The New Jersey Department of Taxation is using a tough vehicle seizure program to obtain compliance for delinquent out-of-state motor carriers.

What is surprising about the measure is that it is used as a first-line tool for tax enforcement, as opposed to the traditional last resort against seriously delinquent taxpayers.

The tax in question is a New Jersey Corporate Business Tax (CBT), which applies to all corporations doing business in the state. New Jersey corporations and other out-of-state corporations with physical premises in the state are presumably well aware that they are subject to the CBT. The applicability of the tax to out-of-state corporations, however, is a far different matter.

We have used this column many times in the past to discuss general principles of state taxation of Canadian motor carriers. Canadian carriers may think they are being picked on by some of the states in the U.S., but the reality is that any tax enforced against Canadian carriers applies equally to out-of-state U.S. carriers. The question presented to all out-of-state carriers, U.S. or Canadian, is the same: Do the business activities of that carrier create a sufficient “nexus” with the state to justify state taxation? The nexus standard adopted by the state must not violate the U.S. Constitution, which provides the federal government with sole jurisdiction over regulation and taxation of purely interstate commerce.

Most states now have adopted nexus formulas in terms of the number of pick ups or deliveries in the state, and/or the number of miles travelled within the state, to trigger tax exposure. The reasoning is that after a certain point, the amount of activity within the state (whether miles driven or pickups/deliveries) is significant enough to give rise to an in-state presence that justifies taxation. In the early 1990s the State of New York began aggressively going after out-of-state carriers. Carriers making more than two pick ups or deliveries in any year found themselves subject to taxation based on all miles driven within the state, not just the miles associated with the small number of pick ups and deliveries. In general, state taxation looks at the number of miles driven within the state as a percentage of overall miles driven in the U.S. and Canada, and uses that percentage to allocate revenues or income to determine the tax due.

Carriers have challenged the constitutionality of these taxes in court, but generally have been unsuccessful in overturning them. These results seem to have emboldened other states in being more aggressive in seeking out delinquent taxpayers, and in lowering nexus thresholds.

The State of New Jersey has the lowest possible threshold imaginable – just one pick up or delivery within the state creates nexus. Since this fact may not be widely known or reasonably assumed by Canadian carriers, they may be unpleasantly surprised. In October of 2003, the Canadian Trucking Alliance and Ontario Trucking Association entered into successful negotiations with the State of New Jersey to mitigate the impact of delinquent taxes on Canadian carriers. Instead of going back as long as 10 years, the State agreed to go back only a maximum of three years. Unfortunately, this, and other features of the negotiated agreement, were only in effect through Dec. 31, 2003.

Carriers who were unaware of the opportunity to enter into the agreement, and carriers who otherwise failed to enter into the agreement, lost all opportunity to do so as of Jan. 1, 2004. Canadian carriers who did not enter into the agreement remain liable for CBT payments for as long as that carrier has made pick ups or deliveries within the state.

Enforcement in New Jersey often occurs in a manner most inconvenient to the carrier. State troopers are trained to investigate CBT exposure when reviewing the driver’s paperwork for a routine traffic or transportation law violation. One technique used is to ask the driver to provide the company’s U.S. Federal Employer Identification Number, a number normally associated with the payment of state and federal taxes. If the carrier does not have one, it is a strong indication that the carrier has never paid New Jersey taxes. Then they ask how many years the carrier has done business within New Jersey. When the driver provides a number, the trooper informs the driver that the truck is being seized and impounded until the carrier can pay $1,000 for every year in which it has admitted to doing business in New Jersey. That amount then serves as the “bond” for eventual payment of taxes. The carrier must compile and file New Jersey tax returns for each of those years, or produce evidence that it did not do business in New Jersey during those years. If the eventual tax determination is less than the amount of the seizure penalty, the carrier can obtain a refund.The message to Canadian carriers is clear.

Know the rules of the state before you enter it, to make sure you fully understand the cost of doing business there.

– Daniel Joyce is a partner with the Buffalo N.Y. law firm Jaeckle Fleischmann & Mugel LLP. He can be reached at (716) 843-3946.