29 March 2018 New Jersey Corporation Business Tax cannot be assessed against a partnership that shows the regular place of business of its partners in New Jersey In National Auto Dealers Exchange, L.P. v. Director, Div. of Taxation,1 the New Jersey Tax Court (the court) ruled that the New Jersey Division of Taxation (Division) cannot assess corporation business tax (CBT) against a partnership whose nonresident partners filed Form NJ-1065E with the partnership. The CBT, the court held, is not directly assessed against partnerships. Instead, according to the court, the only obligation of partnerships under the CBT is to collect Form NJ-1065E or pay the CBT on behalf of the nonresident partner. Thus, if the nonresident partner filed Form NJ-1065E with the partnership but failed to pay the tax due, the Division's only course of action is against the nonresident partner. A nonresident partner can file a Form NJ-1065E with the partnership to report that the nonresident partner is either exempt from CBT or maintains a regular place of business, not including a statutory office, in New Jersey. The filing of a Form NJ-1065E by a nonresident partner establishes that the partnership is not required to pay tax on behalf of its nonresident partners, because they have effectively agreed to be subject to New Jersey taxation themselves.2 In this case, Manheim NJ Investments, Inc. (Manheim) was the 99% limited partner of National Auto Dealers Exchange, L.P. (NADE), the plaintiff in this action. Manheim timely filed Form NJ-1065E with NADE. The court held that CBT is not directly assessed against partnerships. Instead, partnerships are required to pay tax on behalf of their nonresident partners if the partner does not file Form NJ-1065E with the partnership. Thus, according to the court, NADE's only obligations are to either collect the Form NJ-1065E from its nonresident partners or pay the tax on behalf of a nonresident partner that does not submit the form. The court further held that the activities of the partners have no bearing on the partnership's requirement to collect the form or pay tax on the partner's behalf. For example, a partner's later decision to file a refund claim for any reason, including that it had no regular place of business in New Jersey, is irrelevant, because it is not the action of the partnership. The court based its reasoning on its reading of the statutes and its understanding of the CBT Act interpreted as a whole, and not as an isolated collection of statutes. The court rejected the Division's arguments that: (1) the partner's filing of a refund claim effectively revoked the form; (2) tax is imposed directly on the partnership; (3) Form NJ-1065E is no longer effective; and (4) N.J.S.A. 54:10A-15.11 (setting forth the rules for tax payments by partnerships on behalf of their nonresident partners) controlled instead of N.J.S.A. 54:10A-15.7 (procedures for maintaining partnership records with respect to nonresident consents). Because the form had been timely filed, the Division was foreclosed from pursuing any assessment against NADE, regardless of Manheim's actions. Manheim's actions were particularly relevant to the Division because of the companion case, Manheim v. Director.3 In that case, Manheim filed a complaint in the court, contending that it had no CBT nexus in New Jersey since it was not unitary with NADE. In the alternative, Manheim, contended that it was entitled to investment company status and sought a refund of CBT it had paid. The court struck down N.J.A.C. 18:7-1.15(b)(9), precluding Manheim's investment in NADE from qualifying as an investment in a security that would count towards Manheim's qualifying for investment company status. The court found the central issue of Manheim's investment company status, however, unripe for summary judgment.4 Because Manheim was challenging its CBT obligation in this litigation, the Division sought to collect the CBT from either NADE or Manheim. The court, however, foreclosed the Division's ability to collect from NADE, ruling that its sole recourse was against Manheim. It is not yet known whether the Division will appeal the court's decision. If the court's decision stands, it will provide important protection to taxpayers who have interests in partnerships doing business in New Jersey. The Division sought to be able to tax both the partnership and the partner in order to collect the tax, although it did not seek to collect the tax twice. The court's decision prevents the Division from seeking the tax from the partnership. The court's decision is particularly applicable to situations in which the partner seeks a refund based on not having nexus with New Jersey, or being subject to tax at a lower rate. Finally, the court's ruling that partnerships are not subject to CBT may have further implications for other refund claims and for tax planning.
1 National Auto Dealers Exchange, L.P. v. Director, Div. of Taxation, Dkt. No. 000028–2014 (N.J. Tax Ct. Feb. 26, 2018). 4 For more on this, see Tax Alert 2017-0438. Document ID: 2018-0696 | |||||||
