The New Jersey Division of Taxation is offering two new limited voluntary disclosure agreement (VDA) initiatives. The first initiative is a revision and renewal of a previous VDA initiative which expired on January 15, 2013.1 This initiative is for companies that have income tax nexus with New Jersey as a result of deriving income from the use of intangible assets in the state. It applies to intangible holding companies (IHCs) as well as companies with other business operations beyond the mere ownership of intellectual property. The terms of the new IHC initiative are more favorable than those of the previous program and are comparable to the terms of VDAs offered by most other states including New Jersey itself (for non-IHCs).

The second VDA initiative is for partnerships with New Jersey source income that have not filed the requisite forms (PART-100, PART-200T, and NJ-1065).2 This initiative covers both the partnership filing fee and nonresident partnership tax. The program is also available to individual partners that have not satisfied their New Jersey filing and tax remittance requirements. Partnerships considering this program should discuss the decision with their partners, as a VDA entered into by the partnership may trigger the need for VDAs on behalf of the affected partners.

Intangible Asset Nexus Initiative

The Intangible Asset Nexus Initiative began on March 15, 2014 and runs through May 15, 2014. Participating IHCs must meet the standard conditions for all VDA applicants and should follow standard procedures for seeking a VDA.3 Additionally, for IHCs the following provisions apply:

1. The lookback period is limited to periods beginning after July 1, 2010, or the date business commenced in New Jersey. Returns for earlier periods are not required. 2. The Division will waive all penalties.

3. The taxpayer must file all required returns and remit payment of the full tax liability within 45 days of the execution of the VDA. All interest must be paid within 30 days of assessment.

4. Companies that have added back royalties paid to related entities to arrive at New Jersey entire net income may submit amended returns for any period open under the statute of limitations in order to claim an exception to the addback.

5. Returns are subject to routine audit on issues not specifically covered in the VDA. The following chart highlights the differences between this new initiative and the prior IHC initiative that expired on January 15, 2013:

Background

As discussed in our SALT Alert for the prior IHC initiative,4 income taxation on the basis of economic nexus has consistently been upheld by the New Jersey courts.5 The New Jersey Supreme Court decision in Lanco effectively invalidated any Quill physical presence requirement as it relates to corporate tax nexus for IHCs.6 Although IHCs deriving income in New Jersey have increased difficulty in arguing against the imposition of economic nexus, they should examine their specific facts and circumstances carefully to determine whether a nexus determination is appropriate.7

The beginning of the new initiative's lookback period corresponds, not coincidentally, with the elimination of the "throwout" rule. This simplifies the VDA process, as the discretionary Section 8 throwout relief that was a somewhat burdensome provision of the previous IHC VDA program will not be at issue.8 Further, by shortening the lookback period when compared to that prescribed in the previous IHC initiative, the Division continues to make IHC disclosure more appealing. However, taxpayers wishing to take advantage of this program will be forced to act quickly, given the small program window (two months) and short filing deadline (45 days after VDA execution).

Partnership Tax & Partner Fees Initiative

The Partnership Tax & Partner Fees Initiative also began on March 15, 2014 and runs through May 15, 2014. This initiative applies to partnerships with New Jersey source income that have not filed the relevant forms (PART-100, PART-200T & NJ-1065) and remitted the tax and fees owed. Participating partnerships must meet the standard conditions for VDAs and follow the standard procedures for seeking a VDA. Additionally, for partnerships and partners the following provisions apply:

1. The lookback period is limited to periods beginning on or after January 1, 2010.

2. The Division will waive all penalties.

3. The taxpayer must file all required returns and remit payment of the full tax liability within 45 days of the execution of the VDA. All interest must be paid within 30 days of assessment.

4. Returns are subject to routine audit on issues not specifically covered in the VDA.

Background

VDA programs for partnerships are less common than those available to corporations. With its new partnership VDA initiative, New Jersey is targeting the entity-level filing fee as well as the withholding for nonresident partners that is required at the entity level. By including withholding tax in the VDA program, the Division seeks to collect additional tax from individual and corporate partners that previously did not file in the state.

The New Jersey Partnership Filing Fee and Tax Payment Return (PART-100) and its corresponding extension form (PART-200-T) consist of an entity-level filing fee and a nonresident partner tax. The New Jersey Partnership Return (NJ-1065) is used to report partnership income, which is apportioned to each partner on Schedule NJK-1. The NJ- 1065 is necessary because New Jersey does not follow all Federal income tax provisions for partnerships, but rather requires adjustments to be made to conform to the New Jersey Gross Income Tax Act.

The PART-100 filing fee applies to partnerships with more than two partners and is levied at $150 per owner, up to a maximum of $250,000.9 The fee for nonresident partners is apportioned based on the partnership's "corporate allocation factor" which is calculated under the corporation business tax rules and presented as part of the NJ-1065. Also required to be paid with the filing fee is an instalment for the next tax year equal to 50 percent of the current year fee.

The nonresident partner tax remitted with the PART-100 is, for all intents and purposes, mandatory withholding of tax for nonresident partners. The tax is calculated as a percentage (6.37 percent for individuals and 9 percent for corporations) of each nonresident's share of the partnership's New Jersey income as apportioned using the corporate allocation factor.10 The tax is reported on the PART-100, NJ-1065, and on each partner's NJK-1. This amount can then be claimed as a credit for taxes paid on each partner's return (NJ-1040NR for individuals and CBT-100 for corporations). There is no opt-out of this withholding available for partners that would prefer to factor partnership income into their own estimated tax payments.

