Nexus and Tax Base
Interest and intangible expense addback. If your company added back any intercompany interest or intangible expenses, you have a refund opportunity. This follows from Lorillard Tobacco Company v. Director, Division of Taxation,2 in which the Tax Court broadly interpreted the scope of the “unreasonable exception.” Our prior coverage of the Lorillard decision can be found at reedsmith.com.
No tax on partnership income. Under the current CBT statute, a partner and partnership are nonunitary unless the partner (together with any unitary affiliates) owns more than 50% of the voting control of the partnership.3 Accordingly, if a corporate partner lacks voting control over a partnership and the partner’s commercial domicile is outside New Jersey, no CBT is due on its distributive share from the partnership—regardless of whether it has nexus with the state from other activities.
Foreign corporations not taxable on certain income. In Infosys Limited of India Inc. v. Director, Division of Taxation,4 the Tax Court ruled that a foreign corporation’s income is not subject to CBT unless it is reported on Line 29 of their federal 1120-F return. Foreign corporations that paid CBT on foreign-source income or domestic income protected by a U.S. tax treaty may have a refund opportunity. Our prior coverage of Infosys can be viewed at reedsmith.com and at reedsmith.com.
Resurrecting NOL carryovers. Under the statute, a taxpayer’s NOL carryovers are reduced by the amount of any dividends received—even if the dividends qualify for the dividend received deduction.5 If your company reduced its NOL carryovers on account of dividends, you can resurrect those NOLs if the payor and payee are nonunitary. Fortunately, New Jersey has interpreted the unitary business principle in a taxpayer-friendly manner.6 And even if you can’t meet that standard, you can still qualify for factor representation under New Jersey’s equitable apportionment provisions.
State income tax addback. In Daimler Investments US Corporation v. Director, Division of Taxation,7 the Tax Court addressed how New Jersey’s state income tax addback applies to members of a combined group. For income tax expense related to unitary-combined states, the court ruled that New Jersey taxpayers are required to add back only their “pro rata share” of the corporate parent’s actual tax obligation. If your company’s pro rata share is less than the estimated liability reported on your New Jersey return under a tax sharing agreement, you may be entitled to a refund. Because the court did not define “pro rata share” in its decision, taxpayers have flexibility in computing their addback for CBT purposes.
DPAD deduction for software development and food processing. For tax years prior to 2018, federal law provided an income-tax deduction for domestic production activities.8 For CBT purposes, New Jersey decoupled from this so-called “DPAD” deduction—except with respect to certain manufacturing activities.9 The Division of Taxation’s (“Division”) regulations and return instructions suggest that software developers and food processors are required to addback their federal DPAD deduction.10 But under the plain language of the statute, those activities may qualify as manufacturing activities. As a result, software developers and food manufacturers that added back the federal deduction in computing their CBT may be entitled to a refund.
Reduce gain on sale of subsidiary. If you sold stock of a subsidiary with undistributed earnings, you may be entitled to adjust your basis in the stock and, thus, reduce your gain on the sale. This opportunity follows from MCI Communication Services, Inc. v. Director, Division of Taxation,11 in which the Tax Court ruled that certain consolidated-return rules apply for CBT purposes. Under this approach, a taxpayer may be able to apply the federal basis adjustment rules under Treasury Regulation 1.1502–32—even for years before New Jersey adopted combined reporting. For our prior coverage of MCI, please see reedsmith.com.
No nexus for Intangible Holding Companies? The Division’s longstanding economic-nexus standard for CBT was called into question by the Tax Court’s decision in Crown Packaging Technology, Inc. v. Director, Division of Taxation.12 In that case, the court ruled that an intangible holding company (“IHC”) could lack sufficient nexus with New Jersey even if it received royalty income from the use of its intangibles in the state. If your your IHC filed a CBT return based on the receipt of royalty payments from a payee that had a presence in New Jersey that was P.L. 86-272 protected or that otherwise had a limited connection to New Jersey, you may want to file a protective refund claim on behalf of your IHC. For our prior coverage of Crown, please see reedsmith.com.
Apportionment
Receipts from intangibles. If you have receipts from services relating to intangibles (e.g., software, information services) and sourced those receipts based on delivery location or market, you may have a refund opportunity by taking into account back office functions or the location of the ultimate consumer. As reflected in Xpedite Systems, Inc. v. Director, Division of Taxation,13 taxpayers have flexibility in sourcing such receipts. For our prior coverage of Xpedite and New Jersey’s flexible sourcing rules, please see reedsmith.com.
Dock sales and drop shipments. New Jersey is different from most other states with respect to how it treats dock sales and drop shipments. If you sold tangible personal property through a dock sale and the goods were picked up outside New Jersey, none of the receipts need to be included in your New Jersey sales-fraction numerator. Similarly, if you sold tangible personal property via drop shipment and your customer was based outside New Jersey, none of those receipts are includable in your sales-fraction numerator—even if the products were delivered to locations within New Jersey.14
If you are interested in exploring potential refund claims for these or other issues, please contact one of the authors of this alert or the Reed Smith attorney with whom you usually work.
- See N.J.S.A. 54:49–14; N.J.A.C. 18:7–13.8.
- 2019 WL 966940 (N.J. Tax Feb. 27, 2019).
- N.J.SA. 54:10A–4(aa), (gg).
- 2017 WL 5907704 (N.J. Tax Nov. 28, 2017), aff’d on reconsideration, 2018 WL 1385844 (N.J. Tax March 19, 2018).
- N.J.S.A. 54:10A–4(k)(6)(C) (as in effect prior to July 1, 2018).
- See, e.g., BIS LP, Inc. v. Director, Division of Taxation, 26 N.J. Tax 489 (N.J. Super. Ct. App. Div. 2011).
- 2019 WL 409433 (N.J. Tax Jan. 31, 2019).
- See generally I.R.C. § 199 (as in effect for the 2014 privilege period).
- See N.J.S.A. 54:10A–4(k)(2)(J) (as in effect for the 2014 privilege period).
- See N.J.A.C. 18:7–5.2(a)1.xx.
- 2015 WL 4537743 (N.J. Tax July 20, 2015), aff’d, 2018 WL 2999029 (N.J. Super. Ct. App. Div. June 15, 2018).
- 2019 WL 1005143 (N.J. Tax Feb. 26, 2019).
- 2018 WL 4224270 (N.J. Tax Sept. 5, 2018).
- Stryker Corp. v. Director, Division of Taxation, 18 N.J. Tax 270 (N.J. Tax 1999), aff’d 755 A.2d 1200 (N.J. Super. Ct. App. Div. 2000), aff’d 773 A.2d 674 (N.J. 2001).
Client Alert 2019-218
