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New Jersey Issues Guidance on BEIP Grant Conversion

This month the New Jersey Economic Development Authority (the Authority) provided businesses with guidance, in the form of Frequently Asked Questions, on how to elect to have their unpaid Business Employment Incentive Program (the Program or BEIP) grants converted into tax credits pursuant to N.J. Rev. Stat. § 34:1B-129.

Under the Program, New Jersey awarded qualifying businesses cash grants for hiring new employees in the state for a term of up to 10 years.  Since the Program’s inception in 1996, the Authority has executed 499 BEIP agreements valued at nearly $1.6 billion.  However, since 2013, the New Jersey legislature has not funded the Program, and thus many businesses have not received grant payments owed by the state.

In January, Governor Christie signed P.L. 2015, c. 194 into law, permitting the voluntary conversion of outstanding BEIP grants into tax credits. The option to convert a BEIP grant to a tax credit is New Jersey’s attempt to provide relief to those businesses that have been awarded grants but have not received grant payments. The law, unfortunately, was short on details.

Businesses that wish to take advantage of the grant conversion must elect to convert the grant into a tax credit by July 11, 2016. Once the election is made, it is irrevocable.

Because a business cannot predict with any certainty whether the New Jersey legislature will fund the Program in future years, a business has to decide whether to opt to convert its grant. If a business does not elect to convert its grant, it risks losing all of its unpaid BEIP grants. On the other hand, if a business makes the election and the Program is funded in future years, the business will have no choice but to receive tax credits even though a cash payment might be more valuable to the business.

If a business elects to convert its grant commitments to tax credits, the credits will be issued over a period of years as set forth in the statute.   This delayed payment means that the business will suffer an additional loss of money owed by New Jersey on account of the time value of money. The statute provides that the BEIP tax credit must be used in the designated years and may not be carried forward. The credit is a priority credit and should be applied before all other credits. Accordingly, it is important to consider whether the other credits claimed by a business are refundable when deciding whether to make the election and calculating the potential benefit of conversion.

In anticipation of the July 11, 2016, deadline for businesses to opt to convert their grant into a tax credit, the Authority has provided guidance on how to make the election. This guidance, as mentioned above, is informal and not a regulation. The guidance provides that to make the election, a business must submit an executed Amendment to Agreement. The form Amendments to Agreement for different tax types are available on the Authority’s website.  Once a business opts to convert [...]

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Focus on Tax Controversy – December 2015

McDermott Will & Emery has released the December 2015 issue of Focus on Tax Controversy, which provides insight into the complex issues surrounding U.S. federal, international, and state and local tax controversies, including Internal Revenue Service audits and appeals, competent authority matters and trial and appellate litigation.

Mark Yopp authored an article entitled “Waiting for Relief from Retroactivity,” which discusses how courts are expanding the ability of state legislatures to retroactively change taxpayer liability going back many years.

View the full issue (PDF).




U.S. Supreme Court’s Wynne Decision Calls New York’s Statutory Resident Scheme into Question

On May 18, the U.S. Supreme Court issued its decision in Comptroller of the Treasury of Maryland v. Wynne. In short, the Court, in a five-to-four decision written by Justice Alito, handed the taxpayer a victory by holding that the county income tax portion of Maryland’s personal income tax scheme violated the dormant U.S. Constitution’s Commerce Clause.

Specifically, the Court concluded that the county income tax imposed under Maryland law failed the internal consistency test under the dormant Commerce Clause, because it is imposed on both residents and non-residents with Maryland residents not getting a credit against that Maryland local tax for income taxes paid to other jurisdictions (residents are given a credit against the Maryland state income tax for taxes paid to other jurisdictions).

The Supreme Court emphatically held (as emphatically as the Court can be in a five-to-four decision) that the dormant Commerce Clause’s internal consistency test applies to individual income taxes. The Court’s holding does create a perilous situation for any state or local income taxes that either do not provide a credit for taxes paid to other jurisdictions or limit the scope of such a credit in some way.

