New Jersey Attempts An End Run Around P.L. 86-272 While Throwout And Lanco Are Challenged

New Jersey continues to take aggressive stances against foreign corporations. It asserts that physical presence is not necessary to subject a foreign corporation to income taxation in New Jersey. See Lanco, Inc. v. Director, Division of Taxation, 188 N.J. 380 (2006) (petition for certiorari pending) (holding that Quill's physical presence test does not apply to income taxes under the Commerce Clause). It applies the alternative minimum assessment ("AMA") to foreign corporations that are protected from net income based taxes by federal law P.L. 86-272 only if those corporations do not consent to jurisdiction under New Jersey's regular Corporation Business Tax ("CBT"). It removes receipts from the denominator of the receipts fraction based on whether another state has jurisdiction to tax the corporation or whether another state has decided to exercise its right to tax the corporation, under what has become known as the "throwout" rule. Further, when New Jersey throws receipts out of the denominator, it contradicts its subjectivity position (its Lanco economic nexus position) because it applies economic nexus standards for subjectivity in New Jersey yet refuses to apply those same economic nexus standards for subjectivity in other states.

There is hope that New Jersey will be turned back. We are filing a petition for certiorari in the United States Supreme Court in Lanco. The New Jersey Supreme Court favored the State's fisc and misapplied Commerce Clause case law under the United States Constitution. As Justice Benjamin's dissent stated in MBNA, economic nexus positions, like those asserted by the states in MBNA and in Lanco, rely

not on bedrock constitutional principles or on established legal precedent, but rather on legal commentaries with thinly veiled state-favoring taxing agendas, a strained and inaccurate reading of the United States Supreme Court's decision in Quill Corp. v. North Dakota, 504 U.S. 298, 112 S. Ct. 1904, 111 L. Ed. 2d 91 (2002), and a unilateral restatement of the important policy considerations which led to the inclusion of the Commerce Clause within the United States Constitution . . . .

Tax Commissioner of W. Va. v. MBNA Am. Bank, N.A., Docket No. 33049 (W. Va. Nov. 21, 2006) (Benjamin, J., dissenting, slip op. at 1 (Jan. 2, 2007)). We hope that the United States Supreme Court will soon confirm that the physical presence standard exists for all taxes.

We are challenging the throwout rule on constitutional and statutory grounds in the Tax Court of New Jersey. Throwout violates Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), because, as a result of throwout, the CBT is not fairly apportioned and discriminates against interstate commerce. Moreover, it violates New Jersey law.

Additionally, the application of the AMA to corporations that have P.L. 86-272 protection is, at best, questionable and should be struck down.

New Jersey is out on a limb on nexus, throwout, and the AMA. By these corporation tax policies, New Jersey is also contradicting its governor's expressly stated policy of becoming business-friendly.

New Jersey's Business Environment

Recently, New Jersey Governor Corzine "pledged to erase the perception that New Jersey was, in his words, 'adversarial' to business." David W. Chen, Corzine Offers Proposals to Bolster Business Climate, N.Y. Times, Sept. 8, 2006, at B1. Also, Dean Hughes and Professor Seneca, two prominent New Jersey economists at Rutgers University's Bloustein School of Planning & Public Policy, noted "a dramatic shift in the nation's high technology geography away from New Jersey." James W. Hughes & Joseph J. Seneca, High-Tech Industry Leaving New Jersey, Bergen Record, Sept. 17, 2006. Those economists note that the United States as a whole and California, Georgia, North Carolina, Texas, and Virginia, in particular, have gained high-tech jobs.

As part of Governor Corzine's pledge, he announced his strategy to "build an environment conducive to economic growth, innovation, and prosperity" in New Jersey and to remove the "negative perceptions of the state's business climate." Jon S. Corzine, Economic Growth Strategy for the State of New Jersey 2007, at 2, 5. The Governor's strategy assures that it will not require the State to raise new revenue. The Governor promised...