Weekly BNA Insights: Location of Cardholder Governs ‘Sourcing' of Card Issuer's Receipts

From the 10/28/2016 edition of the Weekly State Tax Report:

In the New Jersey Tax Court's just-decided Bank of Am. Consumer Card Holdings v. Div. of Taxation, the taxpayers are in the credit card account business. The taxpayers' receipts are derived from interest, “interchange” and service fees, and the issue in the case was how the receipts should be allocated to New Jersey (Bank of Am. Consumer Card Holdings v. Div. of Taxation, 2016 BL 337981, N.J. Tax Ct., No. 012945, 10/6/16).

In 1945, New Jersey enacted its corporation business tax (CBT). To determine the allocation for a corporation that maintained a regular place of business outside the state, a formula was delineated. The allocation formula consisted of three ratios, addressing property, payroll and receipts, both within and without the state. Once calculated, the ratios were added together and then divided by three. This type of allocation factor has been recognized as valid by the U.S. Supreme Court.

In 1995, New Jersey's CBT was amended to “double weight” the sales fraction of the allocation formula. In 2002, a “throwout” rule was established. Under that rule, the denominator of the sales fraction couldn't include receipts attributable to other states that weren't taxed. This provision was later repealed in 2010 (but was in effect for the years at issue in the Bank of America case).

Robert Willens, president of Robert Willens LLC in New York and an adjunct professor of finance at Columbia University Graduate School of Business, discusses the New Jersey Tax Court’s decision in this week’s BNA Insights article, available here (subscription required). Or sign up for a free trial to the Weekly State Tax Report.

Compiled by Chreasea Dickerson