United States: New Jersey Tax Court Finds Royalty Company Must File And Pay Even Though Related Entity Paid Tax On Same Income

In a decision released August 14, the Tax Court of New Jersey ruled that an intangible holding company with no physical presence was required to file a New Jersey corporation business tax (CBT) return and pay the related tax due based on its income.1 No relief was available to the taxpayer, even though the related entity from which the taxpayer received royalty payments had filed a CBT return and included the same payments in its own taxable income.


The taxpayer, a trademark licensing company, was incorporated in another state and had no physical presence in New Jersey. For the 2000 and 2001 tax years, the taxpayer filed CBT returns showing that it had no offices, employees or property in New Jersey, but had receipts from royalties received from its parent corporation, which was incorporated elsewhere but authorized to do business in New Jersey. The taxpayer reported and paid tax on the New Jersey portion of its royalty income.

During 2002, the New Jersey legislature enacted the Business Tax Reform Act (BTRA) 2 which required royalty payments made to a related corporate member to be added back to federal taxable income in computing New Jersey entire net income (ENI). Specifically, the law required the payee to add back otherwise deductible intangible expenses and costs3 and allowed exceptions under certain circumstances. 4

In response to the 2002 law changes, the taxpayer filed a 2002 CBT return marked "final" and requested a refund of its total tax paid of $165,747 in September 2003. The taxpayer indicated that, pursuant to the 2002 law, the royalty income it earned from intercompany transactions was included in its parent company's ENI reported on the parent's CBT return. Also, the taxpayer asserted that under the new law, its prior CBT filings were technically incorrect5 and that it planned to report future intercompany royalty payments only on its parent company's CBT returns. The taxpayer's parent company filed 2002 and 2003 CBT returns in which it added back royalty payments made to the taxpayer in computing its ENI.

In January 2004, the New Jersey Division of Taxation issued a $165,243 refund to the taxpayer for the 2002 tax year. In January 2005, the Division notified the taxpayer that the refund was erroneous and sought repayment. Specifically, the Division requested further information, asserting that the refund claim was "based upon the recent Lanco Inc. v. Director court decision." 6 The taxpayer responded by filling similar refund claims for the 2000 and 2001 tax years and indicated its intention to wait until Lanco was reversed or modified before considering repayment of the refunded amount.

Following an audit, in 2006, the Division issued a Notice of Assessment for $1,139,641, including interest and penalties based on an audit of the taxpayer's returns for the 2000 to 2003 tax years. The Division assessed the tax because the taxpayer was doing business in New Jersey, and therefore was subject to CBT on the royalty income from its intangibles, the use of which resulted in sales in New Jersey by the licensees. 7 The Division noted that the parent should have claimed an exception to the related party expense addback, which would have resulted in a refund of $108,586 for the 2002 tax year, and a $41,866,667 increase in its net operating losses for the 2003 tax year.

The Division denied the taxpayer's request to modify its audit findings and issued a final determination on March 30, 2010 that was ultimately upheld. The taxpayer appealed the final determination to the Tax Court.

Double Taxation Issue

At issue according to the language in the taxpayer's motion for summary judgment was whether the addback required by the BTRA was effectively a capture of, and a tax upon, the taxpayer's royalty income, so that the assessed amounts resulted in unconstitutional double taxation. In contrast, the Division and the Court focused their motion and determination, respectively, on whether the Division was correct in demanding that the taxpayer, an entity with no physical presence in New Jersey, file CBT returns to report and pay tax on royalty income received from its parent company, even if the parent had added back the deducted royalty payments on its CBT returns.

CBT Filing Requirement

Taxpayers are generally subject to the CBT if they are doing business in New Jersey, unless otherwise exempt. 8 The BTRA expanded the definition of CBT nexus to include foreign corporations that derive receipts from sources within New Jersey or engage in contacts within the state if the taxpayer's business activity is sufficient to give New Jersey jurisdiction to impose the tax under the United States Constitution. 9

Several challenges were brought in response to the legislation, with New Jersey courts ultimately supporting the taxation of foreign companies without physical presence. Specifically, the courts ruled that the CBT could be constitutionally applied to licensing fees attributable to New Jersey and earned by a foreign corporation with no physical presence, employees, or property in the state. 10

As the taxpayer earned licensing fees attributable to New Jersey, the Court found that, based on prior rulings, it was subject to tax. The taxpayer did not assert that the royalty payments received from its parent corporation were immune from taxation and also did not argue that it was otherwise constitutionally protected from being subject to CBT. Thus, the Court concluded that the taxpayer had nexus with New Jersey and should have filed CBT returns for the 2002 and 2003 tax years, and paid tax on its royalty income earned from New Jersey sources.

