The credit is calculated by multiplying the tax due to New Jersey on all income by a ratio, the numerator being income subject to tax by both New Jersey and the other jurisdiction and the denominator being income subject to tax in New Jersey. The product is compared to the tax paid to the other jurisdiction and the resulting credit is the lower of these two amounts (as long as it is not greater than the New Jersey tax liability).

Special problems arise because of the differences in individual taxation between New Jersey and New York. In the matter of Stiber v. Director of Taxation (9 NJ Tax 623 April 15, 1988), the differences and nuances of computing the credit were brought into the light.

The taxpayers computed the credit by using income taxed in New York as the numerator of the ratio and entire New Jersey taxable income as the denominator. The New Jersey Tax Court in a careful analysis of the statutes, regulations, and case law determined that there was a two- pronged test to be satisfied in computing the credit. One issue was whether income subject to tax by New York was also subject to tax by New Jersey. Since New York did not recognize ACRS depreciation, the taxpayers had to increase New York source income subject to tax in New York by the excess of ACRS over normal depreciation. However, New Jersey recognized ARCS depreciation and as a result the taxpayers were not allowed a credit for taxes paid to New York on the portion of tax represented by the ACRS adjustment. Thus, even though the income was subject to tax in New York and taxed by New York (the first prong) it failed the test to the extent of the portion not subject to tax in New Jersey (the second prong).

Another issue dealt with partnership income taxed in New York. New York does not allow nonresidents to deduct losses from out-of-state partnerships, while New Jersey allows such losses to be offset against other partnership income. As a result, the income taxed in New York is greater than the income taxed in New Jersey. Again, the taxpayers failed to meet the second part of the test, i.e., the income must also be subject to tax in New Jersey.

A Tax on the Business

In a rather constricting interpretation of the tax statutes, the Division of Taxation has reversed its prior position that the New York City UBT was eligible for purposes of calculation of the credit (State Tax News July/August 1990). The Division's policy is that UBT is imposed on a business' income and not on the income of the individual taxpayer. it further rationalized its position by stating that the UBT is a tax on the business because the business is able to deduct the tax. Therefore, the UBT is not eligible for the credit for taxes paid to other states.

With respect to New Jersey resident shareholders of S corporations, doing business in New York or any other state which recognizes S corporations and where the corporation has elected S status, the resident credit is generally not available for taxes paid to such other state(s) on the shareholders' distributive share of income. The Division has ruled that it will allow an amount equal to that portion of the dividend distribution (S corporation distributions are taxed as dividends in New Jersey) currently taxable in New Jersey which represents that part of the shareholder's distributive share currently taxable by foreign jurisdictions to be included in the computation of the credit. Shareholders of corporations with a positive Accumulated Adjustments Account (AA& E&P for New Jersey purposes) will only receive a credit to the extent that current distributions are greater than the amount of beginning AAA.

Careful consideration should be given to the wording of the statutes and the rulings of the Division of Taxation when attempting to deal with what appears to be a rather straightforward computation.

CONNECTICUT SALES AND USE

TAX ON TAX PREPARATION

SERVICES

In June 1991, the State of Connecticut imposed a sales and use tax on tax preparation charges efective for any services provided on or after October 1, 1991.

On April 10, 1992, the Department of Revenue Services issued Special Notice 92(6), which clarifies the types of "Excluded Services" that are not considered to be tax preparation services.

Tax preparation services as originally enacted do not include:

1. Tax advice, tax research, or tax planning by whatever name called that is given with respect to a particular tax return on or before the close of the taxable period to which the return pertains.

2. Bookkeeping services, even if the service provider also provides tax preparation services to the client.

3. Accounting services, even if the service provider also provides tax preparation services to the client. Accounting services means, but - is not limited to, services involved in the issuance of a written signed financial statement (or a signed transmittal letter accompanying the statement) including at least a balance sheet and income statement.

4. Advice in connection with, and preparation of, documents that are required to be filed with the probate court. 5. Services rendered in connection with tax audit examinations or correspondence pertaining to a tax return filed with the IRS or the Department of Revenue Services.

The notice clarifies services involved in preparing working trial balances. Where the same service provider provides both accounting and tax preparation services, 50% of the charges for preparation of the working trial balance will be presumed to be charges for tax preparation services (in addition to other tax services). A working trial balance means a worksheet to which adjusting entries are made (including, but not limited to Schedule L, M-1 and M-2 items). The service provider will have the burden of establishing that less than 50% of such charges are attributable to tax preparation services.

In addition, the rules concerning the resale of services have been modified. Services such as computer and data processing involved in generating computerized tax returns may be purchased on a resale basis by a tax preparation service provider, but only if 1) the computer and data processing service provider separately states the exact charge for services for a particular client of the tax preparation service provider, and 2) the tax preparation service provider separately states on the bill or invoice to the client the precise service and exact charge, that was purchased from the computer and data processing service provider for resale to the client.