The internal consistency test—one of the methods used by the Supreme Court to examine whether a state tax imposition discriminates against interstate commerce in violation of the dormant Commerce Clause—starts by assuming that every state has the same tax structure as the state with the tax at issue. If that hypothetical scenario places interstate commerce at a disadvantage compared to intrastate commerce by imposing a risk of multiple taxation, then the tax fails the internal consistency test and is unconstitutional.

Although the Wynne decision does not address the validity of other taxes beyond the Maryland county personal income tax, the decision does create significant doubt as to the validity of certain other state and local taxes such as the New York State personal income tax in the way it defines “resident.” New York State imposes its income tax on residents on all of their income and on non-residents on their income earned in the state; this is similar to the Maryland county income tax at issue in Wynne.

“Resident” is defined as either a domiciliary of New York or a person who is not a domiciliary of New York but has a permanent place of abode in New York and spends more than 183 days in New York during the tax year. N.Y. Tax Law § 605. (New York City has a comparable definition of resident.) N.Y.C. Administrative Code § 11-1705. Thus a person may be taxed as a statutory resident solely because they maintain living quarters in the state and spend more than 183 days in the state, even if those days have absolutely nothing to do with the living quarters; this category of non-domiciliary resident is commonly referred to a “statutory resident.” As such, under New York’s tax scheme, a person can be a resident of two states—where domiciled and where a statutory resident—and thus [...]

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Taxpayer Overcomes New Jersey Amnesty Penalty

The Supreme Court of New Jersey recently affirmed a decision that amnesty and late‑filing penalties did not apply to the taxpayers in United Parcel Serv. Gen. Servs. Co. v. Dir., Div. of Taxation, No. 072421 (N.J. Dec. 4, 2014).  In all, approximately $2 million in penalties and related interest were abated.

The primary substantive issue was imputation of interest related to United Parcel Service’s (UPS’s) cash management system, which hinged on whether the intercompany cash transfers were loans or dividends.  After an audit of the taxpayers’ Corporation Business Tax Returns for the years at issue, the New Jersey Division of Taxation assessed additional tax primarily resulting from the imputation of interest on the intercompany cash transfers, amnesty penalties related to the 1996 and 2002 amnesties, late-filing penalties and interest.  Following a trial, the Tax Court held against the taxpayer on the cash management issue, but noted that “[t]he case law discussed . . . could be interpreted to suggest that the cash management system utilized by the UPS Group may not have” resulted in the tax consequences advanced by the Division of Taxation.  The Tax Court found reasonable cause for the abatement of late-filing penalties and held that amnesty penalties did not apply to the taxpayers.  The Appellate Division affirmed the Tax Court’s decision.

With respect to the amnesty penalties related to the 1996 and 2002 tax amnesties, the statute imposed the amnesty penalties when taxpayers failed to pay liabilities “eligible to be satisfied” through the amnesty programs.  The Tax Court and Appellate Division found that the meaning of the phrase “eligible to be satisfied” was unclear.  Therefore, the lower courts looked to the legislative history for the amnesty programs, which included a statement by the New Jersey Treasurer that “the bill’s penalties will not be applied to deficiencies assessed pursuant to a question of law or fact uncovered through routine audits of taxpayers otherwise in compliance with filing and payment requirements of State taxes.”  The New Jersey Supreme Court looked to that same legislative history.  Noting that the taxpayers had timely filed returns and paid the tax shown as due on those returns, and that the Division of Taxation had uncovered issues of fact and law on audit of the tax returns, the court upheld the decision that the amnesty penalties did not apply.

With respect to the late-filing penalties, the taxpayers argued that reasonable cause existed for the abatement of penalties because the taxpayer had taken a good faith filing position with respect to the cash management system, and the imputation of interest on the cash transfers was an issue of first impression in New Jersey.   The New Jersey Supreme Court noted that the case involved genuine issues of fact and law, and there was “no directly pertinent legal authority then in existence” regarding the cash management system.   The court “therefore agree[d] with the Appellate Division and affirm[ed] the Tax Court’s finding that the Division did not exercise properly the discretion that the Legislature afforded to it . . . when it [...]

