United States: New Jersey Appellate Court Issues Throwout Ruling

In a decision issued this morning, a New Jersey appellate court ruled that the throwout rule does not apply to intangible holding companies.1 New Jersey courts have not been kind to the throwout rule. When it was first adopted in 2002, the Division of Taxation had hoped that throwout would generate additional revenue of up to $100 million per year.2 But the court's decision effectively makes throwout inapplicable except for a very limited category of taxpayers. You can read the court's decision here.

Until its repeal, effective in 2011,3 the throwout rule required a taxpayer to compute its sales-fraction denominator by excluding receipts that were sourced to a state in which the taxpayer was not "subject to a tax" based on income or business activity. The throwout rule was particularly problematic for IHCs. The New Jersey Supreme Court, in Lanco, Inc. v. Director,4 held that physical presence was not required for income tax nexus. As a result, IHCs that licensed intangibles to affiliates doing business in the state became subject to New Jersey's corporate income tax. If the IHC wasn't filing business activity returns in any other separate-company state, the Division took the position that the IHC's double-weighted sales fraction was 100%. Many IHCs received assessments in the tens of millions of dollars.

One such IHC was Lorillard Licensing Company. Because of throwout, its annual tax liability jumped by nearly 600%. The Division audited Lorillard and issued an assessment of more than $24 million. While most IHCs settled their assessments for pennies on the dollar, Lorillard appealed its assessment to the New Jersey Tax Court.

Meanwhile, the New Jersey Supreme Court, in Whirlpool Properties Inc. v. Director,5 held that it was unconstitutional to apply throwout to receipts sourced to a state that had made a policy choice not to tax those receipts. By contrast, the court permitted throwout of receipts sourced to a state that didn't impose tax because it lacked jurisdiction under the U.S. Constitution. The issue in Lorillard was whether New Jersey's nexus standards, or those of the destination state, applied in determining whether a taxpayer was "subject to tax" for purposes of throwout.

Lorillard argued that under New Jersey's broad economic nexus standard, it was subject to tax in every state. By definition, therefore, throwout couldn't apply to any of Lorillard's receipts—even if it didn't file a separate-company return in any state except New Jersey. The Tax Court agreed and issued a 2013 ruling that throwout did not apply to Lorillard. The Division appealed this trial court decision to the New Jersey Appellate Division.

A three-judge panel of the Appellate Division heard oral argument September 21, 2015. At oral argument, the Division argued that Whirlpool had been wrongly decided and that another state's mere ability to impose tax shouldn't preclude New Jersey from applying throwout. But Judge Messano, in particular, seemed unconvinced by this. He also questioned whether throwout could ever be applied constitutionally—other than to remote sellers of tangible personal property that ship their products by common carrier.

Today's decision reiterates that throwout applies only in very limited circumstances. Despite the Division's long-standing polices, throwout should not apply to:

  • Any receipts whatsoever from intangibles or performing services—regardless of where the receipts are sourced
  • Receipts from tangible personal property sourced to states that don't impose an income or business activity tax
  • Receipts sourced to states in which the taxpayer is immune from tax under P.L. 86-272, 15 U.S.C. 381-384
  • Intercompany receipts sourced to unitary-combined states that eliminate those receipts from the sales factor

The Division will likely appeal the Appellate Division's decision to the New Jersey Supreme Court. Still, the decision is good news for taxpayers with pending appeals or audits. The general limitations period for filing refund claims is four years. But if you've signed a waiver or are currently being audited, your refund rights remain open.

Footnotes

1 Docket No. 002033-13 (Sept. 21, 2015).

2 See Legislative Fiscal Estimate, Assembly No. 2501 (9/13/2002); Fiscal Note, Assembly No. 2722 (9/16/2008).

3 L.2008, c. 120.

4 908 A.2d 176 (N.J. 2006).

5 26 A.3d 446 (N.J. 2011).

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions