Joyce or Finnigan? New Jersey Guidance Creates Confusion
On January 21, 2021, the New Jersey Division of Taxation (DOT) expressed its view on how the new definition of “taxpayer” will affect the application of P.L. 86-272, which limits the imposition of state taxes on net income of a taxpayer if certain conditions are met. TB-100 states the DOT essentially views a combined group as one taxpayer rather than a collection of taxpayers. Therefore, the activities of the members of the combined group in relation to the unitary business of the combined group determine whether the combined group exceeds P.L. 86-272. Consistent with the DOT’s policy stated in TB-86(R) and TB-89(R), if one member of the combined group exceeds the protections of P.L. 86-272, the entire combined group exceeds P.L. 86-272.
The DOT’s interpretation of P.L. 86-272 will likely eliminate any sales factor benefit an individual group member may derive from the Joyce rule, which is explicitly codified into the CBTA in N.J.S.A. 54:10A-4.7. The concepts of Joyce and Finnigan are derived from decades-old California State Board of Equalization decisions. As held in Joyce, tangible property shipped to California purchasers by a member of a unitary combined group of corporations, only some of which were actually California taxpayers, i.e., members with California nexus that exceeded P.L. 86-272, could not be included in the California sales factor numerator of the combined group if the selling member was immune from California taxation under P.L. 86-272. The Finnigan decisions dealt with the issue of throwback sales for members of a combined unitary group. In Finnigan, it was held that sales of tangible personal property shipped from California to states where the seller was immune from taxation pursuant to P.L. 86-272 shall not be thrown back and included in the California sales factor numerator if any member of the seller’s unitary group was subject to taxation in the destination state.
The DOT's guidance in TB-100 appears to contradict New Jersey’s statutory language.
N.J.S.A. 54:10A-4.7 plainly states the following:
In computing its denominator for the sales fraction, the taxable member shall use the combined group’s denominator for that fraction. In computing the numerator of its sales fraction, each taxable member shall be treated as a separate taxpayer and that taxable member’s numerator will include only that taxable member’s receipts assignable to this State.
Taxpayers should carefully evaluate whether following TB-100 is appropriate in light of New Jersey statutes for current and future tax years.
For additional guidance on the New Jersey’s TB-100, contact your BKD Trusted Advisor™ or submit the Contact Us form below.