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New Jersey Tax Court Finds Two Pennsylvania Taxes Are Not Required To Be Added Back

In a Corporation Business Tax (CBT) case, PPL Electric Utilities Corporation v. Director, Division of Taxation, Dkt. No. 000005-2011 (N.J. Tax. Ct. Oct. 2, 2014), the Tax Court of New Jersey found for the taxpayer and held that the Pennsylvania Gross Receipts Tax and Pennsylvania Capital Stock Tax were not required to be added back in computing New Jersey entire net income.

The case involves a 1993 amendment to the CBT statute regarding adding back taxes deducted in computing federal taxable income.  Prior to 1993, the New Jersey statutes required taxpayers to add-back only certain federal taxes and the CBT in computing New Jersey entire net income.  The amendment added a requirement that taxpayers add-back to federal taxable income taxes paid to states other than New Jersey “on or measured by profits or income, or business presence or business activity.”  N.J.S.A. 54:10A-4(k)(2)(C).  According to legislative history cited by the court, prior to the amendment “corporations which [did] business in several states [paid] a lower effective rate of tax on their New Jersey activities than [did] corporations which only [did] business in New Jersey.”  The court explained that the amendment corrected the inequity “by requiring multi-state taxpayers to add-back state taxes similar to that of the CBT.”

The Tax Court concluded that the Pennsylvania Gross Receipts Tax is not subject to the tax add-back, finding that the tax is:  (1) “based solely on the amount of electricity sold, regardless of whether income or profit is realized from such sales and not based upon the taxpayer’s business presence or business activity in Pennsylvania;” and (2) “passed through to the ultimate consumer of electricity.”  The court held that the Pennsylvania Capital Stock Tax was not subject to the tax add-back because it was in substance a property tax.

Interestingly, the Tax Court found that the New Jersey Division of Taxation’s (Division) interpretation of the tax add-back was not only incorrect but also discriminatory.

The 1993 amendment was passed because previously, solely New Jersey taxpayers were taxed on a higher tax basis than similarly situated multi-state taxpayers . . . .  Here, Taxation’s interpretation of the statute discriminates against multi-state taxpayers because they would be required to add-back the Pennsylvania Corporate Income Tax as well as other non-CBT-type taxes imposed by other states, such as the Pennsylvania Gross Receipts Tax and the Pennsylvania Capital Stock Tax, while solely New Jersey taxpayers are only required to add-back CBT-type taxes.  This court finds that the Legislature did not intend to cure one inequity by imposing another.

Given the number of different types of state taxes in existence, this case may have broad ramifications for multi-state taxpayers subject to the CBT.  We have seen the Division make similar adjustments to other companies on audit and this decision should be helpful in disputing those adjustments.  Additionally, multi-state taxpayers may have refund opportunities for similar taxes that they have previously added back.




New Jersey Division of Taxation’s 2014 Tax Resolution Initiative – Not To Be Confused With An Amnesty

The New Jersey Division of Taxation (Division) is trying to help taxpayers resolve unpaid tax liabilities for tax periods 2005 through 2013.  Through November 17, 2014, the Division is offering taxpayers that pay all tax and interest for the applicable periods a waiver of most penalties (but not penalties related to the 2009 amnesty) and any costs of collection or recovery fees.  Notably, this is not an amnesty like those conducted in 2002 and 2009.  It is not statutorily mandated and no penalties may be imposed for non‑participation.  Because the initiative is not statutorily mandated, the Division is not offering something it could not offer at any other time.  However, the Division’s offer to waive most penalties may be a good chance for many taxpayers to resolve issue and move on and is worth considering.




A Very Scary Time of the Year: MTC Joint Audit Selection

With both Halloween and the Multistate Tax Commission (MTC) Income Tax Audit selection nearing, taxpayers should prepare themselves for the possibility of being spooked in the near future.  On Thursday, October 30, from 2-4 pm EST, the MTC Audit Committee—including representatives from the 22 states participating in the upcoming round of joint income tax audits—will be holding a teleconference that will begin with a public comment period.  Because of the inevitable disclosure of confidential taxpayer information, the bulk of this meeting—including selecting the various companies to audit—will take place during the second half of the agenda and be closed to the general public.  Just because a company has completed an audit in the past does not mean this season will be all treats.  The authors have noticed that companies previously audited by the MTC can remain on the list of targets and are often repeat selections.

