New Jersey State Tax Update
New Jersey Supreme Court Upholds the Facial Constitutionality of the "Throwout Rule" But Limits Its Application; Taxpayers Should Consider Refund Claims
The New Jersey Supreme Court recently decided that the "Throwout Rule" is facially constitutional in Whirlpool Properties, Inc. v. Director, Division of Taxation. However, the Court held that receipts that are not taxed because a state does not impose a corporate income tax or similar business activity tax may not be excluded by the Throwout Rule.
Taxpayers subject to the New Jersey Corporation Business Tax that paid additional tax due to the Throwout Rule with respect to receipts allocated to jurisdictions that do not impose a corporate income or similar business activity tax should consider making refund claims for open tax years. Taxpayers may generally file refund claims within four years of making a payment of New Jersey Corporation Business Tax. In addition, taxpayers may consider challenging the Throwout Rule based on their particular facts.
The Throwout Rule was added to the New Jersey Corporation Business Tax Act in 2002 to address concerns that taxpayer receipts allocated to jurisdictions that do not impose a tax on or measured by profits or income, business presence or business activity, escaped taxation. Such receipts are sometimes referred to as "nowhere sales."
New Jersey uses an allocation factor to determine the portion of a taxpayer's income that is taxable by New Jersey. The allocation factor consists of three fractions: the property fraction, the payroll fraction and the sales fraction. The numerator of each fraction consists of the property, payroll or sales, as applicable, within New Jersey and the denominator of each such fraction is property, payroll or sales everywhere. The Throwout Rule excludes from the denominator of the sales fraction receipts allocated to a jurisdiction that does not subject a taxpayer to a tax on or measured by profits or income, business presence or business activity (i.e., since the taxpayer does not have sufficient nexus with the jurisdiction for a tax to be imposed). This results in an increase in the sales fraction and, therefore, the amount of New Jersey Corporation Business Tax paid by the taxpayer. However, as set forth above, receipts allocated to jurisdictions that choose not to impose a corporate income or similar business activities tax may not be excluded from the receipts fraction.
Note that the Throwout Rule has been repealed for tax periods beginning after June 30, 2010.
Alternative Business Calculation Deduction for New Jersey Gross Income Tax Available Starting in 2012
The New Jersey Gross Income Tax subjects enumerated categories of income to tax. However, losses in one category may not be used to offset income in other categories.
For tax years beginning on or after January 1, 2012, an alternative business calculation deduction will be included in the New Jersey Gross Income Tax Act in an effort to afford some relief to taxpayers with business losses. The amount of the new alternative business calculation deduction is determined by computing a taxpayer's "business increment." The amount of the deduction is limited to a maximum of 50% of the business increment and is phased in as follows:
|Taxable Year Beginning In||% of Business Increment Deductible|
|2016 and thereafter||50%|
The "business increment" is:
(1) "Regular business income," which is the sum of the following categories of gross income without any intercategory loss netting: (i) net profits from business; (ii) net gains or net income derived from rents, royalties, patents and copyrights; (iii) distributable share of partnership income; and (iv) net pro rata share of S corporation income; less
(2) "Alternative business income or loss," which is the sum of (i) the four categories set forth in (1) above computed by allowing intercategory loss netting; plus (ii) any allowable "loss carryforward."
When computing the business increment, the amount of alternative business income or loss cannot be less than zero. "Loss carryforward" is alternative business loss to the extent that it has not been utilized. Taxpayers may carryforward such losses during each of the 20 taxable years following the taxable year in which the loss was generated.
New Jersey Division of Taxation Fails in its Attempt to Tax Limited Partner in BIS LP, Inc. v. Division of Taxation
The New Jersey Appellate Division determined that a limited partner of a partnership that derived a substantial amount of its income in New Jersey was not subject to New Jersey Corporation Business Tax in BIS LP, Inc. v. Division of Taxation. BIS LP, Inc. ("BIS") was a Delaware corporation having no place of business, property, employees, agents or representatives in New Jersey. Its only asset was a 99% limited partnership interest in BISYS Information Solutions L.P. ("Solutions"), a Delaware limited partnership that did business in New Jersey. The partnership agreement of Solutions provided that BIS did not have the obligation or the right to take part in the active management of, perform an act on behalf of or take any part in the business affairs of Solutions.
The New Jersey Division of Taxation argued that BIS was subject to New Jersey Corporation Business Tax since BIS and Solutions conducted a unitary business and BIS was deriving receipts from sources within New Jersey. The Court found that BIS and Solutions were not in the same business since BIS was an investment company and Solutions was a banking information data processing business. Further, even though the only asset of BIS was its interest in Solutions and BIS derived all of its revenue from its interest in Solutions, there was no unitary business since BIS and Solutions were not in the same line of business, there was no substantial overlapping of officers and there was no sharing of offices, operational facilities, technology or know-how.
The Court determined that BIS was a foreign corporation simply holding a limited partnership interest in a partnership and was not a part of the unitary business of the partnership. BIS was therefore not subject to New Jersey Corporation Business Tax.
Single Factor Formula to be Phased In for New Jersey Corporation Business Tax Allocation
The current three-fraction allocation formula under the New Jersey Corporation Business Tax consisting of sales, property and payroll fractions will be replaced by a single sales fraction allocation formula. This change will be phased in over three years starting with tax years beginning on or after January 1, 2012.
For tax years beginning during the 2012 calendar year, the sales fraction will account for 70% of the allocation formula and the payroll and property fractions will each account for 15% of the allocation formula. For tax years beginning during the 2013 calendar year, the sales fraction will account for 90% of the allocation formula and the payroll and property fractions will each account for 5% of the allocation formula. For tax years beginning during the 2014 calendar year and thereafter, the Corporation Business Tax will be computed based on only a taxpayer's New Jersey sales.
This provision is intended to provide Corporation Business Tax relief for taxpayers having significant property and workers located in New Jersey.
New Standards Regarding Sales Tax Exemption Certificates
The New Jersey Division of Taxation has historically required a seller to obtain exemption certificates in good faith in order for many sales tax exemptions to apply.
Due to changes in the Streamlined Sales and Use Tax Agreement, standards regarding exemption certificates have changed as follows:
- Sellers must simply obtain a completed exemption certificate within 90 days of sale. Good faith acceptance at the point of sale is no longer applicable.
- If a seller did not obtain a completed exemption certificate, the seller has 120 days after the Division of Taxation's request for the exemption certificate to (1) acquire in good faith a fully completed exemption certificate from the purchaser; or (2) otherwise demonstrate that the sale is exempt from sales tax.
If a seller satisfies (1) or (2) above, the seller is not liable for tax on the sale unless the seller knew, or should have known, that the claimed exemption was materially false or knowingly participated in an activity intended to evade the tax on the sale.