New Jersey Division of Taxation Sales Tax Audit Mediation & Protest

The situation

Rosa, 51, owns Fernanda's Deli, a busy New Jersey deli and sandwich shop in Hoboken with $980,000 in annual revenue. She received a NJ Division of Taxation Notice of Assessment six weeks ago: "Sales and Use Tax Due: $34,200 (penalty of $5,130 + interest of $2,800 = $42,130 total)."

The Division auditor used Q2 2020-Q1 2021 as the statistical sample period and calculated an 18% underreporting rate, extrapolated across three years.

Rosa has 90 days from the notice date to file a protest with the Conference and Appeals Branch, but she has almost no idea what that means or how to do it.

(a) There is a NEW option she's never heard of: the Mediation Pilot Program. Since October 2025, the NJ Division of Taxation offers a voluntary, nonbinding, private mediation option for Sales and Use Tax disputes of $5,000 or more (Rosa's assessment of $34,200 qualifies). The auditor is supposed to inform Rosa of the mediation option at the post-audit conference, but the auditor's mention was brief, Rosa didn't understand the significance, and she's been focused on trying to reach a tax attorney. Mediation key facts: (1) it's NONBINDING, Rosa doesn't have to accept any outcome; (2) it's PRIVATE, settlement offers discussed in mediation cannot be used against Rosa at Conference and Appeals or Tax Court; (3) participation does NOT waive Rosa's Conference and Appeals rights (she can still file her protest after mediation fails); (4) the only downside is time (mediation typically resolves in 60-90 days). This is a potentially significant risk-free option that Rosa should exercise before spending money on a tax attorney.

(b) The sample period is the strongest argument. Q2 2020-Q1 2021 was when NJ COVID restrictions were most severe: indoor dining remained closed or severely restricted through most of 2021. For Fernanda's Deli, the 2020-2021 period saw significant customer traffic reduction and a shift in revenue MIX, fewer sit-down prepared food orders (taxable), more sealed grocery items (exempt). The auditor's extrapolation of an 18% "underreporting rate" from this atypical period to the full 3-year audit period systematically inflates the assessment.

(c) The food taxability line may have errors. The NJ auditor classified several of Fernanda's Deli's revenue streams as taxable prepared food. Some may be incorrect: pre-packaged grocery items sold from a refrigerated case (sealed manufacturer packaging, hummus, cheese, deli meats in sealed packages) are EXEMPT even from a restaurant or deli. If the auditor included these sealed-package sales in the taxable revenue calculation, the taxable base is overstated. Rosa's 2022 records show $85,000 in sealed-package grocery sales that should be exempt.

(d) A tax attorney quoted Rosa $7,500 to "review the audit findings, draft a Conference and Appeals protest, and represent her at the conference." The Mediation Pilot application (Form NJ-MED-1) + the 90-day protest letter is largely self-executable with the right structure.

Who receives this

New Jersey small retailers, delis, restaurants, food service businesses, and clothing boutiques that receive NJ Division of Taxation Sales and Use Tax assessment notices. Primary industries: NJ restaurants and delis (food taxability misclassification, especially prepared food vs. sealed packaged items, COVID-period sampling anomaly for NJ's restricted dining market 2020-2021), NJ clothing retailers (no-price-cap clothing exemption misclassification), and NJ e-commerce sellers with NJ nexus. Geographic concentration: dense NJ metro market (New York metro suburbs + Philadelphia suburbs) with extremely high restaurant and retail density.

Why the agency will not advise you

NJ Division of Taxation cannot advise audit respondents on how to use the Mediation Pilot Program, or how to build the most effective protest for their specific taxability dispute. The October 2025 Mediation Pilot is particularly valuable here, the Division announced it, the auditor is supposed to mention it, but there is no plain-language guide for small businesses on WHEN to request mediation, HOW to fill out Form NJ-MED-1, and WHAT to write in the application to maximize acceptance likelihood. Tax attorneys and consultants (NJSTARS, handsoffsalestax.com, tfdtaxlawyer.com) serve this market at $5,000-$15,000; the tool bridges the gap for the $10,000-$75,000 assessment range where attorney fees are economically irrational.

