The transfer pricing rules can be applied in the state tax context in a manner similar to the federal transfer pricing rules. In particular, the transfer pricing rules can be applied to situations involving related parties located in different states and can be used to determine the arm’s-length pricing of intercompany transactions of goods, intangible property, and services and the proper allocation of income and expenses between commonly controlled entities. Due to the different methodologies of how states determine tax liabilities, i.e., unitary combined versus separate filing, it is necessary that state taxing agencies carefully examine transactions between a taxpayer’s separate legal entities, even in cases of no consequence to the IRS.
The New Jersey Division of Taxation (DOT) announced that from June 15, 2022 through March 2, 2023 it has a transfer pricing initiative whereby corporate taxpayers can request (or volunteer) to report and resolve any potential transfer pricing conflicts. All requests must be received and agreed to by the DOT and the taxpayer by September 15, 2022, with all information provided to the DOT by October 31, 2022. Those eligible to participate in the program include corporate taxpayers under audit or notified of an upcoming audit and those wishing to expose and resolve a potential issue related to intercompany pricing. Corporate taxpayers involved in any litigation with the DOT are prohibited from participation.
What are the advantages of participating in this initiative? The first advantage is a resolution process that should take fewer than 120 days. The DOT will propose a settlement amount within 90 days of receiving the requested information and the taxpayer will have 30 days to accept the proposal. During this time period, the taxpayer is allowed to propose an adjustment, but ultimately the case will be resolved within the 30-day period. The second advantage is that penalties will not be assessed on the adjustment, though interest will be included in the adjustment amount.
In 2014, New Jersey tax administrators asked the Multistate Tax Commission (MTC) to create a group to increase state tax authorities’ knowledge on transfer pricing issues and enforcement. The MTC ultimately formed the State Intercompany Transactions Advisory Service (SITAS) Committee. SITAS members have included tax agency representatives from Alabama, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, and South Carolina, among others. To enhance collaboration, each state signs a participation commitment and exchange of information agreement. Dr. Ednaldo Silva has been a resource to the SITAS and is expected to assist the DOT with its transfer pricing initiative.
State tax authorities have historically been unsuccessful in collecting tax revenue associated with transfer pricing audit examinations, so the question remains whether this initiative will have the potential for success in New Jersey.
To discuss the state tax audit risk or transfer pricing documentation for your state tax structure, please reach out to a professional at FORVIS or submit the Contact Us form below.