United States

New Jersey: Appeals Court Affirms Ruling that Economic Nexus Standard Applies to Determine Whether Receipts Must be Thrown Out

Dec 14, 2015
From KPMG TaxWatch

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A New Jersey appeals court recently affirmed a tax court decision addressing the application of New Jersey’s now-repealed throwout rule. Recall, in August 2013, the New Jersey Tax Court opined on a significant issue associated with the controversial throwout rule.  This rule affected the computation of the New Jersey sales factor by excluding from the numerator and denominator—or “throwing out” —receipts attributable to a state or foreign country “in which the taxpayer is not subject to a tax on or measured by profits or income, or business presence or business activity.” The constitutionality of the throwout rule has been the subject of much litigation. In Whirlpool Properties, Inc. v. Director, Div. of Taxation, the New Jersey Supreme Court held that the rule operated permissibly with respect to receipts attributed to states where the taxpayer was protected under Public Law 86-272, or simply did not have the requisite contacts to establish nexus. However, the rule was facially unconstitutional with respect to receipts attributable to states that could impose a tax but had declined to do so for policy reasons.  The issue before the New Jersey Tax Court in the instant case was whether the state could use a different standard in determining whether Lorillard was “subject to tax” in a state for nexus purposes than it used to ascertain whether the throwout rule applied. Lorillard argued that New Jersey should apply its own economic nexus standard adopted in Lanco to determine whether it was subject to tax in the other state. In other words, if Lorillard was subject to tax in the other states under the Lanco court’s rationale, the throwout rule should not apply. After the tax court agreed with Lorillard’s position, the New Jersey Division of Taxation appealed.

Before the appeals court, the Division primarily asserted that the taxpayer’s arguments against the throwout rule lacked merit because Lanco and Whirlpool addressed different issues. The appeals court agreed that they addressed different issues, but observed that both issues were governed by the U.S. Constitution. Agreeing with the tax court’s rationale, the court held that the economic nexus standard upheld as constitutional in Lanco applies to determine whether taxpayers are subject to tax and subject to throwout. Whether or not Lorillard actually filed returns in the other jurisdictions was irrelevant because under Lanco Lorillard had constitutionally sufficient contacts with the other states to subject it to tax.  Please contact Jim Venere at 973- 912-6349 with questions on Lorillard Licensing Co. LLC v. Director, Division of Taxation

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.