Over the past several weeks, state and local governments have issued a slew of “stay-in-place” or “shelter-in-place” orders mandating the closure of all “nonessential businesses” and requiring all persons to self-isolate. For most companies, this means that most, if not all, of their employees are required to work remotely. While telework has become a great way for businesses to protect their employees from the Coronavirus (COVID-19), it may also be exposing the businesses to taxation in states where they may not otherwise have sufficient nexus. This is because employees may be working remotely from states where a business does not otherwise have a presence. Under the traditional nexus rules, the employees’ work in these states would likely be sufficient to create nexus such that the states can tax the business. This seems unfair given that the federal, state and local governments are strongly encouraging individuals not to travel and to work remotely.
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 [...]
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.
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.