During September 2023, the New Jersey Division of Taxation released several Technical Bulletins providing guidance on key Corporation Business Tax (CBT) issues such as nexus, combined group filing methods, and the tax treatment of global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII) to reflect major tax reform legislation enacted on July 3, 2023.1 The nexus guidance addresses implementation of the new bright-line standard as well as the application of Public Law 86-272 (P.L. 86-272) protection to transactions conducted over the internet. In the combined group filing methods guidance, the Division discusses changes in allocation, group composition, and the treatment of income excluded from federal taxation by tax treaties. The GILTI and FDII bulletin reflects statutory amendments treating GILTI as dividend income. All of the new guidance applies to privilege periods ending on and after July 31, 2023.
Nexus
The Division issued new and expanded nexus guidance that covers bright-line economic nexus and includes an updated discussion of P.L. 86-272.2 Also, the new guidance addresses nexus in the context of combined reporting, tax treaties, and disregarded entities. The Division’s existing nexus guidance has been revised to clarify that it applies to privilege periods ending before July 31, 2023.3
Bright-line nexus
As amended by A.B. 5323, for taxable years ending on and after July 31, 2023, a corporation deriving receipts from sources within New Jersey is deemed to have substantial nexus and is subject to the CBT if it meets either of the following criteria during its fiscal or calendar year: (i) derives more than $100,000 in receipts from sources within New Jersey; or (ii) has 200 or more separate transactions delivered to customers in New Jersey.4 The guidance clarifies that the economic thresholds apply to any taxpayer subject to the CBT regardless of filing method. A member of a combined group is a taxable member if it meets an economic threshold. In determining whether receipts and transactions are sourced to New Jersey for purposes of the thresholds, the CBT statutory sourcing provisions are applied.5 If a corporation does not meet bright-line economic thresholds, it could still have nexus if it meets any of the other statutory, regulatory or case law nexus requirements.6 For corporate partners that are unitary with a partnership that has New Jersey receipts or transactions with New Jersey customers, the corporate partner has nexus with the state if the partner’s proportionate share of the partnership’s activities in New Jersey satisfies the bright-line economic nexus thresholds.
P.L. 86-272
P.L. 86-272 is a 1959 federal law that limits the state taxation of income from sales of tangible personal property if the taxpayer’s only business activities in the state are the solicitation of orders that are approved and shipped from outside the state.7 In August 2021, the Multistate Tax Commission (MTC) adopted revised guidance addressing the interpretation of P.L. 86-272 to reflect the treatment of internet business activities.8 The New Jersey guidance addressing P.L. 86-272 that previously had been in effect provided a list of 13 traditional business activities in the state that created CBT nexus and exceeded the protections of the federal law. The updated nexus guidance includes the same 13 business activities and adds 12 modern business activities that, in the view of the Division, exceed P.L. 86-272 protection. Also, the guidance adds a list of 13 activities that do not exceed the protection provided by P.L. 86-272.
The treatment of the internet activities added to New Jersey’s guidance generally is consistent with the MTC’s revised guidance, though New Jersey does not specifically reference the MTC as a source for the changes. Similar to the MTC’s guidance, New Jersey’s guidance provides that P.L. 86-272 protection does not apply to the placement of “cookies” on computers and devices in the state that are used to gather market or product research, but the placement of “cookies” for other reasons is protected. New Jersey’s guidance differs from the MTC’s guidance by explaining that sales and activities involving financial products, financial instruments, and financial services are not protected by P.L. 86-272 because they are not tangible personal property. Unlike the MTC’s guidance, the New Jersey guidance provides that the offering, soliciting, selling, accepting, or buying of digital assets such as virtual currency or non-fungible tokens (NFTs) and/or offering of services pertaining to them is the offering and selling of financial products, financial instruments, and financial services and is not P.L. 86-272 protected.
Independent contractors may solicit or make sales or maintain an office without subjecting a company to liability for CBT based on or measured by net income.9 Because all combined groups are now required to use the Finnigan method,10 a combined group cannot claim P.L. 86-272 protection if one of the members has activities that are not protected or exceed the protections of P.L. 86-272.