Addback Required by BTRA

As noted above, the legislation enacted as part of the BTRA included the disallowance of a deduction for intangible expenses paid to a related party. 11 The taxpayer argued that it had no requirement to file CBT returns and pay the related tax because the same royalty amounts paid to it by its parent company had been included in the parent company's ENI for the tax years at issue and had already been subjected to tax. Relying upon specific language from the Lanco ruling, the taxpayer asserted that, in circumstances when the BTRA amendment denying the royalty deduction applies, "jurisdiction to tax the company receiving royalty income from use of its intangibles in New Jersey is not essential to capture that income in this state's tax base." 12

However, the Court found no relationship between the addback provision and the statute subjecting corporations doing business in New Jersey to the CBT. 13 Specifically, there were no cross-references between the statutes and no plain language to indicate that one of these provisions could apply in place of the other. Though the Division acknowledged the Lanco statement, it denied its relevance, finding that it "does not broadly exempt a foreign intangible holding company from filing a CBT return or paying tax on the same, or relieve a foreign intangible holding company from its obligation to do so when it receives income from its intangible assets used by a related member. In the context of a jurisdictional nexus issue, the dicta affirms that denying the payor an otherwise allowable deduction for royalty payments will allow New Jersey to capture the CBT which the intangible holding company escaped/avoided. It did not bless the corporate family's attempt to avoid the CBT or sanction the out-of-State related member entity's refusal to file CBT returns." 14

Available Relief from Double Taxation

With respect to the potential for dual taxation which arose with the enactment of the BTRA, the Court cited the Division's own recognition of this issue while proposing the related BTRA regulations that "the rules include instances where tax reporting methodologies (such as portions of NJAC 18:7-5:18 dealing with related party transactions) have been created to prevent unreasonable taxation upon transactions from occurring simply because of the way the transactions may have been structured." 15

In order to avoid double taxation on the same income stream, New Jersey allowed an exception to the intercompany addback rule in situations where the payee paid tax to New Jersey on the income stream. Specifically, Form CBT-100, Schedule G-2, contained an available exception to the required addback of intangible expenses. 16 The Court cited the availability of this discretionary attempt by the Division to prevent the double payment of tax, and thus address the issue at hand. Also, there was no statutory provision preventing the taxpayer from requesting relief under the provision allowing several options to prevent unfair results of multistate apportionable income. 17

In conclusion, the Court found the taxpayer's claims of unconstitutional double taxation questionable, in part because the taxpayer did not avail itself of statutorily available remedies to alleviate double taxation, but instead opted not to file CBT returns. Also, the Court noted that while it would be most efficient for the Division to audit the taxpayer and its parent company simultaneously to address issues relative to potential double taxation, no such legal requirement exists. Thus, the taxpayer's arguments regarding double taxation were rejected and the Court found that the Division was justified in its action requiring the taxpayer to file CBT returns to report its royalty income.


While seemingly unfair to a taxpayer and its parent that essentially have been taxed twice, the Tax Court's decision is not surprising. In the intervening years between the original dispute and its resolution, two separate amnesty programs were offered by New Jersey. 18 The facts considered by the Court indicate that the taxpayer and/or its representatives were made aware of the opportunities to settle the dispute under the terms of those programs, but the taxpayer chose not to pursue this avenue.

