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State and Local Tax

New Jersey Based Firm Permitted to Use Market Sourcing Prior to Change in Law

· 5 minute read

· 5 minute read

By David Engel 

The New Jersey Tax Court has ruled that facts and circumstances permitted a firm to use market sourcing prior to the effective date of the change made to N.J. Rev. Stat. § 54:10A-6 (tax years ending on or after July 31, 2019) that required the sourcing of sales from services based on where the benefit of the service was received. (Solix v. N.J. Div. of Taxation, N.J. Tax Ct., Dkt. No. 011113-2019, 04/11/2024.)

New Jersey based firm.

The firm was hired by various state agencies to manage the provision of universal phone service to the clients of those agencies. The firm provided web-based business solutions to its customers, which included the creation or customization of its proprietary software that was designed and developed by its information technology team in New Jersey. The main computer servers were in New Jersey. All executive functions, such as management, finance, human resources, payroll, and contract review/finalization, were performed in New Jersey. Management traveled frequently to meet its out-of-state customers, whether for sales presentations, software specifications, or to address applicant issues and there were a significant number of out-of-state employees.

Sourcing of sales.

The corporation first used the cost of performance (COP) method to source sales to New Jersey for the 2011 and 2012 tax years which resulted in more than 50% of the receipts being sourced to New Jersey. The corporation then sought to amend its returns to use a market based approach which resulted in less than 30% of the receipts being sourced to New Jersey. The Division of Taxation argued that: (1) the law required the COP approach for sourcing receipts for tax years prior to 2019; and (2) taxpayers who sought a different sourcing method were required to specifically apply to use that method.

Market-based sourcing allowed.

The court was not persuaded by the Division’s arguments. While the court acknowledged that it is true that N.J. Rev. Stat. § 54:10A-6(B)(4) as it existed in 2011 and 2012, required that receipts from sales of “services performed within the State” should be included in the numerator of the sales fraction, that statute did not plainly state that market-based sourcing of service receipts is barred. The Division did not point to any legislative history indicating that the location of an entity’s market (customer-base) is irrelevant for determining receipts from an entity’s sales of services. Nor did this statute indicate whether or how the numerator of the sales fraction should be calculated if services are performed inside and outside New Jersey. The court added that the Division’s preference for the COP method does not foreclose consideration of the alternative methods permitted under N.J. Admin. Code § 18:7-8.10(a). Thus, if destination or market-based sourcing of sales receipts is supported by the economic realities underlying the generation of income, then it is a permissible under the Division’s regulation even if that “reasonable method” is not labeled as “market-based,” “destination based,” or “benefit-based.”


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