Unique Complexities

The MTC audit process is not without its share of traps for the unwary.  First and foremost is the effort a taxpayer must expend in managing a multistate audit.  Issues such as differing statute of limitations, the effects of federal Revenue Agent’s Reports (RAR) and net operating loss (NOL) differences on limitations periods, timing of protests, and tax confidentiality become of heightened importance when one auditor is reviewing a taxpayer for multiple states.  Audited taxpayers should also keep in mind that the MTC does not issue the actual deficiency notices – these must come from the states.  As a result there may be certain areas such as credits or refunds that the MTC does not review and must be raised directly with a participating state.

On the substantive side, a primary area of inquiry of an MTC audit has been and is likely to continue to be inter-company transactions.  Historically MTC audits have taken a variety of approaches to disallow a taxpayer’s intercompany structure, including collapsing separate affiliates, applying the sham transaction doctrine, or using aggressive addback concepts.      Another similar concern for taxpayers audited by the MTC is the increased likelihood of transfer pricing issues being raised.  This comes in the wake of the creation of the MTC Arm’s-Length Adjustment Service (ALAS) this summer, led by former Montana Department of Revenue Director Dan Bucks.  The group recently held a transfer pricing summit at which it designed the MTC services to include third-party economic consultants at every stage.  The MTC transfer pricing services are expected to be implemented in mid-2015—just in time for companies selected for an MTC Income Tax Audit to be the test subjects.  Notably, of the nine states committing seed money to the development of a multistate transfer pricing audit service, five (Alabama, Hawaii, Kentucky, New Jersey and the District of Columbia) are participating in the MTC Income Tax Joint Audit Program.  It is not clear whether the two MTC-sponsored audit programs will be intertwined; however, the option was proposed this past summer and remains a possibility as we approach the upcoming audit selections.

Finally, it remains to [...]

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MTC to Hold Transfer Pricing Group Meeting with Third-Party Contract Auditors

On October 6 and 7, 2014, the Multistate Tax Commission (MTC) will hold an Arm’s-Length Adjustment Service (ALAS) Advisory Group Conference at the Atlanta Airport Marriott.  On the first day, third-party contract auditors will give presentations on transfer pricing issues.  An ALAS Advisory Group meeting will be held on the second day.

This past year, the MTC has been designing a joint transfer pricing program.  So far, nine members have committed money to the development of this program: Alabama, the District of Columbia, Florida, Georgia, Hawaii, Iowa, Kentucky, New Jersey and North Carolina.

Dan Bucks, former executive director of the MTC and former director of the Montana Department of Revenue, is the project facilitator.  In the lead-up to the event, he discussed arm’s-length issues with numerous third-party contract auditors.  On October 6, the contract auditors will explain how they believe a multistate transfer pricing program should work and how the MTC would best use their services to conduct transfer pricing audits on behalf of member states.

The list of contract auditors includes Chainbridge Software, Economics Analysis Group, Economists Incorporated, NERA, Peters Advisors, RoyaltyStat and WTP Advisors.  While project facilitator, Dan Bucks, has indicated that this meeting is not an audition for a procurement process, the discussion seems to be headed in that direction and the MTC has not ruled out utilizing third-party audit assistance in the transfer pricing program.

Businesses concerned with the overall direction of the ALAS Advisory Group, including the possibility of subjecting taxpayers to Chainbridge-style audits on a nationwide scale, should contact the authors.  For more information on the conference, please visit the MTC ALAS webpage.