The compliance burden for meeting the terms of this VDA program could be substantial for many partnerships. Not only are participants required to file NJ-1065s, but also PART-100s which will effectively withhold tax on behalf of any nonresident partners. Those nonresident partners will then need to enter into the VDA program themselves or risk a "lookback" including additional prior periods and the assessment of penalties. The Division's announcement does not mention whether partnerships would be permitted to enter into a joint VDA on behalf of the partnership and its nonresident partners, perhaps by filing composite returns. Of course this solution would only be available to nonresident individuals with no income reported outside of composite returns.

Commentary

New Jersey continues to make proactive disclosure of IHCs more appealing, as the courts continue to validate economic nexus. The shortened lookback period is an improvement from what amounted to a nine-year lookback under the previous initiative and is actually six months shorter than the four-year lookback for standard business tax VDA participants.

The Division's Policy Statement makes no mention of participants in the earlier VDA for IHCs and apparently no relief will be offered to taxpayers who participated in that far stricter program. The Division may justify this disparate treatment by citing specific terms in earlier VDAs which typically stated that the VDA was a "final settlement of the throwout issue and is binding on both the Taxpayer and the Division of Taxation."11 If so, this latest initiative represents a rare case where procrastination works to the advantage of "delinquent" taxpayers.

Taxpayers with IHCs should be aware that the U.S. Supreme Court may consider an economic nexus case in the near future, despite its recent history to the contrary.12 The fact that the Court continues to deny certiorari on economic nexus cases should not be interpreted to mean that the Court is content to leave the economic nexus issue to the states. The Court has made it clear in the past that the denial of certiorari expresses no opinion on the merits of any given case, and may reflect more on the fact that it is exceedingly difficult for a case to reach the Court due to the limited number of cases the Court hears each term.

While some aspects of the program may be appealing, the Partnership Tax & Partner Fees Initiative presents significant compliance difficulties. The filing of a VDA on behalf of a partnership could force a disclosure requirement on the partners, and perhaps many others if part of a tiered structure. It is important for taxpayers to keep in mind that New Jersey is one of the few jurisdictions that impose a filing requirement on partnerships with one or more resident partners, regardless of whether such partnerships have income or loss derived from sources in the state. To make matters worse, the state assesses a penalty of $100 per month for the failure to file, with no maximum.13 Partnerships will need to examine their situation carefully and involve the partners in the discussion as any disclosure will expose them as well.

Taxpayers contemplating participation in either of these programs will need to consider each situation on a case-by-case basis. However, this analysis must be done quickly as the May 15th deadline is just around the corner, especially for those with heavy spring compliance obligations.

Footnotes

1Policy Statement, Intangible Asset Nexus Initiative, New Jersey Division of Taxation (Feb. 20, 2014). Note that the previous VDA initiative is discussed in GT SALT Alert: New Jersey Division of Taxation Offers Limited Voluntary Disclosure Initiative for Intangible Holding Companies.

2 Policy Statement, Partnership Tax & Partner Fees Initiative, New Jersey Division of Taxation (Feb. 20, 2014).

3 To be eligible for New Jersey's standard business tax VDA: (a) there must have been no previous contact with the taxpayer by the Division; (b) the taxpayer is not registered for the type of taxes that are the subject of the disclosure; (c) the taxpayer is not currently under any criminal investigation; and (d) the taxpayer must be willing to pay outstanding tax liabilities and file the prior period returns within a reasonable period. The taxpayer must submit a written proposal detailing all New Jersey business activity. Statutory interest will be assessed for the tax returns and period included in the agreement. The taxpayer is expected to remain compliant with all ongoing and future tax obligations.

4 See GT SALT Alert: New Jersey Division of Taxation Offers Limited Voluntary Disclosure Initiative for Intangible Holding Companies.

5 See Lanco, Inc. v. Dir., Div. of Taxation, 908 A.2d 176 (N.J. 2006), cert. denied, 551 U.S. 1131 (2007), and Praxair Tech. Inc. v. Dir., Div. of Taxation, 988 A.2d 92 (N.J. 2009).

6 See Lanco and Quill Corp. v. North Dakota, 504 U.S. 298, 314 (1992).

7 N.J. ADMIN. CODE § 18:7-1.9(b).

8 See Policy Statement, Intangible Asset Nexus Initiative, New Jersey Division of Taxation (Sep. 18, 2012) and N.J. REV. STAT. § 54:10A-8.

9N.J. REV. STAT. § 54A:8-6(b)(2)(A).

10 N.J. REV. STAT. § 54:10A-15.11.a.

11 Note that there is no similar language "binding" taxpayers to the number of periods covered by the VDA.

12 See Lanco. See also Tax Commissioner v. MBNA America Bank, N.A., 640 S.E.2d 226 (W.Va. 2006), cert. denied, 551 U.S. 1141 (2007) and KFC Corp. v. Iowa Department of Revenue, 792 N.W.2d 308 (Iowa 2010), cert. denied, 132 S. Ct. 97 (2011).

13 N.J. ADMIN. CODE § 18:35-11.3.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.