On October 11, 2016, the New Jersey Tax Court published its
long-awaited decision concerning the sourcing of interest and other
fees related to credit card transactions. The court ruled against
the taxpayers and held that market sourcing applied—despite a
statutory rule based on place of performance. The decision is
likely to be appealed, but New Jersey-based taxpayers should
consider filing refund claims in the meantime.
The case involved several out-of-state financial services
companies that issued consumer credit cards. The issue was how to
apportion various receipts from New Jersey cardholders, including
interest, service fees, and interchange fees (the 2% transaction
fee retained by the issuing bank on the amount charged). For
apportionment purposes, the court determined that interchange fees
were the same as interest, and sourced both types of receipts based
on the location of the borrower. Despite a lengthy 76-page opinion,
the court provided relatively little analysis in reaching its
conclusion. Rather, the court relied heavily on an example in the
Division's regulations that includes interest in the
sales-fraction numerator to the extent paid by a New Jersey
This ruling could have significance for more than just financial
services companies. In applying market sourcing to interest, the
court specifically rejected sourcing intangible receipts based on
the taxpayer's commercial domicile. This means that New
Jersey-based companies may have a refund opportunity. New
Jersey-based companies that currently include intangible receipts
in their sales fraction numerator should consider sourcing those
receipts based on payor location if it produces a better
Court Adopts Benefit-Received Test for Services
Perhaps the most surprising part of the opinion is the
court's treatment of service fees. The statute provides that
service receipts are sourced to New Jersey only if the
"services [are] performed within the State ...." N.J.S.A.
54:10A-6(B)(4). Because the taxpayers performed services outside
New Jersey, they argued that their receipts should be included only
in the sales fraction denominator. But, despite the plain statutory
language, the court concluded that fees received by the taxpayers
from New Jersey customers were earned entirely from New Jersey and,
thus, includable in the sales fraction numerator. In light of
technological advances, the court observed that services no longer
have to be performed locally. Unlike services performed on a
tangible object (such as a haircut or carwash), the court reasoned
that the situs of services performed on an intangible (such as a
financial transaction) is amorphous. Accordingly, the court
concluded that service receipts from such transactions should be
sourced "based upon where the benefit of the service is
derived or earned, not necessarily where the service is technically
Because the court's conclusion contradicts the statutory
rule based on location of performance, this decision is likely to
be appealed. But again, the court's decision provides a
potential refund opportunity for companies performing services in
New Jersey. Companies that perform services within New Jersey, and
that have been including those services receipts in the numerator
based on the statute, should file a refund claim to the extent
their customers receive the benefit of those services outside the
The court included only 50% of the service fees in the sales
fraction numerator based on N.J.A.C. 18:7-8.10(c), which is the
Division's special apportionment regulation for certain
electronic transactions. The regulation provides that 25% of the
receipt is sourced to the state of origination, 50% to where the
service is performed, and 25% to where the transaction terminates.
Although the court ruled that the Division was bound by its
regulation, the court stated that the Division could rescind the
regulation going forward.
This article is presented for informational purposes only
and is not intended to constitute legal advice.
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On October 5th, 2016, the Internal Revenue Service and Treasury Department published final, temporary and reproposed regulations1 under Sections 707 and 752 of the Internal Revenue Code of 1986, as amended.
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