Weekly Round-Up: New Jersey Backtracks From Controversial TAM

A new technical advisory memorandum on advance pricing agreements , Technical Advisory Memorandum TAM-2012-1, was issued by the New Jersey Division of Taxation to clear up taxpayer confusion arising from an earlier TAM, and not to reflect a change in tax policy, a senior state official told Bloomberg BNA reporters Erin McManus and Dolores Gregory.

TAM-2012-1 provides that the division will accept an APA or third-party pricing study “as proper documentation and evidence” when it is evaluating intercompany transfer pricing and determining a fair and reasonable tax. It replaces TAM-2011-17, issued June 6, 2011.

Michael J. Bryan, director of the Division of Taxation, said the intention of the original TAM was to make clear that the state intended to give APAs “the credence we thought they deserved.” Taxpayers, however, viewed the original TAM as “New Jersey trying to expand its authority in this area, and that was really unintended.”

In most cases, according to TAM 2012-1, the division will use I.R.C. § 482 standards to audit and adjust items above line 28 of Schedule A of the New Jersey corporate business tax return. It further provides that “in most circumstances” the division will respect “APAs and their content, including pricing methodologies, economic assumptions and analysis and market valuations.”

“An advance pricing agreement is a fairly arduous process that taxpayers engage in,” Bryan said. “We are not going to take those and just say ‘okay, fine, we are going to ignore your APA.' The taxpayers produced a credible document, and we cannot just ignore that.”

TAM 2011-17 stated that N.J. Rev. Stat. § 54:10A-10(b) authorized the division to go beyond the scope of APAs to determine a “fair profit” that the taxpayer would have derived but for its transactions with a foreign affiliate. It was intended to convey the same information as TAM 2012-1, Bryan said, but instead, it generated “a lot of confusion.”

Bryan acknowledged that taxpayer concern that New Jersey planned to ignore APAs was in part generated by its relationship with Teradata Corp., and its subcontractors, Affiliated Computer Services Inc. and Chainbridge LLC, which were retained to conduct transfer pricing analyses of dozens of multistate companies operating in New Jersey.

“We got a lot of criticism from working with Chainbridge, and part of Chainbridge's M.O. was to ignore APAs,” Bryan said.

For a complete look at the controversy surrounding TAM 2011-17 and the department’s efforts to clear up the confusion, check out the new article by Bloomberg BNA State Tax Law Editor Erin McManus and Bloomberg BNA Reporter Dolores Gregory, published in this week’s issue of the Weekly State Tax Report.

In other developments…

Morrison & Foerster LLP releases their March 2012 issue of New York Tax Insights which includes a look at guidance issued on the new sales tax exemption for electronic news services.

Jasper L. Cummings, of Alston + Bird LLP, looks at erroneous sales tax collections in North Carolina.

The Center on Budget and Policy Priorities releases the testimony of Michael Mazerov, Senior Fellow, State Fiscal Project, before the Maryland Senate Budget and Taxation Committee regarding SB 269 [Combined Reporting].

When it comes to business taxes, location matters, a new study by the Tax Foundation argues.

Lawmakers kill bill to streamline Internet sales tax, Melissa Davlin of the Times-News Magicvalley.com reports.

Tax-free Internet sales, exemptions erode state revenue, Dennis Cauchon, of USA TODAY, writes.

Compiled by Priya D. Nair
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