NJ Defines Corporate Business Nexus Guidelines

NJ Defines Corporate Business Nexus Guidelines

The recent Technical Bulletin issued by the New Jersey Division of Taxation established a final set of guidelines for activities that subject a company to the corporate business nexus tax. These guidelines include a detailed description of activities that are outside the protection of Public Law 86-272 for in-state companies, according to a Wolters Kluwer report on the Technical Bulletin.

The corporate business nexus guidelines

All domestic or nonresident corporations are required to pay an annual franchise tax for various privileges that stem from a nexus in the state, as listed in the New Jersey Corporation Business Tax Act. The way this works is that if a foreign company has a nexus in New Jersey, meaning that it has a significant physical presence in the state, it is subject to the corporation business tax. This law now encompasses privileges for companies with a nexus in New Jersey, including exercising a corporate franchise, deriving receipts from revenue sources, communicating or engaging with contacts and conducting business – which includes having employees, owning capital or property and maintaining an office in the state.

The same rules apply to foreign business with a corporate franchise in New Jersey, except for two addendums. If the foreign company is registered with the New Jersey Department of Revenue, and if the business has authorization issued by a New Jersey government department or agency to engage in corporate activities in the state.

Determinants of a corporate business nexus within the state

There are several qualifications that determine whether a business qualifies as having a nexus in New Jersey. These classifications pertain to the nature and extent of business activities, the office and business locations and the continuity and frequency of activities in the state. The corporate business  also evaluates the employment of agents, officers and employees within New Jersey state limits, as well as the location of the actual seat of executive management and/or the individuals in control of the corporation.

Net income tax exemptions for foreign corporations under Public Law 86-272

The state of New Jersey adheres to Public Law 86-272, also known as the Federal Interstate Income Act. This federal law prohibits any state from the imposition of a tax based on the net income a foreign business earned from interstate commerce. Further, the law explains that a foreign company is exempt from a net income-based tax if its only business activities in a state are to solicit orders of tangible personal property, and then have these orders sent outside the state’s borders to be filled for shipment or delivery.

Exceeding the protection of the Federal Interstate Income Act

However, there are certain business activities that exceed the protection of the Federal Interstate Income Act. For instance, the NJ Division of Taxation clarified in the New Jersey Corporation Business Tax Act that if a foreign company conducts business activities in the state that qualify it as having a nexus within the state, it is subject to the corporation business tax that is determined by the net income of the company – not simply the net income earned within the state of New Jersey. This is significant because that foreign company is subject to the corporate business tax due to a nexus in the state, even if its activities are protected by the Federal Interstate Income Act.

Specific business activities not protected under Public Law 86-272

The activities of foreign companies that create a nexus in New Jersey include repairs, installations, maintenance, property collections or repossessions, credit investigations and providing technical support. These business activities also involve conducting training events of any kind for employees and company personnel, consigning tangible personal property, picking up damaged or returned property and maintaining facilities in the state. Further activities outside of the protection of the Federal Interstate Income Act encompass accepting orders or securing deposits on sales, personnel acquisitions for purposes other than solicitation, maintaining displays at in-state locations for longer than two weeks, distributing or exchanging samples for sales solicitation and resolving customer complaints for purposes other than to position sales employees to curry favor with the customer.

Open Issues

It remains to be seen how the conflict between the varying  state rules will be resolved. The New York rule is that if the service is delivered to a New York customer location, it is deemed to be taxable in New York.  New Jersey reportedly will treat the same transaction as a New Jersey sale if the work was performed in New Jersey.  A consultant can perform the work in New Jersey and deliver it on-line to a New York client. 

At some point, a uniform standard imposed on all states would be welcome.  Perhaps, when we enact a VAT we will obtain this as well.