Several Key Changes to Existing New Jersey Tax Provisions
July 09, 2014
The recently enacted New Jersey State Budget for the 2015 fiscal year contains good news, as well as potentially bad news, for New Jersey taxpayers. The good news: Governor Christie did veto two tax increases that were passed by the legislature. The potential bad news: The new law does make four key changes that take effect for tax years ending on or after July 1, 2014:
- Expanding the definition of “operational income;”
- Requiring more non-resident partners of New Jersey partnerships to file New Jersey returns;
- Subjecting New Jersey “net operating losses” to attribute reduction for cancellation of debt income; and
- Adopting “click-through nexus” for sales and use tax purposes.
Expanded Definition of “Operational Income”
In determining income for purposes of allocation, New Jersey distinguishes between “operational” and “non-operational” income. (In many other states, similar rules differentiate between “business” and “non-business” income.) Until now, taxpayers were required to meet all three factors of N.J.S.A. 54:10A-6.1 in order for their income – such as the gain from the sale of an asset – to be considered apportionable “operational” income. Similar to what other states have done in recent years, the new law in New Jersey replaces “and” with “or” so the key phrase now reads “acquisition, management OR disposition.”
This statutory change substantially broadens the definition of operational income, which should generate more apportionable business income, while limiting the type of litigation recently seen in New Jersey. As a result, taxpayers should carefully review any non-operational income position based on transactions that take place on or after July 1, 2014.
Additional Filing by Non-Resident Partners
Under the new law, nonresident partners of partnerships doing business in New Jersey are required to file an income tax return and to report income subject to tax in New Jersey in order to claim credit for amounts paid on their behalf by the partnership under N.J.S.A. 54:10A-15.11.
Further, a partnership that makes tax payments on behalf of its nonresident partners is no longer permitted to claim a refund for those payments credited to its nonresident partners. This creates administrative as well as possibly constitutional issues, since the excess payments on account may be out of reach to both the nonresident partner and the partnership, and effectively only subjects partnerships with nonresident partners to taxation.
Subjecting Net Operating Losses to Attribute Reduction
Because New Jersey has its own definition of “net operating loss,” the requirement to reduce net operating losses by the amount of cancellation of debt income not reported due to IRC §108(a) was not applicable in New Jersey. Under the new law, any newly generated net operating losses – and any previously-generated NOL carryovers utilized on or after July 1 – must be reduced by any amount excluded from income as a result of debt discharged on account of bankruptcy, insolvency or qualified farm indebtedness.
As a result, taxpayers may need to evaluate their net operating loss carryforward for attribute reduction purposes, if they have previously recognized cancellation of debt income that was not reported for federal and state income tax purposes.
Adopting “Click-Through Nexus” for Sales and Use Tax Purposes
An addition to N.J.S.A. 54:32B-2 attempts to provide “click-through nexus” for those out-of-state sellers that use networks to solicit sales in New Jersey. Under the new law, a seller is now presumed to have nexus for New Jersey sales and use tax purposes when it:
- sells tangible personal property or specified digital products or services;
- contracts with an independent contractor or “other representative” that is located in New Jersey; and
- has cumulative gross receipts in excess of $10,000 during the preceding four calendar quarters.
It should be noted that the presumption of nexus can be rebutted by proof that the in-state representative did not actually solicit sales in New Jersey on behalf of the out-of-state seller. Although similar provisions have been struck down elsewhere (such as in Illinois), these “click-through” nexus provisions have recently been upheld in other states (such as New York).
If you would like to analyze the impact of these tax changes on your business or need additional information, please don’t hesitate to contact your EisnerAmper tax advisor.