New Jersey Rules that State Cannot Assess Partnership Directly for Tax of Corporate Partner

April 2, 2018

The New Jersey Tax Court struck down the Division of Taxation’s argument, ruling that a partnership can’t be held liable for the corporate business tax obligation of its corporate partner.

By Jeff Weinkle, SALT manager

Under federal tax law, partnerships are not taxable entities but instead pass their income through to their partners. Most states follow this income tax principle, however several have implemented additional provisions where partnerships are not themselves taxed but rather required to withhold taxes on behalf of certain corporate and individual partners. By requiring partnerships to withhold tax, the states are able to collect tax closer to the source of the taxable activity and obtain tax payments on behalf of several taxpayers (i.e., the partners) through one taxpayer (i.e., the partnership).[1]

States that require partnerships to collect this withholding tax may allow partners to provide an affidavit or certification of exemption from this withholding. Under the provisions of these exemptions, the partner typically consents to taxation by the state and agrees to file its own state return, and the partnership is typically released from the obligation to withhold and pay tax on behalf of that partner. In National Auto Dealers Exchange LP v NJ Division of Taxation,[2] the New Jersey Tax Court recently examined an issue where the Division of Taxation held a partnership liable for corporation tax despite receiving an exemption form from a corporate partner, ultimately ruling in favor of the of the partnership.

National Auto Dealers Exchange LP (“NADE”) is a partnership that was doing business in New Jersey for the years in question. Manheim NJ Investments, Inc. (“Manheim”), a corporate limited partner of NADE, provided the partnership with a NJ-1065E nonresident corporate partner’s exemption form for the years the partnership was taxable in New Jersey. On this form, Manheim certified to NADE that it had a regular place of business in New Jersey, thereby relieving NADE of its obligation to withholding corporation business tax on behalf of Manheim.[3] Manheim then went on to file its own New Jersey tax returns and pay the corporation business tax directly for those years.

After the court decision in BIS LP Inc[4] was issued in 2011, Manheim took the position that it did not have nexus in New Jersey for corporation business tax purposes, and filed refund claims for past corporation business tax it had paid. While these refund claims were under pending litigation between Manheim and the New Jersey Division of Taxation, the state went on to assess NADE for the corporation business tax attributable to Manheim for these periods. This assessment was issued on the grounds that Manheim had revoked its NJ-1065E exemption when it filed the refund claims and that NADE was now responsible for withholding corporation business tax on Manheim’s behalf. The assessment was levied in order to ensure that the state could still collect the tax without relitigating the nexus case with Manheim were it to ultimately prevail on its refund claims.

NADE protested this assessment on the grounds that it was not itself a taxable entity under the corporation business tax statutes and could not be assessed a deficiency at this point. Once they had received and submitted the NJ-1065E exemption form with their partnership tax return filing, the state should have no further legal recourse against NADE and were instead required to pursue the corporate partner that had consented to taxation by executing form.

The New Jersey Tax Court struck down the Division of Taxation’s argument, ruling that the state lacked the statutory authority to impose an assessment on NADE. NADE had satisfied their withholding obligation under the corporation business tax law by obtaining and filing Manheim’s NJ-1065E exemption with its partnership tax return. The court concluded that later actions by the partner should not subject the partnership to additional tax liability, as the partner had consented to New Jersey taxation at the time. Since NADE was not directly subject to corporation business tax and had satisfied its withholding obligations under the law, the issue of whether Manheim’s share of income from the partnership was subject to corporation business tax could only be resolved directly with Manheim.

The Tax Court noted in its decision that, had Manheim not originally filed a corporation business tax return and paid the tax at issue, the Division of Taxation’s argument may have had more credence. However, they did not go so far as to suggest that a partner’s failure to file tax returns after providing an exemption form to the partnership would result in an assessment on the partnership.

Pass-through withholding obligations can be quite onerous and difficult for an entity to monitor if it has many partners.  In the context of tiered pass-through structures, the withholding rules are even more complex.  The penalties for noncompliance can significant.  Aprio’s SALT practice has experience dealing with multi-state partnership and withholding tax issues and is ready to advise you on the impact of these rules to your business so that you can remain in compliance and reduce tax exposure. We constantly monitor these and other important state and local tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

[1] This is similar to the reason that states pursue sales tax against a seller rather than going after each individual purchaser.

[2] National Auto Dealers Exchange LP v Director, New Jersey Division of Taxation, (Docket No. 000028-2014).

[3] See NJ Rev. Stat. §54:10A-15.7. Partnerships are required to remit NJ corporation business tax on behalf of corporate partners who have not provided written consent to NJ tax.

[4] BIS LP Inc v Director Div. of Taxation, 26 NJ Tax 489 (2011). In this case, the Superior Court of NJ Appellate Division ruled that a holding company with no presence in NJ did not have nexus from its limited partnership interest in a partnership that was conducting business in the state.

Contact Jeff Weinkle, SALT manager at or  Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the March 2018 SALT Newsletter.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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