On Monday, the New Jersey Division of Taxation's Regulatory Services Branch released a Technical Advisory Memorandum concerning its corporation business tax (CBT) nexus policy. A copy of this TAM, as well as other information and articles concerning New Jersey nexus, is available at: www.reedsmith.com/njnexus.

In the TAM, the Division explained that effective with the 2002 tax year, corporations that "derive receipts from sources within New Jersey or engage in contacts within New Jersey" are subject to tax; that standard, explained the Division, is coextensive with the minimum standards set forth in the U.S. Constitution and federal statutes. The Division defined this minimum constitutional standard by reference to the West Virginia Supreme Court of Appeals' decision in MBNA and the New Jersey Supreme Court's decision in Lanco, which upheld nexus on an out-of-state credit card company and intangible licensing company, respectively.¹

Under the Division's policy, therefore, companies "that solicit business within the State or derive receipts from sources within the State" are subject to CBT-even if they are domiciled outside the State and perform services exclusively from outside the State.

The Division specifically noted that this broad nexus standard applies to financial corporations. The TAM provides that a "financial business corporation, a banking corporation, a credit card company or similar business that has its commercial domicile in another state is subject to tax in this State if during any year it obtains or solicits business or receives gross receipts from sources within this State." A company could face CBT liability even if it does not purposefully market to New Jersey customers. All that is required for nexus is that a company obtain gross receipts from New Jersey sources. The TAM does not distinguish between lending to third-parties and lending to affiliates, so both appear to create nexus. While the TAM does not define when interest receipts are deemed to be "from sources within this State," the Division's typical practice has been to focus first on whether the commercial domicile of the borrower is in New Jersey. Yet when it suits the Division (i.e., when the borrower's commercial domicile is outside New Jersey), the Division has also considered other factors, such as whether the loan is related to New Jersey activities or is secured by New Jersey collateral.

By explicitly adopting the West Virginia court's rationale in MBNA, the TAM directly conflicts with earlier guidance. As recently as 2008, the position of the Regulatory Services Branch (the same branch that drafted and promulgated the TAM) was that a company "[r]eceiving interest from credit cards issued to New Jersey customers . . . does not have nexus because recently the Division chose not to follow the rationale of the MBNA decision."² This policy change is particularly troublesome since the TAM purports to be retroactive to 2002. The TAM is also inconsistent with the New Jersey Tax Court's 2009 decision in Accuzip,³ in which the court refused to adopt MBNA's significant economic presence test.

Importantly, P.L. 86-272 may not completely insulate a company from CBT if it would otherwise have nexus with New Jersey under the Division's new policy. New Jersey has an alternative gross receipts tax (known as the alternative minimum assessment). Although the alternative minimum assessment expired for most taxpayers in 2006, the Division's position is that it still applies to taxpayers who are immune from New Jersey income tax based on P.L. 86-272. (Based on the obvious discrimination against out-of-state taxpayers, however, look for this position to be challenged in the courts.)

For now, the TAM is merely informal guidance and does not have the force of law. But the TAM indicates that a regulation will likely follow. If that happens, it will become increasingly difficult for companies to challenge the Division's expanded nexus policies because of the deference New Jersey courts give to formal regulations.

For more information on the changes to the Division's new nexus policy, contact the authors of this Alert or another member of the Reed Smith State Tax Group. For more information on Reed Smith's New Jersey tax practice, visit www.reedsmith.com/njnexus.

Reed Smith's state and local tax practice is comprised of 30 lawyers across seven offices nationwide. The practice focuses on state and local audit defense and refund appeals (from the administrative level through the appellate courts), as well as planning and transactional matters involving income, franchise, unclaimed property, sales and use, and property tax issues.

1.  See Tax Commissioner of the State of W. Va. v. MBNA America Bank, N.A., 640 S.E2d 226 (W.Va. 2006), cert. denied sub nom FIA Card Services, N.A. v. Tax Commissioner of West Virginia, 127 S.Ct. 2997 (2007) and Lanco, Inc. v. Director, 21 N.J. Tax 200 (2003), 379 N.J. Super 562, 879 A.2d 1234 (App. Div. 2005), 188 N.J. 380, 980 A.2d 176 (2006), cert. denied 127 S.Ct. 2974 (2007).

2.  Regulatory Services Branch, Dec. 16, 2008, ruling at p. 3. Excerpt of ruling available upon request from the authors.

3.  AccuZIP, Inc. v. Director, Div. of Taxation, 25 N.J. Tax 158, 186-187 (Tax 2009) ("The Director urges this court to adopt the [MBNA] significant economic presence test to determine whether a substantial nexus exists .... A significant economic presence test applied in MBNA is not binding on this court.").