Nexus and Other COVID-Related New Jersey Tax Issues
To address nexus issues during the coronavirus pandemic, New Jersey has implemented numerous temporary rules. Given the complexity these rules have introduced and the ongoing volatility of the COVID-19 pandemic, now is an important time for businesses to more fully review their nexus status.
Telecommuting and Corporate Nexus
In 2010, the Tax Court of New Jersey ruled that an out-of-state company employing a telecommuter who resides and works in the state was “doing business” in New Jersey. This created nexus and, thus, was subject to the New Jersey Corporation Business Tax Act (Telebright Corporation, Inc. v. Director, Division of Taxation).
The Tax Court cited the company’s consistent contact with the employee and the employee’s use of a company-owned computer as being sufficient to trigger a taxable presence in New Jersey. For this particular case, the New Jersey employee’s software development and coding activities, on behalf of Telebright, exceeded solicitation protected by P.L. 86-272, which requires the payment of state income tax.
Due to the pandemic, working from home has become a social norm to assure public health, safety and welfare. Fortunately, the New Jersey Division of Taxation issued guidance that, as a result of COVID-19, it is temporarily waiving the impact of the legal threshold discussed in Telebright which treats the presence of employees working from their homes in New Jersey as sufficient nexus for out-of-state corporations.
Therefore, an employee working remotely in New Jersey solely as a result of closures due to the coronavirus pandemic and/or an employer’s social distancing policy does not create nexus and apportionment for an out-of-state business in New Jersey.
In addition, the Division stated it would not require employers to change the current work state setup in their payroll systems for employees telecommuting from or temporarily relocated to an out-of-state location. New Jersey is permitting businesses to continue to withhold income tax in the state where the employer is located.
Under the normal rules, New Jersey dictates that income is sourced to the state based on where the service or employment is performed, using a day’s method of allocation. However, during the COVID-19 outbreak, the Division has stated that wage income will continue to be sourced as determined by the employer, in accordance with the employer’s jurisdiction.
The Division notes that because of the reciprocal agreement between New Jersey and Pennsylvania, New Jersey nonresident income tax is not required on wages for services performed within New Jersey by Pennsylvania residents. These states have also agreed not to tax workers who have moved there temporarily because of the pandemic.
The Convenience-of-the Employer Test
New York’s convenience-of-the-employer test states that when an employee is teleworking, if it is done voluntarily, at the employee’s option, withholding is done at the employer’s work location (New York) even if the employee is teleworking in a different state, such as New Jersey. If the employer requires or mandates it, then the employee can have state tax withholding where teleworking (New Jersey).
Using the location of the employer helps prevent a potential double tax when one state uses the convenience of employer test (New York and Pennsylvania) to source wage payments while another state uses the physical presence standard. It is possible that a resident’s state credit for taxes paid to another state may not cover all the nonresident state taxes paid.
Guidance on Nexus for Sales Tax
The New Jersey Division of Taxation states that, due to the COVID-19 pandemic, it has temporarily waived the sales tax nexus standard that is generally met if an out-of-state seller has an employee working within New Jersey. Accordingly, as long as the out-of-state seller did not maintain any physical presence, other than employees working from home in New Jersey, and is below the economic thresholds, the Division will not consider the out-of-state seller to have nexus for sales tax purposes during the period of the COVID-19 emergency.
However, a remote seller that makes a retail sale of tangible personal property, specified digital products or services delivered into New Jersey must register, collect and remit New Jersey sales tax if the remote seller meets either economic threshold: $100,000 of revenue or 200 transactions in a year.
Sales Tax and Surcharges for COVID-19 Precautions
A separate surcharge (regardless of what it is called) to cover the cost of COVID-19 precautions is an expense that a seller incurs in order to perform a service or sell a product. As the surcharge is part of the sales price, the taxability of it depends on the taxability of the service provided or the products sold. Thus, if a service or product a business offers is not subject to sales tax, then the COVID-19-related surcharge is also not subject to tax.
Apportionment Sourcing Rules for Services
The Division has adopted rules for sourcing services for tax years ending on or after July 31, 2019. These rules are intended to source revenues from services to the location(s) where the benefits are received. As such, New Jersey is moving away from the traditional cost of performance method to market sourcing, which many other states have already adopted.
A general rule provides that the numerator of the sales fraction includes receipts from services not otherwise apportioned, if the benefit of the service is received by the customer at a location within New Jersey. A customer within New Jersey is either (1) a recipient that is engaged in a trade or business and maintains a regular place of business in New Jersey, or (2) an individual who is not a sole proprietor and is located in New Jersey. If the location of the individual cannot be determined, then the benefit of the services will be deemed to be received at the individual’s billing address.
A regular place of business in New Jersey is not limited to the principal place of business of the customer, and this includes any office, factory, warehouse or other business location in New Jersey where the customer either conducts business in a regular and systematic manner or maintains property or employees. However, one of the requirements in order for an office to be considered a regular place of business is that the office is owned or rented in the taxpayer’s name.
The sunset date of these waivers varies from state to state, with some tied to emergency declarations and others to specific dates. New Jersey is also tied to the existence of measures to control the spread of the virus such as work-from-home orders, including employers’ own social-distancing policies. The expiration period may be adjusted depending on the course of the pandemic.
This article appeared in the January/February 2021 issue of New Jersey CPA magazine. Read the full issue.