New Jersey - Economic nexus standard applies to determine whether receipts must be “thrown out” 

September 11:  The New Jersey tax court, in a recent oral ruling in a summary judgment motion proceeding, addressed a significant issue associated with the state’s controversial—and now repealed—throwout rule.

The state tax court stated the economic nexus standard that New Jersey imposes on out-of-state taxpayers must similarly be applied for purposes of the throwout rule.


New Jersey’s throwout rule affected the computation of the New Jersey sales factor by excluding from the denominator—or “throwing out”—receipts attributable to a state or foreign country “in which the taxpayer is not subject to a tax on or measured by profits or income, or business presence or business activity.”

The constitutionality of the throwout rule was the subject of prior litigation.

In Whirlpool Properties, Inc. v. Director, Div. of Taxation, the New Jersey Supreme Court held that the throwout rule operated permissibly with respect to receipts attributed to states in which the taxpayer was protected under Public Law 86-272, or simply did not have the requisite contacts to establish nexus, but that the rule was facially unconstitutional with respect to receipts attributable to states that, for tax policy reasons, had declined to adopt a corporate income tax or other business presence or business activity tax.

The New Jersey high court decision, however, did not end litigation, as a number of taxpayers then proceeded with their “as applied” challenges. These taxpayers argued that as applied to their facts, the throwout rule was unconstitutional because it violated various constitutional provisions—most notably the “fair apportionment” prong of the four-part Complete Auto Transit test for determining whether a state tax violates the Commerce Clause.

New Jersey Tax Court

The issue before the New Jersey Tax Court, on a summary judgment motion in Lorillard Licensing Co. LLC v. Division of Taxation, was whether the state could use a different nexus standard in determining whether the taxpayer (an intangible holding company located in North Carolina) was “subject to tax” in a state, so that receipts would be thrown out of the sales factor denominator that it used in determining whether an entity was subject to tax in New Jersey.

The Division of Taxation argued that the taxpayer must actually file returns in other states to be considered subject to tax and thus not subject to the throwout rule.

The taxpayer countered that the state must apply its own economic nexus standard (as adopted in Lanco) in determining whether the taxpayer was subject to tax in the other state. In other words, if the taxpayer were subject to tax in the other state under the Lanco rationale, the throwout rule would not apply.

In its summary judgment ruling, the New Jersey Tax Court stated that the Division can only apply one nexus standard for tax purposes, and this is the standard adopted and upheld by the court in Lanco.

Thus, a company that licenses intangibles and that has receipts attributable to all states imposing a corporate income tax will not be subject to the throwout rule because the economic nexus standard that New Jersey imposes on out-of-state taxpayers must similarly be applied for purposes of the throwout rule. Under New Jersey’s economic nexus standard, a licensing entity would be “subject to tax” in all relevant states for New Jersey purposes.

For more information, contact a KPMG State and Local Tax professional:

Jim Venere

(973) 912-6349

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