N.J.A.C. 18:2-8.4 - Set-off of Tax Liability of a Member of a Partnership or S Corporation Under Contract With the State

When a partnership or an S corporation is a vendor, the Division may also seek to reduce the contract payment due to that vendor by the amount of the State tax indebtedness of any of that vendor's partners or shareholders. The amount set off may not exceed the individual partner's or shareholder's proportionate share of the contract payment due to the vendor-partnership or vendor-S corporation.

Example 1: A vendor-partnership earns $10,000 providing consulting services to the State. The partnership has two equal partners, one of whom has a$ 100.00 gross income tax debt.

The debtor-partner's share of the contract payment due to the vendor-partnership is $5,000. However the partner's tax debt is only$ 100.00. Since the individual's tax debt ($100.00) does not exceed his proportionate one-half share of the contract payment ($ 5,000), the contract payment will be set off by the full $ 100.00 debt owed by the debtor-partner.

The vendor-partnership will receive a $ 9,900 contract payment. The debtor partner's gross income tax debt will be satisfied through the set-off.

Example 2: A vendor-S corporation earns $10,000 providing electrician services to the State. The S corporation has 10 equal shareholders, one of whom has a$ 10,000 gross income tax debt.

The debtor-shareholder's one-tenth proportionate share of the $10,000 contract payment is$ 1,000. Therefore, although his individual tax debt is $10,000, the portion of that tax debt that can be used to offset the contract payment due to the full S corporation is limited to$ 1,000, that is, the debtor-shareholder's proportionate share of the contract payment.

The vendor-S corporation will receive a contract payment of $9,000. The debtor-shareholder will have a remaining gross income tax indebtedness of$ 9,000.