Johnson & Johnson (J&J), the international pharmaceutical company whose headquarters are right down the road from the Eyet Law office, has won a $56 million dollar tax case before the Supreme Court of New Jersey that poses broad implications for tax law interpretation.  

The case, the result of a long process of appeals, carries implications for how tax law may be interpreted. It clarifies requirements for New Jersey taxpayers from 2011 to 2020 and, importantly, delivers new insight into how courts might read ambiguous tax laws.

The Background 

Johnson & Johnson, headquartered in New Jersey, is insured by Middlesex Assurance Company Limited (MACL). MACL, which is based in Vermont, was established to insure Johnson & Johnson. 

MACL was formed solely to provide insurance coverage for Johnson & Johnson. Because of this, they’re categorized as a “non-admitted insurer” in New Jersey, which refers to insurance companies that offer coverage without being licensed to undertake insurance business in that state. As such, they operate under different regulations. 

A decade ago, Congress passed the Non-admitted and Reinsurance Reform Act (NRRA) of 2010 which streamlined how non-admitted insurers could be taxed for out-of-state insurance premiums by states. 

This move gave the insured’s state of residence the sole right to tax premiums for all coverage nationwide instead of granting tax rights to wherever there was nexus. For Johnson & Johnson, this meant that New Jersey alone could pass laws levying taxes on their out-of-state non-admitted insurance premiums (called an Independent Procurement Tax, or IPT), which they did in 2011. 

Initially, Johnson & Johnson followed suit and paid IPT premiums in New Jersey for all nationwide premiums. But, in 2015, they filed for a refund for coverage outside of New Jersey, arguing that amendments did not, in fact, levy taxes on nationwide coverage.  

How the Courts Responded 

The New Jersey Division of Taxation initially rejected their case, stating that the 2011 amendment wasn’t clear and that the legislative intent appeared to be for IPT to apply to all non-admitted insurance acquired by New Jersey entities nationwide as per the NRRA.

Johnson & Johnson responded by appealing to the Superior Court of New Jersey, Appellate Division. The Appellate Division determined that:

• The statute didn’t clearly levy IPT for out-of-state coverage  
• Legislative intent didn’t clearly show otherwise
• In situations of ambiguity, courts should lean in the favor of taxpayers.  

Although a portion of the New Jersey amendment expanded the law’s scope to all nationwide coverage, the law only specified that this applied to surplus lines policies — a type of policy that is historically taxed like other non-admitted policies in New Jersey but which isn’t the type of coverage Johnson & Johnson acquired from MACL.

The Division of Taxation and the Department of Banking and Insurance (DOBI) countered by appealing to the Supreme Court of New Jersey. Their argument stated that the amendment should be read to apply to all non-admitted coverage, not just surplus lines coverage, and that when in doubt the courts should give deference to their regulatory interpretations. The Supreme Court followed the Appellate Division’s reasoning and rejected this argument.

Unpacking the Argument

“Surplus lines policy” isn’t defined in statutes, though “surplus lines insurer” is: any insurer that offers insurance regulated by the surplus lines law. Because non-admitted insurance is typically regulated like surplus lines insurance, the laws governing it are located in a section of the surplus lines law, and so this definition of “surplus lines insurer” arguably includes insurers who offer other non-admitted insurance as well.

Additionally, the laws governing surplus lines coverage had also been amended elsewhere to include nationwide premiums. As a result, interpreting the statute in question to apply to just those taxes would be to read the new language as duplicative, and therefore a legal nullity. Courts usually avoid these interpretations, given that they are ostensibly not what the legislature intended.

Altogether, the Supreme Court and Appellate Court found that this was not enough to determine the statutory language was unclear and the language clearly applied the nationwide scope of the tax to “surplus lines policy” premiums only. However, the courts held that even if the law was unclear the tax still wouldn’t apply, as the taxpayer should get the benefit of the doubt in such circumstances.

The Tax Takeaway

For most taxpayers, the key takeaway here is the guidance on how courts evaluate cases when tax statutes are unclear. In this situation, the courts determined the relevant statutes to be clear. However, another principle came into play: when in doubt, find in the taxpayer’s favor rather than defaulting to the Division of Taxation’s interpretations.

Although one of the major themes of 2020 is remote working, retail is an industry that had adapted to remote work long before the pandemic. From Etsy craft barons to direct-to-consumer startups, retail broke out of the brick-and-mortar mold with an e-commerce boom starting in the late 1990s. 

As a percentage of total retail sales, e-commerce sales have shown vigorous growth in the last decade, rising from 5.1 percent in 2007 to 13 percent in 2017. But some of that growth has been fueled by advantageous taxation practices for remote sellers, who are defined as sellers that don’t have a physical presence in a state but sell products or services for delivery there.

Ambiguity in tax laws allowed remote sellers to avoid paying sales taxes in states. However, this changed in 2018 when the United States Supreme Court declared in South Dakota v. Wayfair that individual states could require online sellers to pay state sales tax on their sales. 

Under this ruling, states are able to pass laws allowing them to collect sales taxes from remote sellers. Most states have put the legal framework for this into place, including New Jersey. 

To get the full picture of how sales and use tax applies to remote sellers in New Jersey, check out Eyet Law founder Matt Eyet’s comprehensive FAQ from 2019 in the prestigious Practical Law journal. Read on below for the key points.

Remote Sellers: Who Pays and For What Reason?

Particularly important to remote sellers is the concept of nexus. It’s the connection they have with a state, and it determines who pays taxes. Nexus can be the revenue a remote seller makes through sales in a state (economic nexus), a certain amount of sales referred from in-state business partners (click-through nexus), or through a party that facilitates a retail sale (marketplace nexus).

In New Jersey, there’s an economic threshold that determines economic nexus. Sellers have economic nexus if: 

• The remote seller’s gross revenue from eligible sales delivered into New Jersey during the current or prior calendar year exceeds $100,000; or
• The remote seller conducted 200 or more separate eligible transactions during the current or prior calendar year.

New Jersey also has established a click-through nexus standard which creates a rebuttable presumption that a remote seller has nexus in New Jersey if that remote seller:

• Enters into an agreement to compensate a New Jersey independent contractor or representative for referring customers via a link on its website or otherwise to that out-of-state seller; and
• Has sales from referrals to customers in New Jersey over $10,000 for the prior four quarterly periods ending on the last day of March, June, September, and December.

Finally, the third type of nexus which renders a remote seller’s sales into New Jersey taxable is marketplace nexus. Importantly, in this scenario where the remote/marketplace seller makes sales through a marketplace facilitator (such as Amazon), the remote/marketplace seller doesn’t need to collect and remit sales tax as that burden falls on the marketplace facilitator. Marketplace sellers and facilitators, however, can agree to a different arrangement for the collection and remittance of sales tax.

Registration and Tax Compliance

Because of the Wayfair decision, remote sellers need to register with tax authorities in states where they have nexus for tax purposes. New Jersey is a full member of the Streamlined Sales and Use Tax Agreement, which reduces tax compliance burdens on sellers. But while tax compliance may be simplified, remote sellers need to be mindful of penalties. New Jersey imposes penalties for late filing or payment and failure to file or pay. 

Remote retail is a major part of the retail economy, but just as technology shifts standards and best practices, so do tax laws. Paying state sales and use tax is part of the new normal for remote sellers. 

Don’t let this change catch you off guard. For a comprehensive overview of how New Jersey sales and use tax applies to remote sellers, take a look at Matt Eyet, Esq.’s guidance for 2019, as well as an updated version for 2020 in Practical Law. 

Have questions? Contact our team to schedule an appointment.