Banks Beware: New Jersey And Pennsylvania Developments Impacting Financial Institutions

Two recent tax developments in New Jersey and Pennsylvania have brought potentially far-reaching changes to financial institution taxpayers. A policy change broadening the New Jersey Corporation Business Tax (CBT) nexus standard could retroactively impact financial corporations. Likewise, a novel interpretation of the application of the Pennsylvania bank and trust company shares tax (shares tax) in the context of mergers that contradicts existing case law could retroactively affect financial institutions that have engaged in merger activity in the past several years.

New Jersey: Nexus rules as applied to financial services industry

Effective Aug. 15, 2011, the New Jersey Division of Taxation (Division) adopted amendments to the CBT regulation explaining when foreign corporations are subject to tax by adding the following sentence:

A financial business corporation, a banking corporation, a credit card company or similar business that has its commercial domicile in another state is subject to tax in this State if during any year it obtains or solicits business or receives gross receipts from sources within this state.1

This amendment essentially codifies the language of a technical advisory memorandum (TAM) issued by the Division earlier this year.2 At first blush, the addition of this subsection and release of the TAM did not appear to change the status quo for non-New Jersey domiciled financial institutions. However, in reviewing the Division's impact statements to the proposal and its response to public comments, it appears that a larger policy change in the application of its nexus rules has occurred with respect to the financial services industry. Perhaps even more concerning is the Division's intent to retroactively apply this nexus standard to tax years beginning on and after Jan. 1, 2002.

The phrase "receives gross receipts from sources within this state," is particularly notable, implying an all-inclusive concept. However, the Division, in its response to comments on the proposed amendments, stated that the amendment is not intended to expand the types of contact that would subject a foreign corporation to tax, but simply clarify its position. According to the Division, the use of the word "receives" versus "derives" gross receipts as used in the previous regulatory subsection when referring to general corporations does not unfairly target the financial services industry, but is merely explanatory in nature.

If the amendment is not...