Combined reporting
The combined group and the members of the group are considered taxpayers under New Jersey law and the combined group is taxed as one taxpayer. A member of the combined group may have nexus with the state by deriving New Jersey receipts from the unitary business or may have nexus independent of the group. A member also may be a taxable member if the corporation is deriving receipts from New Jersey sources that meet the bright-line economic nexus threshold. All combined groups must use the Finnigan method to allocate receipts. Thus, the New Jersey receipts of all the members that were not eliminated as transactions between group members must be included in the numerator.
Tax treaties
New Jersey follows the effect of federal tax treaties, with the exception of tax returns filed using a worldwide group filing method. Non-U.S. corporations that are members of a worldwide group combined return must include their treaty protected income or loss and are taxable members if they have nexus with New Jersey. For all other filers, income exempt from federal tax under a treaty is also exempt from New Jersey CBT. A non-U.S. corporation with tax treaty protection, that is a member of a water’s-edge combined group or affiliated group, is a taxable member if it has nexus with New Jersey. However, the items of treaty protected income or loss are excluded from the income of the combined group.
Disregarded entities
A business entity that is treated as a disregarded entity for federal income tax purposes is also treated as a disregarded entity for New Jersey CBT purposes. When evaluating whether a taxpayer has nexus with New Jersey, the attributes and activities of the disregarded entity are included as the taxpayer’s attributes and activities for determining whether a taxpayer has nexus.
Combined reporting filing methods
The Department issued new guidance for combined group filing methods to reflect statutory changes enacted by A.B. 5323.11 The Division’s existing combined group guidance was updated to indicate that it applies to privilege periods ending before July 31, 2023.12 Also, the existing guidance notes that the water’s-edge and worldwide group combined returns historically used the Joyce method, but affiliated group combined returns followed the Finnigan method. The existing guidance further explains that the recent legislation amended the water’s-edge inclusion categories to include more entities in the group.
Apportionment (allocation) method
As amended by A.B. 5323, for privilege periods ending on and after July 31, 2023, New Jersey has adopted the Finnigan approach as the allocation method for all combined groups.13 In addition, the combined group is treated as one taxpayer for purposes of sourcing the unitary receipts. The numerator is derived from all members of the group, regardless of whether a member has nexus with New Jersey.
Water’s-edge group
Under the default water’s-edge group filing method, the combined group considers the income and allocation factors of only the statutorily mandated members. The guidance continues to list four categories of members that must be included in the water’s-edge combined group, but the fourth category has been amended to include any member, wherever incorporated or formed, with effectively connected income or loss within the meaning of the Internal Revenue Code (IRC) as modified by the CBT.14 A non-U.S. corporation from a foreign nation with a comprehensive tax treaty with the U.S. does not include in entire net income (ENI) any item of income or loss excluded from federal taxable income under the treaty.15 For a non-U.S. corporation, only the member’s effectively connected income or loss reported for federal purposes, as modified by the CBT, is included in ENI of the combined group.16
One-year exception to change combined return election in 2023 tax year
A New Jersey combined return defaults to the water’s-edge method unless the managerial member makes a worldwide or affiliated group election. In general, the election must be made on a timely filed original return in the tax year it becomes effective. The election is binding for the tax year of the election and the subsequent five tax years. Due to the amendments made by A.B. 5323, the Division is providing a one-time exception to prospectively allow a change to the combined group’s filing method on 2023 Form CBT-100U. The filing method election selected on a prior Form CBT-100U will not be binding. Any election the combined group makes on its 2023 return will be considered the start of the five-year binding period.17
Worldwide and affiliated group elections
When making a worldwide group election, the combined group must include all members and all the income, attributes, and allocation factors of all the worldwide business entities that are members of the unitary combined group, regardless of whether the members filed a federal tax return or federal consolidated return. The guidance adds new language providing that the combined group must include all the income and attributes of these members without regard to terms of a tax treaty. Thus, they must include income that is protected by a treaty for federal tax purposes.
An affiliated group combined return effectively includes the U.S. footprint of a multinational business without application of the unitary relationship concept.18 Non-U.S. corporations that do not file a federal return cannot be included in the New Jersey affiliated group combined return. An affiliated group must include all U.S. domestic corporations19 that are commonly owned by any member of the group.20 For a non-U.S. corporation that is a member of an affiliated group because it files a federal return and has effectively connected income, only the member’s effectively connected income reported for federal purposes is included in the group’s ENI. A non-U.S. corporation that is a member of a New Jersey affiliated group that is incorporated or formed in another nation with a comprehensive tax treaty with the U.S. does not include in ENI any item of income or loss excluded from federal taxable income under the treaty.
