- New Jersey Revises Corporate Tax Statute to Reduce Tax on Businesses with Sales outside New Jersey
- April 3, 2009
- Law Firm: Riker Danzig Scherer Hyland & Perretti LLP - Morristown Office
On December 19, 2008, Governor Jon S. Corzine signed into law L. 2008, A2722, eliminating the "throw-out" rule and the regular place of business requirement under New Jersey's Corporation Business Tax. The law is effective for tax periods beginning on or after July 1, 2010.
New Jersey imposes the Corporation Business Tax on a fraction of a corporation's income. The fraction is an average of three quotients (a sales factor, a payroll factor, and a property factor) with the sales factor being double-weighted. The numerator of each factor is based on the amount allocable to New Jersey (amount of sales in NJ, amount of property located in NJ and the amount of payroll costs attributable to NJ) and the denominator of each factor is based on the total amount (total sales, total property value, total payroll costs). The formula below illustrates how a corporation generally determines how much of its income is taxable by New Jersey:
Income Multiplied by average of:
NJ Sales + NJ Sales + NJ Property + NJ Payroll
Total Sales Total Sales Total Property Total Payroll
The throw-out rule increases the sales factor by requiring a corporation to “throw-out" or exclude from the denominator of the sales factor all receipts that are assigned to jurisdictions where the corporation is not subject to a net income tax. By reducing the denominator while leaving the numerator unchanged, the sales factor is increased and the portion of a taxpayer's income that is subject to New Jersey tax is increased. Since the sales factor is double-weighted, the effect of this increase is even more significant. New Jersey is currently just one of two states that use the throw-out rule (although some states use a similar provision called the "throwback” rule).
Effective for tax periods beginning on or after July 1, 2010, corporations will no longer be required to exclude from the denominator of the sales factor any receipts from jurisdictions where the corporation is not subject to a net income tax.
Eliminating the throw-out rule brings New Jersey in line with neighboring states like New York, Pennsylvania, and Connecticut, which do not have a similar provision. Unlike New York and Connecticut, which use a single factor sales apportionment, and Pennsylvania, which triple weights the sales factor, New Jersey still double weights the sales factor, which is generally perceived as less advantageous to multistate businesses than a single factor sales apportionment.
Regular Place of Business Requirement
Under current law, a corporation is required to maintain a regular place of business outside of New Jersey before it can apportion its income between New Jersey and other jurisdictions. If a corporation does not maintain a regular place of business outside of New Jersey, all of its income is taxed in New Jersey even though a substantial portion of that income may be derived from operations in other jurisdictions. The new law eliminates this requirement for tax periods beginning on or after July 1, 2010, allowing a corporation to apportion some of its income outside of New Jersey without regard to whether it maintains a regular place of business outside New Jersey.
Currently, New Jersey is the only state that requires a multistate company operating in a single location to maintain a "regular place of business" outside the state in order to allocate its income on the same basis as companies with multiple business locations. This change thus brings New Jersey in line with the rest of the country on this issue.