New Jersey Implements Market-Based Sourcing for Services

Effective September 8, 2020, New Jersey issued new tax regulations for the allocation of receipts from certain service transactions for the tax years ending on or after July 31, 2019. These rules are intended to source revenues from services to the locations where the benefits are received. Sales are apportioned to New Jersey if the benefit of the service is received by a customer located within New Jersey.

A customer (recipient) is deemed to be within New Jersey if they maintain a regular place of business in New Jersey and engaged in a trade or business activity in New Jersey.

If the service is provided to a business with locations in New Jersey and another state, the taxpayer will include the sales in the numerator of the apportionment factor, based on the value of the benefit received in New Jersey or receipts attributable to the state’s marketplace. In order to determine the extent of the benefit received, a taxpayer may use the following guidelines:

1. The receipts are attributable to New Jersey if the recipient receives all of the benefit in New Jersey.
2. If the recipient receives some of the benefit in New Jersey, those receipts are in New Jersey in proportion to the extent of the benefit received in the state.
3. A taxpayer may use the terms of the contract, the taxpayer’s books and records, or the nature of the service to determine how much of the benefit is received in New Jersey.

If the above guidelines do not provide the information necessary to determine how much of the benefit of the service is received in New Jersey, the taxpayer may use a reasonable approximation to attribute the location of the receipts.

This differs from previous regulations by no longer requiring that the numerator of the receipts fraction include receipts from services based on the cost of performance or amount of time spent in performing these services.

These changes were created to eliminate confusion for taxpayers over the manner in which receipts from the sale of certain services are allocated to New Jersey. The tax regulation change provides examples and further clarification for a number of service industries, including engineering services, custom computerized software, advertising, and payroll processing services.

Please contact your Marcum State and Local tax adviser for additional guidance.