Governor Murphy of New Jersey last year signed into law legislation (P.L. 2023, c.96) that includes significant revisions to the Corporation Business Tax, retroactive provisions for business taxpayers, and updates to the state’s partnership sourcing rules.
For tax years beginning on or after January 1, 2023, the legislation requires nonresident taxpayers to source their partnership receipts using single-sales factor in accordance with New Jersey’s Corporation Business Tax Act, aligning partnership sourcing with corporate sourcing. Prior to this legislation, the partnership business allocation percentage was a three-factor formula, and the sales sourcing was determined by pro-rata cost of performance. With this change, the sales factor will be determined using the corporate market-based sourcing rules.
Rules for Sourcing Service Receipts
Under the corporate sourcing rules, the receipts for a service are sourced based on where the benefit of the service is received. This is particularly important for investment management companies with operations within New Jersey.
Based on N.J. Admin. Code § 18:7-8.10A, receipts arising from the sale of asset management services shall be allocated to New Jersey in accordance with the procedures described in this paragraph:
- In the case of asset management services directly or indirectly provided to individuals, receipts shall be allocated to New Jersey if the domicile of the individual is in New Jersey.
- In the case of asset management services directly or indirectly provided to a pension plan, retirement account, or institutional investor, such as private banks, national and private investors, international traders, or insurance companies, receipts shall be allocated to New Jersey to the extent the domicile of the beneficiaries of the plan, beneficiaries of the account or beneficiaries of the similar pool of assets held by the institutional investor is in New Jersey.
In the event that the domicile of the beneficiaries cannot be determined, New Jersey permits the allocation of receipts based on “reasonable approximation.” Under reasonable approximation, the location where the benefit of the services is received is determined in a manner that is consistent with the activities of the recipient to the extent such information is available to the taxpayer.
“Asset management services" means the rendering of investment advice, making determinations as to when sales and purchases are to be made, or the selling or purchasing of assets and related activities. As used in this sub-subparagraph, "related activities" means administration services, distribution services, management services, and other related services.
Unlike California’s draft sourcing regulations, the asset management service sourcing rule in New Jersey does not contain the language to look through private investment funds to the ultimate investor to determine the benefit of the service. This “look-through” approach that is currently in California’s draft regulations requires the taxpayer to look beyond the customers or clients of their services to the ultimate beneficiary of the service provided. In a “look -through approach,” the market is defined as where the customer directly or indirectly received the value of the service; therefore, looking through to the ultimate beneficiary of the service. Conversely, Massachusetts has specifically carved out rules to source the receipts arising from a sale of services to the state where the contract of sale is principally managed. In other words, Massachusetts does not adopt a “look-through” approach and the receipts from the sale of a service are sourced to where a business customer is located under Massachusetts rules.
New Jersey has not yet published any guidance to determine whether they will be adopting a “look-though” approach to source the receipts from sales of services. Additionally, the term “beneficiaries” is not defined further in the statute. Consequently, fund managers outside of New Jersey may have nexus and filing requirements in New Jersey to the extent investors in their funds are domiciled in the state. In the absence of direct language to interpret a “look-through” approach, investment management companies should source their receipts from the sale of services to the location of the direct customer, which receives the benefit of the investment management’s service.