New Jersey Remote Sales Tax Bill a Good Step but Needs Clarity

The New Jersey state legislature is taking a step in the right direction by providing meaningful relief to smaller merchants with much higher tax burdens in the years since the US Supreme Court’s decision in South Dakota v. Wayfair.

The state is considering a bill to remove the 200-transaction requirement from the statutory sales tax and corporation business tax, or CBT, nexus thresholds. If passed, the bill would benefit certain out-of-state sellers but wouldn’t address the current gross income tax, or GIT, nexus requirements for pass-through entities and sole proprietors.

Given that the bill may cause confusion and inadvertent noncompliance due to the state’s existing nexus landscape, the legislature should consider providing uniform standards or, at the very least, clarifying the limits of the relief offered.

This New Jersey bill is part of a national trend of states dialing back broad nexus thresholds adopted in response to the Wayfair decision. Several states have enacted sales tax (and in certain cases, income tax) nexus thresholds consistent with the Wayfair fact pattern (for example, $100,000 of annual receipts or 200 transactions).

Over time, states found that these new thresholds imposed a significant burden on smaller merchants—particularly the 200-transaction threshold—and adjusted their nexus standards by increasing dollar thresholds, requiring both thresholds to be met, retaining only the $100,000 receipt threshold (as proposed in the bill), or implementing some combination of these changes.

For example, California initially imposed the $100,000 receipt or 200-transaction threshold, but then quickly changed the receipts threshold to $500,000 with no 200-transaction test. Other states applied the Wayfair thresholds for years before modifying them, such as Indiana, which dropped the 200-transaction threshold last year.

Current Law

New Jersey law is a patchwork of non-uniform sales tax, CBT, and GIT nexus requirements for out-of-state sellers without an in-state physical presence.

The state’s sales tax nexus law requires collection and remittance of sales tax if either a seller’s annual gross revenue from sales of tangible personal property, specified digital products, or taxable services delivered to the state exceeds $100,000, or the seller has 200 or more of such in-state transactions.

CBT nexus is triggered if a seller has at least $100,000 of gross revenue or 200 separate transactions from in-state sources, regardless of whether such revenues or transactions are subject to sales tax. Pass-through entities and sole proprietors are required to file GIT returns if they derive income from New Jersey sources.

Outlook

The bill’s relief is particularly significant for merchants in New Jersey that are organized and taxed as corporations, as it includes both direct tax and compliance relief. While the bill would presumably impact state revenue, the sales tax loss would be a maximum of $6,625 per taxpayer per year, with the actual loss likely to be much lower. The loss of CBT revenue would likewise be low.

But despite the bill’s positives, it still doesn’t address the difference in nexus standards among the sales tax, CBT and GIT.

It may confuse merchants by creating the misimpression that the bill provides uniform relief for sales tax, CBT, and GIT purposes. As the likely majority of small merchants conduct their business through pass-through entities or as sole proprietors, such resulting noncompliance may have a more acute, although inadvertent, revenue impact.

The scenarios below reflect the differing nexus results for sales tax, CBT, and GIT purposes, all stemming from the same activity conducted by either a CBT or GIT payer.

To mitigate this confusion, the legislature should consider incorporating uniform nexus standards for CBT and GIT purposes into the bill, as well as rearticulating the distinction between the sales tax and CBT $100,000 thresholds. The bill exclusively benefits out-of-state merchants, so the legislature should also consider providing such relief to small merchants who conduct their business within the state.

This bill goes a long way to improve tax administration and lessen the burdens borne by smaller businesses. With a few improvements, it can be a model of clarity for future legislation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Michael Puzyk is tax partner at McCarter & English, focusing on domestic and international businesses, organizations, and individuals in state and local taxation, with emphasis on New Jersey tax matters.

Paul Buonaguro is an associate at McCarter & English and a member of the firm’s tax and employee benefits group.

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