Treatment of GILTI and FDII
The Division issued guidance that discusses the changes to the CBT treatment of GILTI, the IRC Sec. 250 deduction, and FDII.21 Also, the Division updated its existing guidance on GILTI and FDII to reflect that it applies to privilege periods ending before July 31, 2023.22
As amended by A.B. 5323, effective for privilege periods ending on and after July 31, 2023, GILTI is treated as a dividend for New Jersey purposes.23 The IRC Sec. 250 deductions for GILTI and FDII are no longer allowed because the New Jersey statute providing these deductions has been repealed. The gross amount of FDII is included in ENI for CBT purposes. The dividend exclusion applies after the New Jersey additions but before the state deductions to ENI. Dividends and deemed dividends from 80% or more owned subsidiaries are 100% excluded from ENI. Also, dividends and deemed dividends from more than 50% but less than 80% owned subsidiaries are 50% excluded. The recent legislation includes a claw-back provision requiring the dividend exclusion to be reduced by 5% of the dividends and deemed dividends that the taxpayer receives during a particular privilege period.24 Thus, depending on the level of ownership, the exclusion is reduced from 100% to 95% or 50% to 45%.
Commentary
The Technical Bulletins provide useful guidance in interpreting and applying some of the major provisions of the significant tax reform legislation enacted by New Jersey in July. The Division is planning to promulgate regulations for some of these topics in the coming months, but the interim guidance provides some level of clarity for taxpayers. In particular, the guidance on nexus and P.L. 86-272 protection as it applies to internet transactions is noteworthy. In 2022, California issued administrative guidance following the MTC’s revised guidance on P.L. 86-27225 and New York released a draft regulation adopting the MTC’s guidance.26 Also, the Minnesota Department of Revenue issued draft guidance earlier this year addressing the MTC’s revised guidance.27 New Jersey is the latest state to follow the MTC’s guidance on P.L. 86-272 as it applies to internet transactions, but the New Jersey guidance is unique because it expressly provides that the protection does not apply to the sale of NFTs. It will be interesting to see if other states adopt a similar position on NFTs. In any event, this guidance should be carefully considered in determining whether a business has nexus with New Jersey. To the extent that such business has nexus under the new provisions, the Division has advised voluntary registration with New Jersey through the Division’s voluntary disclosure program.
The combined group filing method guidance should be closely examined because there were some major statutory changes concerning allocation, group composition, and the treatment of income subject to tax treaty protection. In light of these amendments, it may be advantageous for a combined group to prospectively change its filing method on the 2023 return. Combined groups generally are locked into the same filing method for five subsequent tax years, but the Division is providing a one-time opportunity to make this change in light of the significant statutory amendments.28
Finally, the guidance on GILTI and FDII is informative because New Jersey substantially changed the treatment of this income in its recent legislation. The guidance should provide useful direction in making the GILTI and FDII calculations for tax periods ending on and after July 31, 2023.
1 Ch. 96 (A.B. 5323), Laws 2023. For further discussion of this legislation, see GT SALT Alert: New Jersey makes many changes to corporation business tax. This SALT Alert discusses the major guidance that was released during September 2023. We plan to release another SALT Alert that covers the guidance issued in October 2023.
2 Technical Bulletin TB-108, New Jersey Division of Taxation, Sept. 5, 2023.
3 Technical Bulletin TB-79(R), New Jersey Division of Taxation, revised Sept. 5, 2023.
4 A.B. 5323, § 6.
5 Thus, market-based sourcing is used for service receipts and transactions.
6 The guidance cites nexus requirements under N.J. Rev. Stat. § 54:10A-2 and N.J. Admin. Code §§ 18:7-1.6–18:7-1.25.
7 Pub. L. No. 86-272, 15 U.S.C. §§ 381-384.
8 Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States Under Public Law 86-272, Multistate Tax Commission, revised Aug. 4, 2021. The revised statement adds a subsection to determine what constitutes protected or unprotected activities under federal law, specifically addressing activities conducted using the internet. In general, when a business interacts with a customer via the business’s website or app, it is engaged in “business activity” within the customer’s state that exceeds P.L. 86-272 protection. However, if the website merely presents static text or photos, P.L. 86-272 protection applies. The statement provides a listing of 11 different activities conducted by internet businesses and explains whether they are protected for P.L. 86-272 purposes. States are not bound by the MTC’s revised statement and are responsible for adopting its principles.
