New Jersey Tax Court Further Limits Throw-Out Rule

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By Leslie A. Pappas

New Jersey’s throw-out rule doesn’t apply to receipts on tangible goods shipped out of states where a throwback rule applies, the New Jersey Tax Court ruled.

The court agreed with Elan Pharmaceuticals Inc., a division of Perrigo Co. PLC, that in a 2002 audit the New Jersey tax authority improperly used the state’s throw-out rule to increase the amount of income apportioned to New Jersey from 6.676 percent to 9.716 percent ( Elan Pharmaceuticals v. Dir., Div. Taxation , N.J. Tax Ct., No. 010589-2010, 2/6/17 ).

“Elan properly contends that New Jersey cannot isolate application of the Throw Out Rule to itself and deny that other originating States can effectuate tax by a similar Throwback Rule,” New Jersey Tax Court judge Mala Sundar wrote in the Feb. 6 opinion.

Sundar added that “just because one state does not impose a tax on a sale does not mean that New Jersey or any other state can.”

The case is of interest to any company still under audit under New Jersey’s throw-out rule, which was repealed in 2010, David J. Gutowski, a tax partner with Reed Smith LLP, told Bloomberg BNA.

Gutowski called the ruling “one of the final nails in the coffin of throw-out.”

“Hopefully the division won’t appeal,” he said.

Willem O. Rijksen, a spokesman for New Jersey’s Department of the Treasury, wouldn’t say whether the division would appeal the decision, telling Bloomberg BNA in an e-mail that the division doesn’t comment on pending litigation.

Throwback Trumps Throw-Out

Enacted in 2002, New Jersey’s throw-out rule allows the state to modify the calculation of the denominator of the sales factor to exclude any receipts assigned to a state or to any foreign country that doesn’t impose tax on profits, income or business activity.

Throwback rules mandate that sales into states that aren’t taxable will be “thrown back” into the state of origin for tax purposes.

“In effect, the court reasoned that a state’s right to impose throwback trumps New Jersey’s right to impose throw-out,” Gutowski and colleague Matthew L. Setzer wrote in a Feb. 7 alert on the case.

Most states have throwback rules, though New Jersey doesn’t, Gutowski said.

To contact the reporter on this story: Leslie A. Pappas in Philadelphia at

To contact the editor responsible for this story: Ryan C. Tuck at

For More Information

Text of the decision is at

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