Solix Tax Refund Decision Signals Disconnect on Sourcing Rules

The New Jersey Tax Court decision this month allowing government contracting firm Solix Inc. to get a nearly $400,000 corporate business tax refund is worth examining in light of controversy on sourcing of receipts from the sale of services, deference to taxing agency interpretations, and alternative apportionment.

The unpublished opinion in Solix Inc. v. Dir., Div. of Tax’n, which dealt with market-based sourcing of receipts from sales of services, points out the potential for state courts to interpret somewhat similar sourcing provisions differently.

The case follows (and relies heavily on) the 2023 Pennsylvania decision in Synthes USA HQ, Inc. v. Commonwealth in determining that market-based sourcing is the appropriate way to source receipts from services where statutory language doesn’t require that method.

Solix held that because the applicable statute didn’t provide a method (cost of performance or MBS) for determining when a taxpayer’s services were in the state, and Division of Taxation regulation didn’t mandate COP as the exclusive sourcing method, the taxpayer was entitled to source its receipts to the location where the benefit of the services was received.

However, Solix is difficult to reconcile with the ways the Indiana Tax Court and Virginia Supreme Court interpreted statutes that were similar to the regulation at issue in Solix. This raises the question of how other courts might interpret language on COP for determining when a taxpayer’s services were in the state.

Of perhaps greater importance: Solix could be viewed as part of a judicial trend to choose not to defer to a taxing authority’s interpretation of a statute.

The Solix opinion rests on several puzzling premises. Specifically, it relied on Synthes to conclude that it’s appropriate to apply “market-based sourcing for services [where doing so] conform[s] to the treatment of sales of tangible personal property.”

It also agrees that a 2018 amendment (which was not in effect for the years at issue) mandating MBS “simply clarifie[d] [that MBS] should be the accepted allocation method.”

The conclusion that the 2018 amendment was a “clarification” and not a “change” contradicts a quote from the governor “recommending changes to support New Jersey-based companies by including market-based sourcing.”

The quote unequivocally states that requiring MBS is a change. The court’s conclusion seems all the more curious when it comes in the sentence immediately following the governor’s quote and one considers that the opinion uses “change” three times when discussing the 2018 amendment.

Chief Judge Mala Sundar observed the Department of Taxation’s regulation provided for COP sourcing of services but didn’t mandate the COP method or expressly bar MBS—so the taxpayer was permitted to use MBS.

The opinion also summarily dismissed the Department of Taxation’s argument that receipts from intangibles and services should be sourced differently. That distinction may have been one without a difference in this case, but many states have revised their statutes to expressly provide different sourcing methods for intangibles and services.

The way statutes define intangibles and services, combined with the proliferation of yet-to-be-imagined types of digital goods, will certainly be an area ripe for litigation soon.

Sundar cited well-established New Jersey precedent for the principles that:

• “Final determinations are no doubt entitled to a presumption of correctness”
• “The Director’s expertise, particularly when exercised in the specialized and complex area of the CBT Act[,] is entitled to great respect by the courts” (Metromedia)
• “Courts are not obliged to stamp their approval of [Taxation’s] administrative interpretation” (Koch)

She found the taxpayer had met its burden of overcoming the presumptive correctness of the Department of Taxation’s determination. Yes, the taxpayer should have prevailed. However, the disjointed and less-than-linear statutory and regulatory construction noted above suggest that Section 8’s alternative apportionment would have been a more secure rationale to support the taxpayer’s victory.

The statutory and regulatory analyses contained in this opinion create uncertainty for future tax litigants—the Department of Taxation and taxpayers—regarding the role of legislative history, the inferences that may be drawn from regulations, and when alternative apportionment is an appropriate remedy.

Because the opinion is unpublished, it doesn’t constitute precedent, isn’t binding on any court, and may not “be cited to any court by counsel unless the court and all other parties are served with a copy of the opinion and of all contrary unpublished opinions known to counsel.”

Though it’s unclear whether the opinion will be published, if the Department of Taxation were to appeal, the Appellate Division would decide whether it is to be published. So the larger question is whether the department will appeal this decision to the Appellate Division within 45 days of April 12, because the Appellate Division rendering of an opinion would create citable precedent on which taxpayers could rely in the future.

The case is Solix inc. v. Dir., Div. of Tax’n, N.J. Tax Ct., No. 11113-2019, unpublished 4/12/24.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Mike Semes is of counsel at BakerHostetler and professor of practice at Villanova University School of Law’s graduate tax program.

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