9 However, a corporation is subject to an income-based tax if the independent contractor maintains a stock of goods in the state under consignment or for purposes other than for display and solicitation.
10 Under A.B. 5323, New Jersey changed from a Joyce to a Finnigan approach. The Joyce and Finnigan methods refer to two California tax matters, Appeal of Joyce Inc., Dkt. No. 66-SBE-070 (Cal. State Bd. of Equal. Nov. 23, 1966) and Appeal of Finnigan, Dkt. No. 88-SBE-022 (Cal. State Bd. of Equal. Aug. 25, 1988). As explained in the fiscal note for A.B. 5323, the Joyce rule only requires the inclusion of New Jersey receipts from group members with CBT nexus in the numerator of the apportionment factor, while the Finnigan rule includes the New Jersey receipts of all group members, whether they independently have CBT nexus or not, in the numerator of the apportionment factor.
11 Technical Bulletin TB-109, New Jersey Division of Taxation, Sept. 5, 2023.
12 Technical Bulletin TB-89(R), New Jersey Division of Taxation, revised Sept. 5, 2023.
13 New Jersey refers to the concept of apportionment as allocation.
14 The member is included in the group only to the extent of its effectively connected income or loss, taking into account items of expense and allocation factors associated with the effectively connected income or loss.
15 Deductions, exclusions, or eliminations are not permitted for any excluded income or loss. The receipts attributable to the excluded items also are excluded from the allocation factor.
16 If a non-U.S. corporation that is a member of a water’s-edge group did not file a federal return, the New Jersey return includes the member’s non-treaty protected U.S. source income (or loss) that would be effectively connected income (or loss) as if the member had been conducting a business effectively connected to the U.S.
17 No retroactive changes in filing status will be permitted for tax years prior to 2023.
18 Note that an affiliated group election by the U.S. domestic corporations does not relieve non-U.S. corporations of their New Jersey CBT liability. Any non-U.S. corporation organized outside the U.S. that does not file a federal return but has nexus with New Jersey must still file a separate New Jersey CBT return.
19 “U.S. domestic corporations” include entities incorporated or formed under the laws of a foreign country that are required to file federal tax returns if the entities have effectively connected income under federal law.
20 The Division interprets “commonly owned” to mean the ownership rules under IRC Sec. 318.
21 Technical Bulletin TB-110, New Jersey Division of Taxation, Sept. 12, 2023.
22 Technical Bulletin TB-92(R), New Jersey Division of Taxation, revised Sept. 12, 2023; Technical Bulletin TB-88(R), New Jersey Division of Taxation, revised Sept. 12, 2023.
23 GILTI may be excluded as a dividend or eliminated as an intercompany elimination under New Jersey law.
24 The guidance also includes specific discussions of: (i) controlled foreign corporation (CFC) income that generated the GILTI; (ii) reporting GILTI and FDII on Schedule J; (iii) separate return filers; (iv) water’s-edge basis or affiliated group basis where a CFC is not included in the combined group; (v) water’s-edge basis where a CFC is included in the combined group; (vi) worldwide group basis where a CFC is included in the combined group; and (vii) GILTI and FDII derived from a combined group member’s independent business operations.
25 For additional information, see GT SALT Alert: California guidance covers P.L. 86-272 protection.
26 For further information, see GT SALT Alert: New York finalizing corporate business tax reform.
27 For a discussion of this proposed guidance, see GT State and Local Tax News for May 2023: Minnesota considering adoption of MTC’s guidance on P.L. 86-272.
28 Note that the Division is providing penalty relief relating to combined group filing methods. The Division will not penalize taxpayers for filing their 2019–2022 returns following applicable year return instructions or the information provided in the Technical Bulletins or web-notices. Taxpayers will not be penalized if they choose a different combined group filing method option when they file their 2023 Form CBT-100U.
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