The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.
By Steven Roll
New Jersey enacted legislation repealing the state's so-called “throwout rule” and eliminating the requirement that a corporation maintain a regular place of business in another state before it can apportion income. [A.B. 2722, enacted 12/19/08]
The changes under A.B. 2722 apply to privilege periods beginning on or after July 1, 2010.
“Taxpayers have despised the throwout rule because it produces extraterritorial taxation,” said Marc Simonetti an attorney with Sutherland's tax group in New York City. He noted that other states such as Illinois, Massachusetts, and West Virginia still have a throwout rule in place.
“Taxpayers also welcome the repeal of New Jersey's regular place of business requirement,” he said.
“The shortcoming of the legislation is its delayed effective date,” Simonetti said, noting that taxpayers will have to contend with New Jersey's throwout rule and place of business requirement until July 1, 2010.
Modification of Sales Factor.
New Jersey's throwout rule, which is codified under N.J. Rev. Stat. § 54:10A-5(i), excludes from, or “throws out” of, the denominator of the sales fraction sales a corporation makes in states that do not tax the corporation's net income. This modification increases the relative weight of the numerator, which has the effect of raising a corporation's taxable income in New Jersey.
Eliminating the throwout will significantly reduce the tax liabilities of corporations with nationwide profits, according to a legislative analysis of A.B. 2722. Under the throwout rule, a corporation with $35 million in nationwide profits is subject to tax on nearly $6.4 million of its income.
Without the throwout rule, the amount of profits subject to tax would be reduced to approximately $6.2 million. The result would be an $156,000 decrease in the corporation's taxable income. This would translate to over $14,000 in tax savings for the year, the analysis states.
Requirements for Apportionment Eased.
Easing the requirements for allowing corporations to apportion income outside New Jersey will also help reduce tax liabilities, the analysis states.
Currently, the ability to apportion income outside of New Jersey is limited under § 54:10A-6 to corporations that have a “regular place of business” in another state. This requirement produces inconsistent results, Simonetti said.
New Jersey adheres to an economic presence theory for purposes of determining whether a corporation's sales are taxable in the state, but then requires that same entity to have a “regular place of business” in another state before it may apportion income, he explained.
The legislation eliminates this requirement. This will allow a corporation with nationwide sales to apportion income outside of New Jersey even if 100 percent of its payroll and property is located in the state, the analysis states.
The full text of the measure is available on the Internet at http://www.njleg.state.nj.us/2008/Bills/A3000/2722_R2.PDF.
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