TRENTON – The state Supreme Court today has upheld an appellate court decision against Whirlpool, which had fought the Division of Taxation over the so-called Throwout Rule used to determine tax deficiencies in sales taxes.
The court unanimously modified and upheld an appellate court decision, and ruled that “For corporate taxpayers having a substantial nexus to New Jersey, the Throw-Out Rule may apply constitutionally only to untaxed receipts from states that lack jurisdiction to tax the corporation due to insufficient connection with the corporation or due to congressional action … but not to receipts that are untaxed because a state chooses not to impose an income tax.”
The court further stated that the “Throw-Out Rule is not facially unconstitutional. For corporate taxpayers having a substantial nexus to New Jersey, the Rule may apply constitutionally only to untaxed receipts from states that lack jurisdiction to tax the corporation.”
The court upheld as modified the decision of the appellate division.
The case is a complicated matter involving corporations with their principal place of business in another state and what is the income to be assessed on the taxpayer’s sales of tangible property shipped to a point within New Jersey.
Whirlpool, based in Michigan, had challenged how the N.J. Division of Taxation calculated a deficiency, the difference between what a taxpayer claims is owed and what the state believes should be owed.
In 2002, the Legislature added what it termed the Throwout Rule in an attempt to address the failure of the corporate business tax to address the so-called “nowhere sales’’ problem, in which corporations managed to allocate an increasing proportion of their income to states that did not have a corporate income or franchise tax.
In essence, the Throwout Rule excluded receipts from non-taxing states as part of the complex formula for ascertaining taxes in New Jersey. The net effect is that this rendered a larger amount of income taxable in New Jersey.
The court case began when the Division of Taxation assessed a deficiency against Whirlpool for 1996 through 2003 of $24.88 million.
Ironically, the Throwout Rule has since been eliminated, but the court stated that played no role in the decision here.
The Legislature repealed it in December 2008 to take effect after June 30, 2010.
The court ruling stated, in part: “Whirlpool Properties, Inc. (Whirlpool) is incorporated and has its principal place of business in Michigan and conducts all activities outside of New Jersey. Whirlpool earns income by licensing brand names that it owns and manages. Whirlpool did not file New Jersey tax returns or pay CBT from 1996 to 2003. The Director calculated allocable income using information gleaned from related entities and issued Whirlpool a CBT deficiency assessment of nearly $25 million for those years. Before the Throw-Out Rule became effective, the portion of income allocated to New Jersey for 1996 through 2001 ranged between 0.9546 and 1.3337 percent. Using the Rule, Whirlpool’s 2002 income was allocated to New Jersey 29.2572 percent and 41.8647 percent, respectively.”
Regarding the lower court ruling, the state’s high court said, “Explaining that Whirlpool did not contest that it “had a nexus with New Jersey” independent from its “unitary business,” or that “sales to non-taxing states were part of that business,” the panel determined that New Jersey had a “constitutionally sufficient nexus to those sales.” The panel also found that the Throw-Out Rule does not discriminate against interstate commerce because it does not cause double taxation and avoids the “forbidden impact on interstate commerce” of “pressuring” out-of-state corporations to increase New Jersey activity.”