TWIST - This Week in State Tax

New Jersey: Division Issues Guidance on Recent Law Changes

The New Jersey Division of Taxation has recently issued several new and revised Technical Bulletins that reflect law changes enacted in July. New TB-111 addresses the changes to the New Jersey Corporation Business Tax (CBT) rules related to the dividend exclusion, and the historic ordering of the net operating loss deduction, dividend exclusion, and international banking facility deduction. Notably, effective for privilege periods ending on and after July 31, 2023, the dividend exclusion and international banking facility deduction are now calculated pre-allocation. The prior net operating loss conversion carryover deduction (PNOLs) and net operating losses/net operating loss carryovers (NOLs) are calculated post-allocation. TB-111 notes that the change in historic ordering is prospective only, and taxpayers cannot adjust NOLs and PNOLs from privilege periods ending before July 31, 2023. Revised Bulletin, TB- 94(R) provides general information on NOLs, noting when a taxpayer uses NOLs generated in privilege periods beginning after July 31, 2023, those NOLs are subject to an 80 percent deduction limitation. The limitation does not apply to PNOLs or NOLs generated in periods beginning before August 1, 2023. Another Revised Bulletin, TB-95(R), addresses NOLs in the context of combined groups.  Finally, new TB-112 explains that on or after January 1, 2023, the Gross Income Tax sourcing rules for receipts from business income are aligned with the CBT sourcing rules. This means Gross Income Tax business receipts of S Corporation shareholders or partners in a partnership are sourced using the single sales factor method and market-based sourcing also applied to CBT. Please contact Jim Venere with questions.

Wisconsin: Title Transfer to Federal Government Was a Sale (Jill Nielsen)

A Wisconsin circuit court recently affirmed a Tax Appeals Commission decision holding that indirect materials purchased to fulfill a taxpayer’s contracts with the federal government were exempt from sales tax. The taxpayer, a manufacturer of specialty vehicles, purchased both direct and indirect materials to use in manufacturing military vehicles.  “Direct materials” were items such as raw steel, tires, and vehicle parts, while “indirect materials” included office supplies and computers. The taxpayer’s contracts required it to transfer title of the indirect and direct materials used in fulfilling the contracts to the federal government, and the title transfer occurred in this case. However, the Department of Revenue asserted that the taxpayer had not resold the items to the government, despite the contractual title transfer, and therefore the transactions were not exempt as sales for resale. After the Tax Appeals Commission concluded that the taxpayer purchased the indirect materials for resale to the government, the Department appealed.

All parties agreed that the taxpayer had purchased the indirect materials and transferred title to the federal government. The issue before the court was whether the transfer of title constituted a “sale” under Wisconsin law so that the resale exemption would apply. Because the purchaser was the federal government, the subsequent sale was not taxable. Wisconsin law provides that a "'sale’ includes any of the following: the transfer of ownership of, title to, possession of, or enjoyment of tangible personal property, or services for use or consumption but not for resale….” In the court’s view, the Commission correctly determined that the statute was unambiguous. Notably, any of the listed actions, which were joined by the disjunctive “or,” constituted a sale. A “sale” was not predicated on “use and consumption” of the goods in addition to the transfer of title, ownership, or possession. As such, the court concluded that a transfer of title alone was sufficient to be a “sale.”  In reaching this conclusion, the court rejected the argument that the taxpayer should be treated as the final consumer of the indirect materials; the federal contracts addressed when the title transfer occurred and supported that the fact that the taxpayer did not use the indirect materials before transferring title to the federal government.  The court also rejected the argument this holding would incentivize corporations to improperly assign indirect material costs to tax exempt entities.  The court noted that similar sales to private entities would remain taxable, and it must uphold the plain and unambiguous language selected by the legislature. Please contact Jill Nielsen with questions on Wisconsin Department of Revenue v. Oshkosh Corp.