The New Jersey Division of Taxation has recently released additional guidance on the revised personal income tax sourcing and allocation rules, effective for tax years beginning on or after January 1, 2023. Detailed in Technical Bulletin No. TB-112(R) dated May 3, 2024, these updates mark a significant shift in how business receipts and income are sourced and allocated in New Jersey. This article provides an overview of the changes and their implications for taxpayers.
Old Sourcing Rules
Before January 1, 2023, New Jersey’s gross income tax sourcing rules for business receipts used a three-factor formula comprising property, payroll, and receipts. Service sales were sourced based on the cost of performance method, where the location of the service costs determined tax obligations.
New Sourcing Rules Effective 2023
From January 1, 2023, the apportionment sourcing rules for business income receipts have been updated to match those used for corporate business tax purposes:
- Single Sales Factor Method: Business receipts are now sourced using a single sales factor.
- Market-Based Sourcing: Service receipts are sourced based on the location where the benefit of the service is received, shifting from a cost of performance basis.
Tangible Property Sales: Destination Basis
For tax years starting in 2023, New Jersey now sources sales of tangible property on a destination basis. Previously, all sales by a New Jersey-based salesperson covering multiple states were sourced to New Jersey. Now, sales are reported based on the destination of the property.
Application of the New Sourcing Rules
These new rules apply to all taxpayers under the Gross Income Tax Act engaged in trade or business within and outside New Jersey, including sole proprietors and partners in partnerships. S corporations were already subject to similar apportionment rules.
Default Method and Alternative Options
The single sales factor is the default method for sourcing. However, taxpayers can request an alternative method if the default does not fairly allocate income. They must justify the alternative approach, such as separate accounting for New Jersey and out-of-state operations.
Defining Operational vs. Nonoperational Income
For tax years beginning on or after January 1, 2023, the classification of income follows:
- Operational Income: Income from property integral to the taxpayer’s regular business operations, including most rental income and gains, is considered operational and is apportioned.
- Nonoperational Income: Income not integral to regular business operations must be proven by the taxpayer to be classified as nonoperational.
Concerns About Double Taxation
The new rules may lead to double taxation in some cases, especially with rental income and gains. For instance, a Florida resident with an LLC operating in New Jersey might face taxation on gains from a property sale in Pennsylvania by both New Jersey and Pennsylvania.
Nexus Considerations
New Jersey’s updated personal income tax sourcing and allocation rules introduce significant changes that align with corporate tax methodologies. Businesses operating across state lines need to understand these changes to ensure compliance and optimize their tax positions. For more detailed information, refer to the New Jersey Division of Taxation Technical Bulletin No. TB-112(R).
The bulletin emphasizes that businesses already providing services to New Jersey customers had nexus before these changes. Therefore, the new single sales factor and market-based sourcing rules are unlikely to create new nexus for gross income tax purposes.
Staying updated on tax regulation changes is crucial for effective tax planning and compliance.
For additional details and tax advice, please contact Martin D. Hauptman at (973) 243-7912 or via email at mhauptman@mblawfirm.com