Division of Taxation Using Combined Returns to Target Non-Filers
Historically, New Jersey taxpayers filed their CBT returns on a separate-company basis.1 Effective in 2019, however, New Jersey switched to combined reporting. As part of the unitary CBT return, the managerial member must identify each member in the combined group and describe their New Jersey activities. Armed with this information, the Division has announced that it is in the process of identifying companies that were included in a unitary CBT return and engaged in nexus-creating activities but that failed to file separate-company returns prior to 2019.2
Expansive Statutory Nexus Standard, Contradictory Policies and Case Law
New Jersey's statute provides a broad “deriving receipts” nexus standard and physical presence is not required.3 As explained in the unitary CBT return instructions, an out-of-state corporation has nexus with New Jersey if it: has a certificate of authority or other authorization to do business in the state; derives income or receipts from New Jersey sources; employs or owns capital or property in the state; or engages in contacts in the state.
But New Jersey courts and even the Division itself have vacillated on the scope of nexus-creating activities.
- Lanco, Inc. v. Director.4 Licensing intangibles to affiliate doing business in New Jersey creates nexus regardless of physical presence. Subsequently, the Division applied this nexus standard even if the licensee was immune from CBT under P.L. 86-272.
- AccuZip, Inc. v. Director.5 Licensing canned software to New Jersey customers insufficient to create nexus.
- TAM 2011-22 (December 7, 2011). Royalty payments made to overseas affiliates may be subject to addback but licensor itself generally not subject to CBT.
- Crown Packaging Technology, Inc. v. Director.6 Rejecting bright-line nexus rule for intangible holding companies that derive royalties from affiliates doing business in the state. Rather, nexus determination requires facts and circumstances test that considers the quality and quantity of a company’s contacts with the state.
- TB-86(R) (December 16, 2019). If one member of a combined group has nexus, then no member of the group may claim immunity under P.L. 86–272.
Because of this somewhat contradictory guidance, non-filers need to analyze their activities carefully before agreeing to participate in the compliance initiative.