Proposed New Jersey nexus regulations.

On November 21, 1995, Tax Executives Institute submitted the following comments to the New Jersey Division of Taxation on proposed regulations concerning the definition of "doing business in New Jersey" for purposes of the State's Corporation Business Tax. The Institute's comments, which took the form of a letter from TEI President Jack R. Skinner to Nicholas Catalano, Chief, Tax Services, were prepared under the aegis of the Institute's State and Local Tax Committee, whose chair is Christopher W Baldwin of Gannett Co., Inc. The following members of the Institute also participated in the development of the Institute's position: J Robert Arthur of Johnson & Johnson, who is president of TEI's New Jersey Chapter, Jeffrey M. Rhines of AT&T, who is chair of the chapter's State and Local Tax Committee; and John J. Quick of Beneficial Management Corp., who is also a member of the New Jersey Chapter.

On behalf of Tax Executives Institute, I am pleased to provide the following comments on the Division of Taxation's proposed regulations under sections 18:7-1.6, 18:7-1.8, 18:7-1.9, and 18:7-1.10 of the New Jersey Administrative Code, relating to the Corporation Business Tax -- Doing Business in New Jersey.

Background

Tax Executives Institute is a volunteer, professional association of nearly 5,000 accountants, lawyers, and other professionals who are responsible for managing the tax affairs of their companies. The Institute's New Jersey Chapter has approximately 200 members from various corporations within the State of New Jersey, and a substantial number of our other members work for companies with significant operations, sales, or activities in New Jersey. In total, more than 2,700 companies are represented by our membership, which must contend daily with business tax laws, from both tax planning and tax compliance perspectives.

TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and the government alike. The Institute is also firmly committed to preserving the Commerce Clause and Due Process rights of business taxpayers, to bringing both equity and clarity to the taxation of multi-jurisdictional businesses, and to maintaining a tax system that works -- both for taxpayers and tax administrators.

Discussion

The proposed regulations represent an ambitious attempt by the Division of Taxation to expand the reach and application of New Jersey's Corporation Business Tax. In brief, the regulations would codify the dubious decision of the New Jersey Tax Court in Pomco Graphics, Inc. v. Director Division of Taxation, 13 N.J. Tax 578 (1993), by providing that any foreign corporation voluntarily registering with the Secretary of State (or any other state regulatory agency) must file an annual return and pay a minimum tax, notwithstanding the protections afforded by Public Law No. 86-272. The regulations would also assert the State's right to tax certain trademark holding corporations receiving licensing fees for the use of such trade names in New Jersey. Finally, the regulations would assert the State's right to tax certain foreign corporations that derive fees from the licensing of computer software to New Jersey businesses.

Tax Executives Institute has three basic concerns about the proposed regulations. First, we question the propriety of the Division's attempting to implement these far-reaching changes by administrative fiat rather than legislation. Utilization of the legislative process, coupled with a series of public hearings or round-table discussions, would ensure that ample consideration is given to policy and administrative issues raised by the proposal.

Secondly, we question the underlying merit of the proposed regulations, which many of our members have interpreted as being anti-business and which we believe may operate to the ultimate detriment of the State. Thus, we disagree with the Division's statement that "[t]he social effect of the proposed amendments will be positive." True, the proposed regulations would "clarify" the applicable rules, but clarity without foundation is not an unquestionable good. Where the rules "clearly" but unreasonably distend the scope of New Jersey's taxing authority and thereby clearly' but improperly undercut the protections accorded out-of-state businesses by Public Law No. 86-272 (to say nothing of the U.S. Constitution), they cannot to our mind's eye be justified on the ground that they "assist out of state corporations and their advisers in better understanding the applicable rules."

The Institute's concerns are most pronounced in respect to Example 2 in section 18:7-1.9(b)(5) and Example 1 in section 18:7-1.9(e). Under the proposed rules, a corporation that licenses its products through an independent distributor that then "sells" these products within New Jersey could find itself subjected to a tax within New Jersey, even though the sale' into New Jersey occurred without its knowledge. In addition, the amendments would essentially impose a tax on intangibles, which could potentially hinder business expansion within New Jersey.

Most fundamentally, TEI believes that the proposed regulations improperly seek to expand New Jersey's taxing authority beyond what is permitted by the Commerce and Due Process Clauses of the U.S. Constitution. TEI acknowledges that only minimal contact with a jurisdiction is required by the Due Process Clause before a State can assert its taxing power over a business; the Commerce Clause however, requires "substantial nexus" -- and it is TEI's firm belief that this more stringent standard is not satisfied by the mere issuance of a software license to a resident of a particular jurisdiction. See Quill Corp. v. North Dakota, 112 S. Ct. 1904 (1992). Hence, we believe it is error for the Division to read the Supreme Court's declining to review the South Carolina Supreme Court's results-oriented discussion in Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (S. Car.), cert. denied, 114 S. Ct. 550 (1993), as an open invitation to issue regulations broadly defining the State's jurisdiction to tax.

Conclusion

Tax Executives Institute believes that significant changes should be made to the proposed regulations before they are promulgated in final form. We suggest that the scope and content of the necessary changes can best be developed through a collaborative effort involving taxpayers, practitioners, and representatives of the Division, as well as appropriate legislative leaders. We encourage the Division to sponsor a series of roundtable discussions on the proposed amendments, with a view toward fostering a mutually beneficial partnership between the business community and the Division.

TEI appreciates this opportunity to present its comments on the proposed regulations and would be pleased to respond to any questions about the Institute's position. In this regard, you should not hesitate to call either Christopher W. Baldwin of the Gannett Co., chair of the Institute's State and Local Tax Committee, at [phone] or Timothy J. McCormally, TEI's General Counsel and Director of Tax Affairs, at [phone].