NJ Clarifies Nexus Creating Activities Subject to Sales and Use Tax

The New Jersey Division of Taxation Regulatory Services Branch recently issued a Technical Bulletin regarding the guidelines that create a nexus in the state and subject an individual to the sales and use tax.

This Technical Bulletin comes in response to a U.S. Supreme Court decision which held that a person must have an established physical presence in a state before that state’s government can impose sales tax, as stated in the Commerce Clause of the Constitution.

New Jersey defined activities that create a nexus as an individual with a physical presence in the state that sells taxable items and services. This individual must then register with the New Jersey Department of Revenue, whereupon the person is required to collect and remit sales tax when the items sold are delivered to a location within state borders, or if the act of the sale itself was performed in New Jersey.

Activities that create a nexus in New Jersey

Activities that trigger a nexus in New Jersey include the sale, leasing or renting of tangible personal property as well as digital products and services. Further, if an individual maintains an office, warehouse, service enterprise or other place of business. These activities also involve having personnel within state borders to include any employees, independent contractors, agents and representatives. An individual may also be subject to the sales and use tax if the person sells, stores, delivers or transports energy to customers. Finally, various other activities include parking or storing motor vehicles, delivering goods sold in the seller’s own vehicle and collecting membership fees for health, fitness, athletic, sporting, or shopping club property or facilities.

E-commerce sales and use tax exemption

Under N.J.S.A. 54:32B-2(i)(1), a rebuttable presumption is created that a foreign seller who makes taxable sale of tangible personal property, specified digital products or services is soliciting business in New Jersey. Therefore, the person has created a nexus in New Jersey if the seller enters into an agreement with a resident of New Jersey, who is an independent contractor and/or representative for compensation in exchange for referrals. The customer referrals to a foreign seller may be made via a website link or other means. The next condition is that the foreign seller has more than $10,000 in sales revenue from these referrals to customers in New Jersey for the prior four quarterly periods ending March, June, September and December.

If the foreign seller meets both of these requirements, the person has created a nexus because he or she is presumed to be soliciting business within the state boundaries of New Jersey. The seller must then register with the NJ Department of Revenue to collect and remit the sales tax on all taxable sales delivered in New Jersey.

Significance of the Technical Bulletin

As the presumption of a nexus is rebuttable, the foreign seller is eligible to provide proof that the independent contractor and/or representative did not solicit business on the seller’s behalf in New Jersey. Therefore, the burden of proof is on the seller to provide a detailed explanation as to why he or she is not subject to the state sales and use tax.

In light of the state budget woes and pension deficit, this revision is not unexpected. Although consumers may resent the imposition of sales tax on purchases that escaped tax, one sees the benefit to local retailers who have complained for years about being disadvantaged. Unfortunately for local retailers and the state, the grasp of the new rule can be avoided by using non-New Jersey sources fro referrals.