By finding for the Division, the Court followed the form of New Jersey law requiring both the taxpayer and its related parent company to file separate CBT returns. Had the taxpayer filed its CBT returns and had its parent company provided the necessary information to avoid adding back the royalty payments in computing taxable income, the two entities possibly could have obtained relief from double taxation. However, because New Jersey has a four-year statute of limitations, by the time the taxpayer was assessed for the tax years at issue, its parent company was ineligible to claim CBT refunds. The Court did not suggest that the Division be required to provide an alternative method to avoid double taxation in this instance, such as by allowing the taxpayer to reduce its ENI by the amount of royalties included as income of its parent company. Instead, it simply observed that the Division "must ensure that income is taxed only once, but it cannot do so if it has no returns to even consider Section 8 adjustments." 19

As many jurisdictions impose economic nexus standards similar to New Jersey's, taxpayers with like income streams could find themselves in similar quandaries in multiple states. Taxpayers with multiple related entities which engage in intercompany transactions should take steps to ensure that entity-level nexus is considered on a regular and periodic basis. While some jurisdictions might be satisfied with simply being made whole from a tax standpoint, others could refuse to offer relief to taxpayers who fail to follow state-specific filing rules. This decision in this case is illustrative of the potential consequences for failing to do so.


1 Spring Licensing Group, Inc. v. Director, Division of Taxation, New Jersey Tax Court, Dkt. No. 010001- 2010, Aug. 14, 2015.

2 Ch. 40 (A.B. 2501), Laws 2002.

3 N.J. REV. STAT. § 54:10a-4.4(b).

4 N.J. REV. STAT. § 54:10a-4.4(c). Specifically, exceptions from the required addition to taxable income are allowed for interest expenses and costs and intangible expenses and costs which: (i) are directly or indirectly paid, accrued or incurred to a related member in a foreign nation which has in force a comprehensive income tax treaty with the United States; or (ii) the taxpayer establishes by clear and convincing evidence, as determined by the director, that the adjustments are unreasonable; or (iii) the taxpayer and the director agree in writing to the application or use of an alternative method of apportionment.

5 N.J. ADMIN. CODE tit. 18, § 7-5.18(b). This provision was promulgated to interpret the BTRA.

6 Lanco, Inc. v. Dir., Div. of Taxation, 908 A.2d 176 (N.J. 2006), cert. denied, 551 U.S. 1131 (2007). Note that in 2005, the time period during which this exchange took place, the dispute had only reached the New Jersey Tax Court (Docket 5329-1997, 21 N.J. Tax 200), which had ruled that tax could not be imposed on a taxpayer earning licensing fees attributed to New Jersey with no physical presence in the state.

7 For the 2001 and 2002 tax years, the Division computed an adjusted allocation factor and applied it to the taxpayer's reported ENI. For the 2002 and 2003 tax years, the Division based the taxpayer's royalty income on its federally reported income.

8 N.J. REV. STAT. § 54:10A-2 as amended by Ch. 40 (A.B. 2501), Laws 2002.

9 Id.

10 See Lanco, Inc. v. Dir., Div. of Taxation, 908 A.2d 176 (N.J. 2006), cert. denied, 551 U.S. 1131 (2007), and Praxair Tech. Inc. v. Dir., Div. of Taxation, 988 A.2d 92 (N.J. 2009).

11 N.J. REV. STAT. § 54:10A-4.4(b).

12 Lanco, Inc. v. Dir., Div. of Taxation, 908 A.2d 176 (N.J. 2006).

13 N.J. REV. STAT. § 54:10A-2.

14 35 N.J.R. 1573(a) (Apr. 7, 2003), amending N.J. ADMIN. CODE tit. 18, § 7-7.6(b).

15 N.J. ADMIN. CODE tit. 18, § 7-5.18(b)(3).

16 Instructions, New Jersey Form CBT-100, Corporation Business Tax Return. The instructions to Schedule G-2 of the CBT return require a taxpayer to file a separate refund claim (Form A-3730) stipulating all of the facts with proof in support of an exception from the addback.

17 N.J. REV. STAT. § 54:10A-8(a).

18 See GT SALT Alert: New Jersey Division of Taxation is Offering Two Limited Voluntary Disclosure Initiatives and GT SALT Alert: New Jersey Division of Taxation Offers Limited Voluntary Disclosure Initiative for Intangible Holding Companies.

19 Spring Licensing Group, Inc. v. Director, Division of Taxation, New Jersey Tax Court, Dkt. No. 010001- 2010, Aug. 14, 2015, referencing the ability under N.J. REV. STAT. § 54:10A-8 for the taxpayer and the Division to agree to a different method of apportionment to achieve a fair result under CBT law.

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