On April 12, 2022, the New Jersey Division of Taxation (Division) issued Revision to Division Policy on Combined Groups and P.L. 86-272 (Revision), which revises its policy with regard to Public Law (P.L.) 86-272 protection for members of a combined group. The Revision provides that members may now claim P.L. 86-272 protection on an entity-by-entity basis. Opportunities are now available to file amended returns in order to take advantage of the Revision.
As a reminder, P.L. 86- 272 provides a taxpayer with protection from state income taxes when the taxpayer’s only connection with a state consists of the solicitation of orders for sales of tangible personal property.
Highlights of the New Policy
Previously, the Division provided in multiple technical bulletins and in the instructions for the 2019, 2020, and 2021 CBT-100U returns that “[I]f one member in the combined group has nexus and sufficient activities in New Jersey to be taxed based on income, no member that has nexus with New Jersey may claim P.L. 86-272 protection.” The Division is reversing that position based on concerns raised, where the Division’s position now provides that “although a combined group is a taxpayer and taxed as one taxpayer … P.L. 86-272 protection for a member will be determined on an entity-by-entity basis.” The Division will allow taxpayers to have the managerial member of the combined group amend the group's 2019, 2020, and 2021 CBT-100U returns reflecting the change in policy, if the combined group filed their 2019, 2020, or 2021 CBT-100U by following the return instructions and/or the guidance of the technical bulletins. Note that combined reporting was not applicable to tax years ending before July 31, 2019.
Many stakeholders questioned the legal merits of the Division’s prior policy, as it seemed overly broad in its inclusion of a unitary group of corporations within the scope of the term “person,” as such term is provided for in the text of P.L. 86-272. Further, such an interpretation seemed inconsistent with the state’s adoption of the “Joyce Rule.” Under Joyce, only the sales of taxable members of the group are included in the numerator of the apportionment factor on water's edge and worldwide combined returns in New Jersey.
Pursuant to the Revision, the state’s application of P.L. 86-272 is now consistent with other aspects of how New Jersey treats combined filers.
We encourage combined filers in New Jersey for tax years 2019, 2020, and 2021 (if already filed) to assess the applicability of P.L. 86-272 to individual group members, and consider filing amended returns. If the taxpayer will benefit through a reduction in New Jersey tax by removing non-taxable members’ New Jersey receipts from the numerator of the combined apportionment formula, then the managerial member should file an amended return claiming a refund of tax previously paid. However, the Revision is silent as to whether the Division will retroactively apply the change in policy to prior years.
Lastly, it is important to remember that this protection applies to income taxes only, and does not extend to any other type of tax, such as a minimum tax, a franchise tax, a gross receipts tax, or a sales tax. As a result, a minimum tax of $2,000 will be imposed on each member of a combined group with nexus in New Jersey, including those that may assert P.L. 86-272 protection.
If you have any questions regarding the application of New Jersey’s revised guidance, please contact James Helms at 864-241-0598 or Sarfraz Bacchus at 770-858-4454.
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