On September 8, 2020, the New Jersey register published New Rule: N.J.A.C. 18:7-8.10A dealing with sourcing of services on a market basis. The rule was originally proposed on March 16, 2020 and adopted on August 10, 2020. The new rule is effective for all years beginning after July 31, 2019. What is unusual in the New Jersey rule is the ability of the taxpayer to use a “reasonable approximation” as to where the benefit is received. Many other states have a reasonable approximation clause in their market sourcing rules. However, New Jersey is unique in that there is greater flexibility to situations in which the reasonable approximation method can be used.
Under the rule, a taxpayer who provides services which the benefit is received both inside and outside of New Jersey looks first to 1) the terms of the contract, 2) the taxpayer’s books and records, or 3) the nature of the taxpayer’s or recipient’s business. If none of those items provide the information necessary to determine the proportion of the benefit of the service is received in the state, the taxpayer may use a reasonable approximation to make that determination.
Reasonable approximation means the location determined by considering all available information as to the recipients’ activities that is available to the taxpayer. If the taxpayer must rely on population information, the taxpayer can use the population contained in the U.S. census if the benefit is received only in the U.S. If the benefit is substantially received outside of the U.S., the taxpayer may include the population of the country(ies) in which the benefit is substantially being received. The taxpayer may also request to use industry standard approximations.
The promulgation of the rule comes at an interesting time when its West Coast sister state, California, is tightening up its rules related to market-based sourcing. One of the methods which California is restricting is the use of a reasonable approximation methodology, while New Jersey’s rule regarding reasonable approximation is much more flexible.
As the coming filing season is the first tax year in which market sourcing applies in New Jersey, taxpayers should carefully examine their options to present the best approach to sourcing revenues from the sale of services.
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