Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

Important Ruling on the Throw Out Rule

Author: Scarinci Hollenbeck, LLC

Date: February 9, 2016

Key Contacts

Back

NJ Tax Court makes important ruling on the Throw Out Rule

Recently, the New Jersey Superior Court Appellate Division upheld a previous decision that intangible holding companies are not required to throw out any out-of-state receipts.

According to a Reed Smith report, the Court ruled in Lorillard Licensing Company LLC v Director, Div. of Taxation that the state’s economic nexus law is applicable in determining if a company is subject to state tax in other jurisdictions as part of New Jersey’s “Throw Out Rule.” In what was ruled as a favorable decision for taxpayers, the corporation was required to pay lower state taxes on a subsidiary company as New Jersey could not raise its apportionment percentage.

The background of the Throw Out Rule 

The state’s Throw Out Rule was originally part of the 2002 Business Tax Reform Act that called upon companies to calculate receipts into the corporation business tax apportionment formula.  In essence, the numerator is receipts from a state and the denominator is receipts from all states. One problem is that not all states have a corporate income tax. The Court states that “The Throw-Out Rule modifies the sales fraction into one that divides New Jersey receipts only by taxed receipts.”  If receipts are attributed to states where there is no corporation business tax, then the state tax apportionment percentage increases in New Jersey. Thus, by throwing out receipts from the denominator, the fraction increases the income that is subject to tax by New Jersey.

In a 2011 case, Whirlpool v. Director, the Appellate Court limited the application of the Throw Out Rule to operate constitutionally.  In that instance, the receipts that were thrown out were limited to receipts not taxed by another state because the taxpayer did not have the requisite level of contact with that state to permit it to exert taxing jurisdiction.

Lorillard disputed the application of the Throw Out Rule rule by the New Jersey Division of Taxation. The company argued that in the determination of whether receipts are applicable or were required to be discounted from the denominator, the same economic nexus rule in Lanco, Inc. v. Director, Division of Taxation should have been applicable in this case. Lanco imposed tax upon an out-of-state intangible holding company that received a royalty for use of the intangibles in the state, Therefore, since the company would be subject to tax in those other jurisdictions, the receipts would not need to be discarded.

Oppositely, the New Jersey Division of Taxation argued that the tax itself as well as the state’s ability to tax companies, should be the primary determination for the applicability of the Throw Out Rule. Further, the Division of Taxation believed that the licensing agreement did not subject the company to taxation in other jurisdictions.

The court’s decision

The Tax Court ruled in favor of the company after it asserted that it was irrelevant if the corporation filed returns or paid taxes for those receipts in other jurisdictions. The Appellate Division then agreed with the Tax Court that the tax policies of other jurisdictions are not relevant. The only issue is whether another state could assert taxing jurisdiction in a manner that satisfied the Commerce Clause of the Constitution.

The significance of the ruling

The Division of Taxation may take its appeal to the New Jersey Supreme Court. Its argument is that there is a constitutional question or that it has the discretion of the court to pursue an appeal based on the application of the Throw Out Rule. However, from a broader perspective, the decision may only resolve Throw Out issues for the determination of whether intangible holding companies have a nexus in the state because Lanco, Inc. v. Director, Division of Taxation only determined nexus for intangible holding companies with licensing agreements with in-state affiliates. On its face, the ruling does not address the application of the Throw Out Rule to traditionally operating businesses where Whirlpool remains relevant.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
How to Dissolve a Corporation in New Jersey: A Step-by-Step Guide post image

How to Dissolve a Corporation in New Jersey: A Step-by-Step Guide

Closing your business can be a difficult and challenging task. For corporations, the process includes formal approval of the dissolution, winding up operations, resolving tax liabilities, and filing all required paperwork. Whether you need to understand how to dissolve a corporation in New York or New Jersey, it’s imperative to take all of the proper […]

Author: Christopher D. Warren

Link to post with title - "How to Dissolve a Corporation in New Jersey: A Step-by-Step Guide"
Gross Lease vs. Net Lease: Understanding the Key Differences post image

Gross Lease vs. Net Lease: Understanding the Key Differences

Commercial leases can take a variety of forms, which is often confusing for both landlords and tenants. Understanding the different types, especially the gross lease structure, is important when selecting the lease that best suits your needs. One key distinction between lease types is how rent is calculated and paid. This article addresses the two […]

Author: Robert L. Baker, Jr.

Link to post with title - "Gross Lease vs. Net Lease: Understanding the Key Differences"
What to Do If You Are Impacted by a Retailer Bankruptcy Part 2 post image

What to Do If You Are Impacted by a Retailer Bankruptcy Part 2

Over the past year, brick-and-mortar stores have closed their doors at a record pace. Fluctuating consumer preferences, the rise of online shopping platforms, and ongoing economic uncertainty continue to put pressure on the retail industry. When a retailer seeks bankruptcy protection, a myriad of other businesses are often impacted. Whether you are a supplier, customer, […]

Author: Brian D. Spector

Link to post with title - "What to Do If You Are Impacted by a Retailer Bankruptcy Part 2"
The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business post image

The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business

Since his inauguration two months ago, Donald Trump’s administration and the Congress it controls have indicated important upcoming policy changes. These changes will impact financial services policies and priorities. The changes will particularly affect cryptocurrency, as well as banking rules and regulations. Key Regulatory Changes in Cryptocurrency For example, in the burgeoning cryptocurrency business environment, […]

Author: Dan Brecher

Link to post with title - "The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business"
Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1 post image

Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1

The retail sector has experienced a wave of bankruptcy filings over the last year. Brick-and-mortar businesses in financial distress include big-name brands like Big Lots, Party City, The Container Store, and Vitamin Shoppe. When large retailers seek bankruptcy protection, they are not the only businesses impacted. Landlords can be particularly hard hit. While commercial landlords […]

Author: Brian D. Spector

Link to post with title - "Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!

Please select a category(s) below: