Effective for periods ending on or and after July 31, 2023, New Jersey has significantly updated its Corporation Business Tax (CBT) rules, making it easier for businesses to determine if they have a taxable presence in the state. These changes are based on a new economic nexus standard, which means businesses may now be subject to CBT even if they don’t have a physical office or employees in New Jersey.
This change will have widespread implications for businesses, especially those operating across state lines. Below, we provide an overview of these changes and their implications.
What Is Economic Nexus?
Economic nexus refers to the threshold at which a business’s activities within a state are considered sufficient to establish a physical presence for tax purposes. Under the new standard, businesses are considered to have substantial nexus with New Jersey if they:
- Generate more than $100,000 in revenue from sources within the state.
- Engage in 200 or more separate transactions with New Jersey customers.
This bright-line standard supplements the existing guidelines, which previously focused on a corporation’s physical presence in the state (e.g., owning property, employing staff, or maintaining an office).
Implications for Foreign and Out-of-State Corporations
These updates particularly affect foreign and out-of-state corporations, many of which may not have considered themselves liable for New Jersey’s CBT in the past. Now, even if a business lacks a physical presence in the state, it may still be required to file and pay CBT if it surpasses the economic nexus thresholds. Additionally, corporations engaged in digital transactions, including those offering services through the Internet, will need to reassess their tax exposure.
Note that if a company’s activities fall within the parameters of P.L. 86-272, as detailed in the bulletin, then the company is exempt from being imposed and paying income tax but is still required to file a corporate business tax return and pay the minimum tax.
Key Points for Businesses to Consider:
- Expanded Tax Liability: Businesses may now face tax obligations in New Jersey, even if they have no physical presence within the state.
- Digital Transactions: Businesses engaged in digital transactions, such as online sales or digital services, should carefully evaluate their activities to determine if they meet the economic nexus thresholds.
- Combined Groups: Businesses that are part of combined groups must use the Finnigan method for allocating receipts, which may increase their tax liability.
- Public Law 86-272: Businesses offering services or digital products, like NFTs or virtual currency, are not exempt from CBT under Public Law 86-272.
Next Steps
With these substantial changes, businesses operating in or deriving income from New Jersey must carefully evaluate their activities to ensure compliance with the new economic nexus rules. Whether your company is engaged in traditional commerce or digital transactions or operates as part of a combined group, these updates require careful consideration to avoid unexpected tax liabilities. If you suspect your business may be impacted, consider seeking guidance from a state and local tax professional. Our team of experts can help you assess your situation and provide guidance on compliance strategies.
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