Yesterday, the New Jersey Division of Taxation (the “Division”) issued corporation business tax (“CBT”) Technical Bulletin 86 (“TB-86”).1
TB-86 follows last year’s sweeping changes to the CBT—including a switch from separate-company to combined reporting. The change concerning combined reporting is effective this year (for privilege periods ending on and after July 31, 2019).2 Our prior coverage of those changes is available at the links in footnote 3.3 TB-86 provides new guidance for members of combined groups concerning the $2,000 minimum tax,4 and the application of P.L. 86–272.
Minimum tax. Some observers had warned that the Division might broadly construe the statute and require every member of a combined group filing in New Jersey to pay the $2,000 minimum tax—even non-corporate members and members that didn’t have independent nexus with the state. For a combined group with many members, this could have resulted in millions of additional tax liability each year. Such an interpretation would have raised serious constitutional concerns and contradicted the legislative intent.
Fortunately, in TB-86, the Division clarified that the minimum tax applies only to a member of a combined group if that particular member has nexus with New Jersey. The Division further clarified that the minimum tax doesn’t apply to disregarded entities or entities that are treated as partnerships for federal income tax purposes.
P.L. 86–272. TB-86 effectively eviscerates the immunity provided by P.L. 86–272, which prohibits a state from imposing income tax on an entity whose only activity in the state involves the solicitation of sales of tangible personal property.5 The bulletin states that if one member of a group has nexus and is subject to tax, “no member that has nexus with New Jersey may claim P.L. 86–272 protection.”6 In other words, the New Jersey sales of a member that was immune from CBT prior to combination are expected to be included in the sales-fraction numerator used to apportion the income of the combined group. The Division’s position has constitutional problems and may violate the plain language of the statute. If a member of your combined group otherwise qualifies for immunity under P.L. 86–272, you may want to consider these potential challenges and pay no more than the $2,000 minimum tax for that member.