Oct 17, 2016
From KPMG TaxWatch
In a 76-page opinion, the New Jersey Tax Court recently addressed how certain receipts received by a credit card bank from in-state cardholders should be sourced under New Jersey’s apportionment provisions. The taxpayer at issue filed amended returns for the 2002-2008 tax years excluding from the New Jersey receipts factor numerator certain types of receipts (interest on credit card purchases, interchange fees, and service fees) paid by or related to New Jersey credit cardholders. The Division of Taxation rejected the refund claims based on the taxpayer’s revised sourcing methodology and the matter eventually came before the tax court. After thoroughly reviewing the structure and history of the Corporation Business Tax (and the now repealed Corporate Income Tax), the tax court separately addressed each of the taxpayer’s revenue streams.
The court, first addressing the sourcing of interest received on credit card balances, rejected the taxpayer’s argument that the taxable situs of an intangible (i.e., loan) is the commercial domicile of the creditor and that the interest at issue should be sourced to where the taxpayer’s operations occurred. In the court’s view, interest derived from New Jersey cardholders was included in the New Jersey receipts factor numerator. In reaching this conclusion, which was consistent with a Division regulation, the tax court held that an earlier court decision reaching the same conclusion under the now-defunct Corporate Income Tax was likewise applicable to the Corporation Business Tax (CBT). The court next addressed the treatment and sourcing of interchange receipts. The Division argued that interchange receipts should be treated as Original Issue Discount (OID), while the taxpayer argued that they should be treated as fees. If the interchange was characterized as a “fee,” the receipts would only be partially attributed to New Jersey. The tax court noted that for federal income tax purposes, the taxpayer computed net income from interchange under the federal OID rules and derived federal tax benefits from such treatment. In the court’s view, the taxpayer’s argument appeared to undercut its federal position of treating interchange akin to interest. Nevertheless, in a lengthy analysis the tax court separately determined that interchange was the economic and functional equivalent of interest. As such, interchange associated with New Jersey cardholders was sourced to New Jersey. Finally, the court addressed how certain fees derived from credit card customers, such as late fees, return check fees, and annual fees, should be sourced. Under a Division regulation, fees are sourced 25 percent to the state of origination, 50 percent to the state in which the underlying service is performed and 25 percent to the state in which the transaction terminates. New Jersey’s sourcing statute provides that the receipts factor numerator includes receipts from “services performed in New Jersey” and in another section captures “all other business receipts earned within the state.” The taxpayer, relying on the rule of statutory construction that applies when general words follow specific words, argued that the fees were “service” receipts from services not performed in New Jersey and therefore the receipts were not included in the New Jersey receipts factor at all. In the taxpayer’s view, the receipts could not be treated as “other business receipts” because the statute first specifically addressed service receipts and therefore the general “catch all” category could not apply to service receipts. The tax court rejected this argument, noting that the rules of statutory construction were subordinate to the paramount purpose of determining legislative intent. And, based on the history, the Legislature intended the CBT law to reach all income corporations derived from New Jersey sources. Having determined that the receipts were other business receipts, the tax court next held that the fees were inextricably associated with the benefit the cardholders received in New Jersey and therefore these receipts were 100 percent attributed to New Jersey, similar to the treatment interest and interchange receipts. However, due to the regulation, the tax court concluded that the receipts could only be sourced 50 percent to New Jersey, as opposed to 100 percent. The tax court next rejected the taxpayer’s constitutional challenges, but held in the taxpayer’s favor that the throwout rule did not apply because the taxpayer had economic nexus in every other taxing jurisdiction. Please contact Jim Venere at 973-912-6349 with questions on Bank of America Consumer Card Holdings v. Director of Taxation.
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.