New Jersey’s Fiscal 2015 Budget, signed by Governor Chris Christie on June 30, 2014, includes Assembly Bill 3486 which contains tax provisions that may increase multistate taxpayers’ New Jersey income taxes. In addition, the bill includes “click-through” nexus provisions that may impose New Jersey sales tax nexus upon non-New Jersey entities. This post will summarize some of the more significant portions of the bill that may result in New Jersey tax traffic headaches for multistate taxpayers.
Income Tax Concerns
A.B.3486 contains several provisions that may increase your New Jersey income taxes.
Operational versus Nonoperational Income: Typically referred to as “business” versus “non-business” income in other states, the bill broadens New Jersey’s definition of “operational.” Specifically, it defines “operational” income as “income from tangible and intangible property if the acquisition, management, or disposition of the property constitute an integral part of the taxpayer’s regular trade or business operations and includes investment income serving an operational function.” Thus if any of the three factors are met, the income is deemed to be “operational” income. Prior to the bill’s adoption, the definition of “operational” income required that all three factors had to be satisfied. This provision is applicable to all tax years ending on or after July 1, 2014.
Net Operating Loss Adjustment for Debt Cancellation: The bill also provides for an “adjustment”, i.e. reduction, in a corporation’s New Jersey NOL, corresponding to the amount of income excluded from federal taxable income pursuant to the application of IRC Sections 108(a)(1)(A), (B), or (C). This provision is applicable to all tax years ending on or after July 1, 2014 inclusive of any affected NOL carryover to such period.
Partnerships And New Jersey Non-Resident Partners: As a result of A.B. 3486, nonresident partners must file a New Jersey tax return that reports income subject to tax in New Jersey in order to be eligible to apply the tax paid by the partnership which is credited to the nonresident partner’s partnership account against its tax liability. In addition, A.B. 3486 indicates that a partnership cannot “claim a refund of payments credited to any of its nonresident partners.” This provision is applicable to all tax years ending on or after July 1, 2014.
Each of these provisions may pose complex issues to multistate taxpayers that warrant further analysis.
Sales Tax Concerns: “Click-Through” Nexus Alert
The bill also expands New Jersey’s sales tax nexus by adopting a “click-through” nexus provision. Pursuant to New Jersey’s new sales tax nexus provision a “person making sales of tangible personal property, specified digital products, or services taxable under the “Sales and Use Tax Act,” P.L.1966, c. 30 (C.54:32B-1 et seq.) shall be presumed to be soliciting business through an independent contractor or other representative” if:
- The person making sales enters into an agreement with an independent contractor having physical presence in this State or other representative having physical presence in this State;
- The agreement calls for a commission or other consideration, under which 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 this State who were referred by all independent contractors or representatives that have this type of an agreement with the person making sales are in excess of $10,000 during the preceding four quarterly periods ending on the last day of March, June, September, and December.
The presumption set forth by this provision “may be rebutted by proof that the independent contractor or rep with whom the person making sales has an agreement did not engage in any solicitation in the State on behalf of the person that would satisfy the nexus requirements of the United States Constitution during the four quarterly periods in question. Nothing in this subparagraph shall be construed to narrow the scope of the terms independent contractor or other representative for purposes of any other provision of the ‘Sales and Use Tax Act,’ P.L.1966, c. 30 (C.54:32B-1 et seq.).”
New Jersey’s “click-through” nexus provision applies to sales, transactions involving taxable services rendered and uses occurring on or after July 1, 2014.
Takeaway Tax Traffic Alert – Be Prepared To Stop
I hope our summary of the significant tax provisions of A.B. 3486 provides a “tax traffic” alert of the potential New Jersey income and sales tax concerns that may affect multistate taxpayers. As I always slow down and heed the messages on those highly effective electronic signs that now guide travelers along the New Jersey Turnpike, multistate taxpayers and their tax advisors would be well advised to be “prepared to stop” and fully review A.B. 3486 provisions for potential ramifications to their New Jersey income tax and sales tax nexus.