Tax Alert

New Jersey Asserts Broad Economic Nexus Standard

(Feb. 11, 2011)

On Jan. 11, 2011, the New Jersey Division of Taxation issued Technical Advisory Memorandum 6 (TAM-6), which suggests that the state subscribes to a broad economic nexus construct for purposes of the Corporation Business Tax (CBT). TAM-6 asserts that this position retroactively applies to tax years beginning in 2002, the year the Business Tax Reform Act was signed into law. TAM-6 also states that the nexus standard applies to all corporations, including financial corporations (indicating New Jersey’s willingness to impose the CBT on out-of-state banks with customers in New Jersey).

TAM-6 is a logical but unfortunate extension of the Lanco Inc. v. Director, Division of Taxation decision. Unlike other cases that have challenged the economic substance or business purpose of so-called Delaware holding company structures (for example, Syms Corp. v. Commissioner of Revenue), the Lanco case places little importance on the fact that the out-of-state licensor was related to the in-state licensee. Instead, the court determined that the taxpayer derived significant benefits from economic activity in New Jersey, despite a lack of physical presence.

The Division may attempt to issue tax assessments to companies with a putative economic presence in the state back to 2002, or even earlier. In Praxair Technology, Inc. v. Director, the New Jersey Supreme court held that a licensor of intellectual property was “doing business” in New Jersey and was therefore subject to the CBT, even in years prior to the Lanco decision.

A copy of the TAM can be found here.

For more information on how this might affect you, please contact Chris Hopkins at 212.572.5592 or, or any Crowe Horwath LLP tax professional.

Under U.S. Treasury rules issued in 2005, we must inform you that any advice in this communication to you was not intended or written to be used, and cannot be used, to avoid any government penalties that may be imposed on a taxpayer.

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Chris J. Hopkins