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Oct. 11 — Bank of America Consumer Card Holdings and other credit card issuers owe New Jersey tax on revenue derived from interest, interchange and service fees.
In an opinion released Oct. 11, the New Jersey Tax Court determined that the companies' receipts of interest and interchange generated from New Jersey cardholder accounts are fully allocable to the state for tax years 2002 through 2008. The companies' receipt of service fees are 50 percent allocable to New Jersey ( Bank of Am. Consumer Card Holdings v. N.J. Div. of Taxation , 2016 BL 337981, N.J. Tax Ct., No. 012947-2011, unpublished 10/6/16 ).
After filing returns for the tax years in question, the companies submitted amended returns covering the same time frame, seeking approximately $42 million in refunds. According to the tax court, they alleged that “none of the income earned or derived from accounts of cardholders located in New Jersey should be allocated to the State of New Jersey.”
The New Jersey director of the Division of Taxation rejected their refund requests.
The dispute implicated the state's Corporation Business Tax, which provides for a three-factor allocation formula incorporating a double-weighted receipts factor.
While Bank of America and the other issuers acknowledged there was sufficient nexus with New Jersey, they contested the allocation of income under the CBT.
The tax court declined to side with the companies' interpretation of the CBT and New Jersey law, and found no viable constitutional claim invalidating the state's apportionment.
According to the court, the “thrust of the taxpayers' argument” was the second prong of the Complete Auto four-prong test for the constitutionality of a tax under the federal commerce clause—whether the tax is fairly apportioned.
“While taxpayers here wring their hands and allege that New Jersey’s version of the three-factor formula unfairly allocates taxation, taxpayers do not allege any clear and cogent evidence that the formula as implemented results in such a distortive effect that is so outrageous to require invalidation,” according to the opinion. The court observed that “a double weighted sales factor is more likely than a single weighted formula to result in an attribution to the taxing state that more closely reflects the net income derived from the state.”
Rejecting the director's arguments relating to the throwout rule, the tax court held that all of the companies' receipts must be applied to the denominator of the receipts allocation formula.
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