By David Engel
The New Jersey Division of Taxation has proposed codifying its corporation business tax nexus standards in regulation form. The Division also added numerous examples to explain the application of its proposed regulations. (57 N.J.R. 305(a) Rule Proposal, N.J. Division of Taxation, 02/18/2025.)
Nexus on sales of financial products.
The proposed regulations would provide that a financial business corporation, a banking corporation, a credit card company, or a similar business that has its commercial domicile in another state is subject to corporation business tax in New Jersey if during any year it obtains or solicits business or receives gross receipts from sources within New Jersey. Sales and activities involving financial products, financial instruments, and financial services are not P.L. 86-272 protected, because financial products, financial instruments, and financial services are not tangible personal property. Therefore, a financial business corporation, a banking corporation, a credit card company, or a similar business that has nexus with New Jersey is subject to corporation business tax in New Jersey based on income, or the minimum tax, whichever is higher.
The regulations would also provide that the offering, soliciting, selling, or buying of and/or offering services (for a fee) pertaining to a digital asset (as defined at IRC § 6045(g)(3)(D)) such as virtual currency or non-fungible tokens (NFTs) to N.J. customers is the offering and selling of financial products, financial instruments, and financial services or other intangibles or services, except when the sole purpose of the exchange is to transfer an item of tangible personal property and not for any other purpose.
Examples.
The proposed regulations then go on to give some examples of the application of these rules.
Example 1: Robo Corp., a robo-adviser, solicits and sells stock through an online website and mobile application for a transaction fee. Robo Corp. actively solicits its services to N.J. customers through a variety of means including, but not limited to, the internet. This is the selling and offering of financial products and services through the internet to N.J. customers. Robo Corp. must file a corporation business tax (CBT) return and pay the CBT based on income or the minimum tax, whichever is higher.
Example 2: Invest Corp. offers investment advisory services for a fee to customers through the internet. Invest Corp. investment service advisors conduct virtual meetings with NJ customers through its internet application. This is the selling and offering of financial products and services through the internet to N.J. customers. Invest Corp. must file a CBT return and pay the CBT based on income or the minimum tax, whichever is higher.
Example 3: Company A buys, solicits, sells, processes, and accepts virtual currencies and other digital assets to/from N.J. customers through its website or downloadable mobile application for subscription fees. Company A solicits its product offerings and services to N.J. through a variety of means, including, but not limited to, the internet. Company A must file a CBT return and pay the corporation business tax based on income or the minimum tax, whichever is higher.
Sales of service contracts.
The regulation would provide that nexus is created and there is no P.L. 86-272 protection for offering, selling, providing maintenance, or performing such duties under a warranty or extended warranty service contract for the performance of services under the contract through any means, whether in-person or through the internet. This includes transmitting code or electronic instructions through the internet to fix or upgrade products as part of a service subscription purchased by the customer or as part of a warranty (or extended warranty) service contract purchased by the customer.
Post-sale activities.
The regulations would provide that nexus is created and there is no P.L. 86-272 protection for post-sales assistance through an electronic chat, email, or application that the taxpayer’s customers access. Some examples include, but are not limited to: chat rooms for troubleshooting problems, cooking classes for customers streamed through the internet featuring taxpayer-hired celebrity chefs, complaint resolution, or an internet help desk for technical support, whereby the customer can talk to a service representative who then may conduct repair services through the internet.
Gathering marketing data.
The regulations would provide that nexus is created and there is no P.L. 86-272 protection for placing “internet cookies” on computers of N.J. customers that gather market or product research whereby the taxpayer gathers and assembles the data for sale as a package of customer/marketing information to data-brokers or other third parties. An internet cookie is small blocks of data created by a webserver while a user is browsing a website, which is placed on the user’s computer or other device by the web browser.
Inventory held by marketplace facilitators.
The regulations would provide that a corporation, which contracts with a marketplace facilitator to facilitate the sale of the business’s products on the facilitator’s online marketplace where the marketplace facilitator maintains the corporation’s products at fulfillment centers in N.J. will not have P.L. 86-272 immunity, and the corporation will be subject to the corporation business tax in NJ based on or measured by income.
Contracts for streaming.
The regulations would provide that nexus is created and there is no P.L. 86-272 protection for contracting with N.J. customers to stream videos and music. However, nexus would not be created by sales of videos and music that are downloaded.
Subscription services.
The sale of subscriptions to any service would create nexus without P.L. 86-272 protection under the proposed regulations.
Example: Tread Co. sells internet connected exercise equipment to customers. Tread Co. also offers a subscription service, named Happy Health, to N.J. customers through a downloadable app, whereby customers have virtual physical training sessions with certified trainers. Tread Co. charges a fee for this subscription service. Happy Health is a subscription service that is separate and apart from Tread Co.’s primary business–the sale of exercise equipment to customers. Therefore, Tread Co.’s offering and selling the Happy Health subscription service to N.J. customers exceeds the protections of P.L. 86-272.
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