New Jersey Tax Court Holds Out-Of-State Corporate Limited Partner Has Nexus For CBT Purposes

The New Jersey Tax Court has held that an out-of-state corporate limited partner in a New Jersey limited partnership that owned and operated numerous supermarkets in the state had nexus for purposes of the New Jersey corporation business tax (CBT) because both entities were in the same line of business and interdependent with each other.1 Specifically, the Tax Court determined that the limited partner had nexus because both entities were parties to the same New Jersey-governed cash management agreement (CMA); had common agents, managers, officers and directors based in New Jersey upon whom they depended to operate their stores; and shared a principal place of business in New Jersey.

Background

Village Super Market, Inc. ("INC") was a New Jersey corporation that owned and operated 25 supermarkets in New Jersey and one supermarket in Pennsylvania. In 1999, INC reorganized its business into separate legal entities to conduct its New Jersey and Pennsylvania operations. INC formed the taxpayer, Village Super Market of PA, Inc. ("PA"), as a wholly-owned subsidiary to own and operate the supermarket in Pennsylvania. PA filed a New Jersey business registration form indicating that it was doing business in the state. INC also formed a New Jersey limited partnership, Village Super Market of NJ, LP ("LP"), to operate the 25 supermarkets in New Jersey. PA held a 99 percent limited partnership interest in LP and INC held a one percent general partnership interest.2 PA's limited partnership interest in LP was its most substantial asset and largest source of income. As LP's general partner, INC appointed LP's officers. PA and LP each had a board of directors comprised of INC employees, officers and shareholders. Also, they both had the same primary place of business in New Jersey.

As part of the reorganization, both PA and LP entered into separate administrative service agreements3 and adopted a CMA4 with INC. The Tax Court noted that the day-to-day operations of the stores did not change since the 1999 reorganization and all stores continued to operate under the same name. Also, the leadership of INC, PA and LP was interrelated. The division of the stores into districts was structured in the same manner as before the reorganization. PA's store was located in the same district as some of LP's New Jersey stores. Furthermore, INC was a shareholder of a large food cooperative, Wakefern, which owned the ShopRite name used by the supermarkets and provided many services and most of the merchandise to the stores. Because only Wakefern shareholders could operate a store under the ShopRite name and INC was the only entity with shareholder status, INC was the conduit between PA and LP and the Wakefern cooperative.

The New Jersey Division of Taxation audited LP for the period of January 1, 2003 through March 31, 2006. After examining whether the distributive share of partnership income was properly reported on INC and PA's returns, the...