New Jersey Issues Ominously Vague Guidance on New Click-Through Nexus Law

The New Jersey Division of Taxation issued a Notice last week that is hardly reassuring to remote sellers.  The Notice basically paraphrases the new click-through statute, noting that the statutory definition of “seller” was amended to create a rebuttable presumption that an out-of-state seller, who makes taxable sales of goods or services, is soliciting business and has nexus in New Jersey if it (1) enters into an agreement with a representative located in New Jersey for compensation in exchange for referring customers via a link on its website and (2) has sales from those referrals to customers in New Jersey in excess of $10,000 for the four prior quarterly periods.

The Notice provides no guidance for sellers on how they can prove that their New Jersey independent contractors or representatives did not engage in any solicitation on their behalf in New Jersey.  The Notice states that the out-of-state seller may provide proof that the representative did not engage in solicitation, but it does not include any details on what type of proof will be acceptable to the Division.

More troubling is that the Notice does not provide specific relief to arrangements where affiliates are paid on a cost-per-click basis (compensation based solely on the number of clicks rather than a commission on sales resulting from clicks).  States such as California, New York and Pennsylvania have said that such arrangements are indicative of advertising rather than solicitation.  The one example given in New Jersey’s Notice describes a commissioned click-through arrangement; the Notice is silent as to cost-per-click advertising.

It is unclear whether New Jersey will issue additional guidance, but given that the Notice does not provide relief for remote sellers with cost-per-click arrangements, they should not simply rely on California’s and New York’s guidance in the interim.  Instead, they should obtain documentation from all their New Jersey independent contractors and representatives that they are not soliciting business in New Jersey on their behalf, even if they are only compensated on a cost-per-click basis.




New Jersey’s New Laws — Retroactive for Most Companies

A newly passed New Jersey law is interesting both for what it does and for what it does not do.  Assembly bill 3486/Senate bill 2268, attempts to “clarify” four aspects of New Jersey law (retroactively for three of the four!).  The four areas affected by the law change are:  (1) the business/non-business income distinction (called “operational/non-operational income” in New Jersey); (2) a limited partner’s eligibility for a refund of Corporation Business Tax paid on its behalf by a limited partnership; (3) net operating losses involving certain amounts related to bankruptcies, insolvencies, and qualified farm indebtedness; and (4) click-through nexus for sales and use tax purposes.

Business/Non-Business Income Distinction

The distinction between business and non-business income (called “operational” and “non-operational” income in New Jersey) is critical as it determines whether certain income (such as gain from the sale of an asset) can be apportioned among the states or instead much be allocated to only one state.  The law change expands the definition of “operational income” so that many more transactions will result in the generation of apportionable income.  In fact, the law change is estimated to increase revenue by $25 million annually.

Historically, New Jersey’s definition of business (“operational”) income included gain from sale of property “if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations. . .”  N.J.S.A. 54:10A-6.1(5)(a) (emphasis added).  Use of the conjunction “and” caused New Jersey courts to determine that all three activities (“the acquisition, management, and disposition”) must each have been integral parts of the taxpayer’s regular trade or business in order for the gain from the asset to be apportionable business (“operational”) income.  This could be overcome by demonstrating that one of the activities—usually the disposition of an asset—was not an integral part of a taxpayer’s regular trade or business.

The definition was changed, however, to replace the conjunctive “and” with the disjunctive “or” such that it will now read “the acquisition, management, and or disposition of the property constitute an integral parts of the taxpayer’s regular trade or business operations. . .”  Thus, because engaging in any one (or more) of those three activities as part of a taxpayer’s regular trade or business is sufficient, many more transactions will generate apportionable business income.

This provision takes effect for tax years ending after July 1, 2014.  This means that for a calendar year filer the provision takes effect retroactively for the tax year starting January 1, 2014, since the end of the year (December 1, 2014) is after July 1, 2014.  Interestingly, while the legislation refers to this change as a “clarification,” the fact that it is anticipated to increase revenue by $25 million indicates that it is, indeed, a change of law, reiterating that for the test really is a conjunctive one for prior periods.

Overturning the Result of BIS LP v. Director

There has been (and continues to be) a substantial amount of litigation in New Jersey courts regarding tax payments and tax [...]

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