IN A PRIOR CASE WE LOOKED AT AKME Corp, a company that makes high quality ocean beach umbrellas in Pennsylvania and sells most of its product through on line ordering and shipping direct to customers in NJ. AKME had no physical presence in NJ. Upon inquiry the NJ Department of Taxation asserted that AKME – which did not charge, collect and remit sales tax on these sales to NJ customers – was wrong!
While we all agreed that NJ might want to chase all of the buying customers for “use tax” we recognize that from an enforcement perspective it was much easier to try to hold AKME responsible for collecting the sales tax.
We ballparked some tax exposure – 75% of AKME’s $50 million of annual sales go to NJ customers. With yearly $37.5 million of sales potentially subject to the 15% sales tax rate, which we were told would apply, we saw a $5,625,000 exposure annually!
Since AKME had consistently hit these sales dollars since 1990, and assuming that AKME’s alleged failure to comply and file would keep the statute of limitation open all the way back to 1990, we saw a LOT of exposure! 15 years (roughly) at $5.625 million per year and we saw a potential $84.375 million TAX exposure! WOW!
You all vigorously defended your client AKME and successfully argued that – under QUILL – AKME’s lack of physical presence in NJ would prohibit NJ from obligating AKME to charge collect and remit sales tax I NJ. WHEW!!! Congratulations…you kept your client!
While you were at it you also considered income tax exposure AKME might have in NJ and concluded PLL 86-272 would protect AKME. Here, as a seller of tangible personal property and where orders are accepted outside of NJ and AKME’s product was shipped by common carrier and its activities in NJ were limited, quite limited, you concluded no income tax liability in NJ, either. Another WHEW!
AKME’s CEO now lives and works out of his home in CAPE MAY, so AKME – beginning in 2016 – sucked it up and agreed it should charge, collect and remit sales tax to NJ (just like AMAZON?). AKME also agreed to start filing income tax returns in NJ at this time. Life is good.
LOOKING AHEAD -
Time passes and AKME is looking at new ways to do business. It contemplates forming a subsidiary and transferring the AKME UMBRELLA trademark into the new company in an effort to protect the value of the TM, a significant asset, especially from those nasty potential NJ litigants! NEWCO agrees to license AKME to use the TM on all of its umbrella sales and AKME will pay NEWCO a 15% royalty on all sales. Sales in NJ have grown to $50 million annually, so you would project that AKME will pay NEWCO $7.5 million per year.
NEWCO has about $500,000 of expenses per year, so NEWCO’s net income is projected at $7 million annually.
Question -
You have been asked by your CEO friend and client to determine whether or not NEWCO will be subject to tax in NJ IF this potential restructuring goes through.
Considering NJ cases such as LANCO, as well as GEOFFREY, MBNA, CAPITAL ONE, ETC, ETC, and trends in other jurisdictions, what do you advise? Why?