Posted tagged ‘New Jersey Tax Court’

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 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 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 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 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 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 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 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 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 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 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 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 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 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.

TAM-13 Issued in Light of Court’s Holding in Beneficial New Jersey v. Director Relating to “Unreasonableness” for Purposes of the Related Member Interest Deduction

April 19, 2011

  by Stewart Weintraub and Jennifer Weidler

On August 31, 2010, the New Jersey Tax Court issued a memorandum decision in Beneficial New Jersey, Inc. v. Director, Division of Taxation, N.J. Tax Court, Docket No. 009886-2007 (August 31, 2010).  The Court held that the taxpayer satisfied one of the enumerated exceptions authorized by the interest add-back statute, N.J.S.A. 54:10A-4(k)(2)(I).  Therefore, the Court found that the taxpayer was entitled to its interest expense deductions.  Recently, the New Jersey Division of Taxation (“Division”) released TAM-13, accepting the  Tax Court’s Beneficial decision. N.J. Division of Taxation TAM-13, “Add-back of Related Member Interest Expense,” Feb. 24, 2011.

New Jersey Interest Add-Bank Provision

The interest add-back provisions of N.J.S.A. 54:10A-4(k)(2)(I) were enacted as part of the Business Tax Reform Act of 2002 (“BRTA”).  The BRTA represented another attempt by a state to undo related company transactions by requiring a related member to make add-back adjustments to taxable income.  N.J.S.A. 54:10A-4(k)(2)(I) provides that the determination of a taxpayer’s “entire net income” shall be made without the exclusion, deduction or credit of “interest paid, accrued or incurred…to a related matter.”  However, the Legislature also provided five (5) exceptions whereby such interest expense deductions would be permitted:

  1. “Three Percent” Exception – This exception applies when the transaction giving rise to the interest does not have a principal purpose of tax avoidance; the interest is charged at arm’s length, pursuant to an arm’s length contract, at an arm’s length rate; the related member receiving the interest is taxable upon its income or gross receipts by a state of the United States or by a foreign nation; the measure of tax upon the related member includes the interest; and the rate of tax applied to the interest is no more than three percent less than the New Jersey tax rate.
  2. “Treaty” Exception – This exception applies when interest is charged to a related member in a foreign nation that has an income tax treaty with theUnited States.
  3. “Guarantee” or “Conduit” Exception – This exception applies when related member interest expenses are directly or indirectly paid or accrued to an independent lender and the taxpayer guarantees the debt upon which the interest is required.
  4. “Unreasonable” Exception – This exception applies when the taxpayer establishes by clear and convincing evidence that the disallowance of an interest deduction is unreasonable.
  5. “Alternative Apportionment” Exception – This exception applies when the taxpayer and the Director agree in writing to use alternative apportionment pursuant to N.J.S.A. 54:10A-8.

Beneficial New Jersey v. Director, Division of Taxation       

Beneficial New Jersey (“BNJ”) conducted retail branch lending operations in New Jersey.  The parent corporation, HSBC Financial (“HSBC”), was a large bank, which borrowed funds from unrelated third parties and then loaned the funds to its subsidiaries, including BNJ.  HSBC charged BNJ interest at an arm’s length rate.  BNJ deducted interest payments paid upon its loans from its parent, HSBC, when arriving at its taxable income, believing that it was entitled to the interest expense deductions.  However, pursuant to an audit, the Director disallowed the interest expense deductions and refused to apply any of the enumerated exceptions in N.J.S.A. 54:10A-4(k)(2)(I).

BNJ appealed the Director’s disallowance of its interest expense deduction and audit determinations.  BNJ argued that it satisfied the “three percent” exception, the “guarantee/conduit” exception, and the “unreasonable” exception.  With respect to the “three percent” exception, the court dismissed BNJ’s claim and clarified that the “rate of tax” in the statute means the taxpayer’s and related member’s effective tax rate, not the state statutory tax rate.  With respect to the “guarantee” exception, the court found that the funding agreement between BNJ and HSBC was not sufficient proof that the debt was guaranteed by the taxpayer.  The agreement did not specify the names of the third party lenders and, as such, either party could unilaterally withdraw from the agreement.  Furthermore, the document did not use the term “guarantee.”

However, the Tax Court concluded that BNJ did satisfy the “unreasonable” exception.  The Court found that the evidence supported BNJ’s argument that the purpose for the transactions between BNJ and HSBC did not constitute tax avoidance.  The term “unreasonable” was not defined by the statute and, thus, the Tax Court interpreted the language by using its ordinary meaning.  It found that the loans from HSBC had economic substance.  The reason for the practice whereby HSBC borrowed funds to lend to its subsidiaries was credible because it enabled HSBC to receive more favorable rates than its subsidiaries would be able to obtain directly from the third party lender.  Furthermore, HSBC paid taxes in other jurisdictions upon the interest income it earned from BNJ.  As such, the court in Beneficial adopted a much broader interpretation of the “unreasonableness exception” than that proposed by the Division and found that, based upon the totality of the circumstances, BNJ’s situation was of the type contemplated by the drafters of the statute.  Moreover, the court found that the “unreasonable” exception should be applied case-by-case.

Division’s Release of TAM-13

A recent Technical Advisory Memorandum (“TAM”) issued by the Division incorporated the analysis provided by the Tax Court in Beneficial.  TAM-13 emphasized that for purposes of the three-percent exception, the term “rate of tax” is interpreted by using a post-apportionment, not pre-apportionment basis.  Additionally, TAM-13 reiterated the Division’s interpretations of the guarantee exception, requiring that in a transaction for which interest is charged to an independent lender through a related member as a conduit, the taxpayer must legally guarantee the debt upon which the interest obligation is required. Furthermore, the Division noted that the taxpayer must memorialize the guarantee at the time of the loan origination, not thereafter.  It accepted the Tax Court’s conclusion that because the taxpayer’s intercompany transactions had economic substance, it was unreasonable to impose the interest add-back rules in that particular situation.  The Division also accepted the Tax Court’s finding that decisions regarding the unreasonableness exception should be made case-by-case, based upon the totality of the circumstances.

Thus, the Tax Court’s Beneficial holding combined with the Division’s release of TAM-13, should cause taxpayers, subject to the add-back requirement, to review their facts and to determine if the totality of their circumstances evidences that a disallowance of deductions for interest paid to related parties falls within the “unreasonable” exception.