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.
Terms of Initiative and Consequences of Failing to Participate
The compliance initiative runs from June 15, 2021 through October 15, 2021. In order to participate, a non-filing corporation must generally meet the following requirements:
- The non-filer must not have been incorporated in New Jersey, authorized, or registered to do business in New Jersey prior to 2019.
- The non-filerer must provide its managerial member’s tax registration number and file returns for the 2016–2018 tax years.
- The non-filer must pay any tax due within 45 days of executing the closing agreement. The Division will issue a bill for any associated interest, which must be paid within 30 days.
In exchange, the Division will waive any penalties and not require any returns to be filed for periods prior to 2016.
Companies that fail to come forward by October 15, will be prohibited from participating in the Division’s normal voluntary disclosure program. If identified and audited, such companies will be subject to penalties of up to 30% of the tax due and may be required to file returns for years earlier than 2016 to the extent they had nexus with the state. Previously, in cases where a non-filer has been discovered on audit, the Division’s Office Audit Branch has threatened that it could assert nexus and subject the taxpayer to CBT as far back as 1946.
Takeaways and Action Items
Because of detailed information gleaned from combined returns, the Division is much more likely to identify previous non-filers and assert nexus. But based on New Jersey case law, a company with income from New Jersey sources may not have nexus for CBT purposes—despite the broad statutory “deriving receipts” nexus standard. Out-of-state companies should weigh the strength of their no-nexus position against the potential benefits of participating in the Division’s compliance program.
In any case, companies that decide to come forward under the program should evaluate their apportionment method before filing any returns. New Jersey uses a single sales fraction for apportionment purposes, but there is tremendous flexibility under the relevant regulations and case law. Therefore, even if a company decides to concede nexus, the potential liability can be mitigated by using a more favorable method for sourcing its receipts.
If you have questions about the Division’s compliance initiative, please contact one of the authors of this alert, or one of the Reed Smith attorneys with whom you usually work.
- See P.L. 2018, c. 48 (July 1, 2018) (enacting combined reporting); see also P.L. 2018, c. 131, Sec. 33 (applying combined reporting to tax years “ending on and after July 31, 2019”).
- See New Jersey Division of Taxation, Corporation Business Tax – Combined Reporting Initiative, available at state.nj.us (last updated June 3, 2021).
- See N.J.S.A. 54:10A–2.
- 908 A.2d 176 (N.J. 2006).
- 25 N.J. Tax 158 (N.J. Tax 2009).
- Docket No. 003249–2012 (N.J. Tax Feb. 26, 2019).
Client Alert 2021-159