Key facts, with sources

• The New Jersey Division of Taxation launched a Mediation Pilot Program effective October 1, 2025, specifically covering Sales and Use Tax (SUT) controversies of $5,000 or more. The program runs for 24 months (through September 30, 2027) and allows taxpayers to request nonbinding, private mediation as an alternative or predecessor to the standard Conference and Appeals Branch protest process. Key features: (1) Voluntary, both the Division and the taxpayer must consent to participate; (2) Nonbinding, neither party is required to settle; (3) Private, all communications (settlement offers, admissions, mediator notes) are confidential and cannot be used in Conference and Appeals proceedings or New Jersey Tax Court; (4) Parallel, participation does NOT waive the taxpayer's right to file a protest with Conference and Appeals or pursue Tax Court; (5) Process: taxpayer submits Form NJ-MED-1 (mediation application) identifying the issues in dispute and why mediation is appropriate; the Division notifies the taxpayer of acceptance within 30 calendar days. The auditor informs taxpayers of mediation availability at the post-audit conference. Most NJ businesses receiving 2025-2026 assessments are unaware of this option, it's a brand-new program with no self-serve explanation targeted at small businesses, only advisory firm memos (BDO, PwC, KPMG, Hodgson Russ). Source: Mediation Pilot Program (TB-115) — New Jersey Division of Taxation · New Jersey Introduces Pilot Mediation Program for Corporate Business and Sales and Use Taxes — BDO · New Jersey's Tax Mediation Pilot Program: A Practical Resolution for Sales Tax Disputes — Sales Tax Helper (March 2026)
• New Jersey's Sales and Use Tax protest process (if mediation is not pursued or fails): the taxpayer has 90 days from the date of the Notice of Assessment to file a written protest with the Division's Conference and Appeals Branch (CAB). The 90-day window is significantly longer than most states' 30-60 day windows (TX: 30 days; CA CDTFA: 30 days; FL: 60 days; IL: 60 days), but the longer deadline can create false urgency reduction, causing businesses to miss the window while waiting to 'figure out what to do.' If Conference and Appeals denies the protest, the taxpayer has 90 days from the Appeals decision to file a complaint with the New Jersey Tax Court (part of the NJ court system). NJ Tax Court is a trial court of record with genuine independence from the Division of Taxation. Tax Court proceedings are formal but the small claims procedure (for amounts under $20,000) allows self-representation. NJ Division of Taxation audits are typically statistical sampling audits covering 3-year periods, using the same COVID-period sampling methodology that has generated inflated assessments in other states. New Jersey was among the most restrictive states for COVID indoor business restrictions (dining rooms closed March-September 2020; 25-50% capacity limits extended through most of 2021), making 2020-2021 sample periods particularly atypical for NJ restaurants. Source: Challenging a NJ Division of Taxation Sales Tax Audit Assessment — NJSTARS · New Jersey Sales Tax Audit: Process and Defense Strategies — Hands Off Sales Tax · NJ Division of Taxation — Conference and Appeals Branch
• New Jersey has two key taxability rules that create specific audit misclassification patterns: (1) Clothing exemption: New Jersey exempts most 'clothing and footwear' from Sales and Use Tax with NO price threshold (unlike New York's $110-per-item cap). Most wearing apparel is exempt from NJ SUT regardless of price. However, accessories (handbags, jewelry, watches, belts) are generally taxable, as are sports equipment and protective equipment (helmets, pads). NJ clothing retailers frequently receive assessments that misclassify exempt apparel items as taxable accessories. (2) Food taxability: New Jersey generally exempts food sold through grocery stores for home consumption (similar to other states). However, restaurant and prepared food is taxable: food sold for immediate consumption (at a restaurant, food truck, concession stand, or prepared deli counter) is taxable at 6.625%. NJ's specific rules: sandwiches sold at a deli are taxable; hot foods are taxable; ready-to-eat salads sold at a salad bar are taxable; pre-packaged grocery items (sealed manufacturer packaging) are exempt even if sold at a restaurant. NJ DOR auditors frequently create inflated assessments for delis and restaurants by misclassifying sealed packaged food items (which are exempt) as prepared food items (which are taxable). New Jersey has no local sales tax, the 6.625% state rate is the only rate applicable everywhere in NJ, simplifying the tax calculation (contrast with NY's 4.5% NYC surcharge or IL's 1.25% Chicago home rule occupation tax). Source: New Jersey Sales Tax & Audit Guide — Sales Tax Helper · NJ Sales Tax on Food and Beverage — NJ Division of Taxation Publication ANJ-12

When to bring in a professional

Self-serve responses fit routine cases: clear facts, amounts a business can absorb, and a deadline still ahead of you. Bring in a licensed professional when the amount at stake is large relative to their fee, the facts are genuinely disputed, criminal exposure is possible, or the deadline has already passed. A short paid consultation to sanity-check your plan is often worth it even when you handle the filing yourself.

All sources for this guide

1. Mediation Pilot Program (TB-115) — New Jersey Division of Taxation
2. New Jersey Introduces Pilot Mediation Program for Corporate Business and Sales and Use Taxes — BDO
3. New Jersey's Tax Mediation Pilot Program: A Practical Resolution for Sales Tax Disputes — Sales Tax Helper (March 2026)
4. Challenging a NJ Division of Taxation Sales Tax Audit Assessment — NJSTARS
5. New Jersey Sales Tax Audit: Process and Defense Strategies — Hands Off Sales Tax
6. NJ Division of Taxation — Conference and Appeals Branch
7. New Jersey Sales Tax & Audit Guide — Sales Tax Helper
8. NJ Sales Tax on Food and Beverage — NJ Division of Taxation Publication ANJ-12