On August 3, 2021, the New Jersey Division of Taxation released guidance on its website informing taxpayers that as of October 1, 2021, the state is ending its temporary waiver of certain corporation business tax (CBT) and sales tax nexus standards necessitated by the COVID-19 pandemic. The temporary guidance allowing employers to source wage income in accordance with an employer’s location will also end. Accordingly, employers generally should resume sourcing income based on where an employee’s service or employment is performed, subject to notable exceptions of any applicable convenience of the employer tests (such as the one adopted by New York State) or reciprocity agreements (such as the agreement in place with Pennsylvania).
The timing of this guidance is somewhat surprising, as in recent weeks a number of companies have pushed back office reopening dates because of concerns related to the COVID-19 Delta variant.
CBT Guidance
As was the case with many states, the Division temporarily waived the impact of CBT statutes treating the presence of employees working from their homes in New Jersey as creating a sufficient nexus for out-of-state corporations. Under the temporary waiver, a corporation that did not otherwise meet any factor giving rise to nexus, other than the presence of employees working from home in New Jersey solely due to the pandemic, would not have nexus for CBT purposes.
| Eversheds Sutherland Observation: New Jersey’s CBT imposition statute broadly imposes CBT upon corporations for the privilege of “deriving receipts” from or “engaging in contacts” within New Jersey, or for the privilege of doing business, employing capital or owning capital or property, or maintaining an office in New Jersey.[1] A New Jersey court has held that the presence of a single remote employee in New Jersey is sufficient to establish nexus for CBT purposes,[2] making the Division’s previous COVID-19 guidance necessary to clarify the obligations of out-of-state taxpayers that did not otherwise meet New Jersey’s nexus standards. Nevertheless, under New Jersey’s broad nexus standard many companies may already have nexus based on their activities regardless of the presence of teleworkers in the state. |
Sales Tax Guidance
New Jersey asserts sales tax nexus over sellers that either maintain a physical presence in the state or exceed the requisite economic activity thresholds (i.e., gross revenue exceeding $100,000 from, or at least 200 separate transactions relating to, delivery of tangible personal property, specified digital products, or services into New Jersey). The Division temporarily waived sales tax nexus if an out-of-state seller triggered a sales tax collection obligation as a result of establishing a physical presence solely because of an employee working from a New Jersey home.
Employer Withholding Guidance
During the pandemic, New Jersey allowed employers to withhold tax as determined by the employer in accordance with the employer’s jurisdiction. According to the Division’s guidance effective October 1, employers should resume sourcing wages based on where the service or employment is performed and withhold New Jersey Gross Income Tax from such wages.
| Eversheds Sutherland Observation: Based on this guidance, beginning October 1, companies may have to update their systems to reflect an employee’s actual work location. However, employers must also square the Division’s guidance with other rules that may significantly impact where wage withholding and reporting occurs. First, a number of neighboring jurisdictions employ a nonresident sourcing rule akin to New York State’s infamous convenience of the employer test, including Delaware and Pennsylvania. In general, the convenience of the employer test deems a remote worker to earn wages at their assigned employer’s location rather than actual work location, e.g., an out-of-state residence. Second, New Jersey has entered into a reciprocity agreement with Pennsylvania, which allows residents of either state to elect to have the residence state tax withheld instead of the work (source) state. The confluence of these rules has a material impact on employer withholding compliance for New Jersey employers, personal income tax liability for New Jersey resident and nonresident employees, and a significant economic effect on the state fisc, given the other state tax credit New Jersey affords to its residents. |
[2] See Telebright Corp., Inc. v. Director, Div. of Taxation, 25 N.J. Tax 333 (2010), aff’d 38 A.3d 604 (2012).
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