New N.J. Law Exempts Corporate Earnings Out of State From Tax

In Uncategorized on January 8, 2009 at 12:46 pm


Charles Toutant
New Jersey Law Journal
January 8, 2009

Gov. Jon Corzine has signed a bill that exempts New Jersey corporations from tax on income earned in other states, a measure designed to keep existing businesses in the state and to attract others to come here.

The bill, A-2722/S-3 , undoes a 2002 amendment that assesses corporate income tax based on a formula that includes income not taxed by other states.

At present, a company’s tax rate is determined through a series of weighted fractions — 50 times the amount of New Jersey sales over total sales, plus 25 times the amount of New Jersey payroll over total payroll and 25 times the amount of New Jersey real property over total real property.

But sales in other states that do not impose a corporate tax are excluded from the denominator of the sales fraction, resulting in higher taxes. The bill signed by Corzine eliminates that provision.

Businesses have criticized the exclusion as contrary to the U.S. Constitution’s Due Process and Commerce clauses because it results in taxation of activity that has no substantial nexus to the taxing state.

“During a time of national recession and economic uncertainty, this overhaul should be a welcome relief to businesses, particularly those that are struggling,” says Senate President Richard Codey, D-Essex, a prime sponsor.

The bill also permits corporations with no offices outside the state to use the same formula that will be permitted under elimination of the exclusion scheme. Currently, under what’s known as the regular-place-of-business rule, a company with a presence outside the state must attribute 100 percent of its income to New Jersey.

The Treasury Department estimates the state will lose $149 million in tax revenue each year for the first two fiscal years, under the legislation.

Even though the state has repealed the exclusion rule, an appeal by a group of multistate corporations will continue. Last May, the state Tax Court rejected the constitutional challenge in Pfizer v. Director, Division of Taxation, No. 000055-2006.

The Appellate Division refused to hear an interlocutory appeal, but on Oct. 30 the Supreme Court granted leave to appeal and summarily remanded the case to the Appellate Division to consider the appeal on its merits.

The case is still active because the plaintiffs want to recoup taxes paid from 2002 until the new law takes effect, says Paul Frankel of Morrison Foerster in New York, who represents Whirlpool Properties Inc. and Macy’s in the case.

The bill’s prime Assembly sponsors were Democrats Joseph Vas of Middlesex, Louis Greenwald of Camden and Albert Coutinho of Essex.

The bill, signed on Dec. 19, takes effect on July 1, 2010.



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