tax, its income would cause a change in New Jersey’s share of the income it is entitled to tax. Thus it is not externally consistent. The change is not reflected on the taxpayer’s activities (the economic activity in within the taxing state), but merely a reflection of another state’s legislature to impose tax. But as to the second, regardless of the other state’s choice regarding income tax, the amount that New Jersey would be able to tax via the throw-out rule remains the same. The only way the result would change is if the taxpayer alters its contacts with the other state.