New Jersey enacts tax reform legislation
Adopts click-through nexus
TAX ALERT |
On June 30, 2014, New Jersey Governor Chris Christie signed into law Assembly Bill 3486 ("AB 3486" or the "new law"), which addresses four areas of New Jersey tax law: (1) the treatment of business and non-business income; (2) the availability of commercial business tax refunds for non-resident limited partners; (3) the amount of net operating losses (NOLs); and (4) the determination of a "seller" who has nexus for sales and use tax collection purposes.
Business and non-business income
Prior to the enactment of AB 3486, business income (called "operational income" under New Jersey laws) was defined as "income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations and includes investment income serving an operational function."1
The new law inserts the word "or" in place of the word "and" in this definition. This might seem like a minor change; however, the effect of this change is that the acquisition, management and disposition of property need not each, individually, be conducted in the regular course of the taxpayer's business for the income derived from tangible and intangible property to be treated as business income and, thus, apportionable to New Jersey. Accordingly, going forward, one of these three types of activities will be sufficient to render income from such property subject to apportionment in New Jersey.
This provision takes effect for tax years ending after July 1, 2014, and will apply to calendar-year taxpayers and some fiscal-year taxpayers retroactively. Accordingly, this change may have a substantial impact on taxpayers that made dispositions of tangible or intangible property before June 30, 2014.
Commercial business tax refunds for non-resident limited partners
AB 3486 provides that a non-resident limited partner may claim a refund for tax paid by its partnership and credited to its account only if the non-resident limited partner files a New Jersey tax return and reports income subject to New Jersey tax. Neither a non-filing partner nor the partnership itself may claim refunds. This change is intended to legislatively overrule BIS LP, Inc., v. Director, Division of Taxation, 25 N.J. Tax 88 (Tax 2009), affirmed, 26 N.J. Tax 489 (App. Div., 2011), remanded, 27 N.J. Tax 58 (Tax 2012), affirmed, Dkt. A–1647–12T3 (App. Div., 2014), in which an out-of-state, non-unitary limited partner without nexus in the state was allowed to obtain a refund of the corporation business tax paid on its behalf by its limited partnership.
This provision takes effect for tax years ending after July 1, 2014, and will apply to calendar-year taxpayers and some fiscal-year taxpayers retroactively. Taxpayers should consider the impact of this new requirement before filing their New Jersey returns.
Net operating losses
AB 3486 requires taxpayers to reduce their newly generated NOLs and previously generated NOL carryovers by any amount excluded from federal taxable income for debt discharged on account of bankruptcy, insolvency or qualified farm indebtedness.
This provision takes effect for tax years ending after July 1, 2014, and will apply to calendar-year taxpayers and some fiscal-year taxpayers retroactively. Taxpayers should review their current and newly generated NOLs to determine the impact of this decoupling provision.
Sales and use tax nexus
Prior to the enactment of AB 3486, New Jersey defined "sellers" who are required to collect and remit sales and use tax to include "person[s] who solicits business either by employees, independent contractors, agents or other representatives or by distribution of catalogs or other advertising matter and by reason thereof makes sales to persons within the state of tangible personal property, specified digital products or services, the use of which is taxed by this act."2
The new law creates a "click-through nexus" presumption, under which a company is deemed to have New Jersey nexus when the person making sales enters into an agreement with an independent contractor or any other representative having physical presence in New Jersey, whereby, for a commission or other consideration, the independent contractor or representative directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, and the cumulative gross receipts from sales to customers in New Jersey who were referred by all independent contractors or representatives that have this type of an agreement with the person making the sales are in excess of $10,000 during the previous four trailing quarters.
Like with click-through nexus laws now being adopted by many states, if a company has an arrangement with a third party whose website directs customers to the company site for sales, New Jersey may treat that company as having nexus with New Jersey even without a physical presence there. Much of the controversy surrounding this type of new nexus provision is expected to center around the distinction between when the third party's direction to the company site constitutes "advertising," which will not trigger a sales tax liability, or "solicitation," which does. For more information on the status of click-through nexus provisions in other states, as well as other sales tax issues related to remote sellers, please see our website.
The altered definition of seller is effective for sales made starting July 1, 2014. Accordingly, impacted sellers have no time to implement sales tax collection system changes and may already have made taxable sales without collecting the appropriate amount of New Jersey tax.
The changes implemented by AB 3486 may be particularly burdensome for impacted taxpayers in terms of both cash taxes and compliance requirements and should be reviewed and addressed as soon as possible. Additionally, these changes may have significant financial statement implications in the reporting period that includes the June 30, 2014, enactment date, and taxpayers should consider the financial statement impact of AB 3486 in accounting for both income and sales tax.
2 N.J. Rev. Stat. section 54:32B-2 (i)(1)(C).