On December 21, the New Jersey Division of Taxation released Technical Bulletin TB-85, which addresses how the Division will expect taxpayers to calculate the amount of so-called global intangible low-taxed income (GILTI) and foreign derived intangible income (FDII) that are taxable for New Jersey corporation business tax (CBT) purposes.

Background: GILTI and FDII under Federal Tax Law

The Federal Tax Cuts and Jobs Act (TCJA) created a new category of income under Internal Revenue Code (IRC) section 951A, known as GILTI.  This provision imposes a tax on U.S. shareholders based on income from controlled foreign corporations (CFCs), to the extent that this income is in excess of a nominal 10% return on the tangible assets of the CFCs.  GILTI is taxed at the regular federal tax rates, but a deduction is generally allowed for 50% of the amount of GILTI included in a taxpayer’s federal gross income under IRC section 250(a)(1)(B). Additionally, foreign tax credits are available to offset the federal income tax imposed on GILTI, with credits limited to 80% of the amount of foreign taxes paid.

The TCJA also identified a new category of income, FDII, which calculates an amount similar to GILTI (i.e., a proxy for intangible income based on an assumed 10% return on tangible depreciable asset basis) and multiplies that amount by the fraction of the income earned in the United States that is attributable to property sold or licensed to a non-U.S. person for foreign use or to services provided outside the United States.  Under IRC section 250(a)(1)(A), taxpayers are generally permitted a deduction from income equal to 37.5% of FDII.

New Jersey Treatment of GILTI and FDII

New Jersey Legislation

New Jersey legislation has confirmed that a corporate taxpayer must include the amount of GILTI calculated under IRC section 951A in its taxable income base for CBT purposes, but also may take the deductions related to both GILTI and FDII under IRC section 250(a).  New Jersey law does not provide for any offset of CBT with foreign tax credits.

In a signing statement released in conjunction with October amendments to the CBT, Governor Murphy acknowledged that taxing GILTI “may disproportionately impact certain New Jersey taxpayers.”  Governor Murphy added that he had been assured that the Division “maintains the discretion under existing law to provide relief to individual CBT taxpayers when appropriate to ensure the taxpayer’s CBT obligation fairly reflects its liability”—leaving many to believe that a corporation taxable in New Jersey would be able to request some form of individualized alternative apportionment relief based on its specific circumstances.  Thereafter, Director John Ficara called apportionment relief a “big issue” and said that the Division would provide its “factor relief approach” in public guidance.

The Technical Bulletin

Although Governor Murphy’s signing statement suggested that the Division would take an individualized approach to provide companies with apportionment relief, the Technical Bulletin instead states that all corporations filing a CBT-100 (the general return for most CBT filers) or BFC-1 (the return for banking and financial corporations) will be expected to calculate the amounts of GILTI and FDII taxable for CBT purposes “based on a separate special accounting method.”  Specifically, taxable GILTI and FDII (net of the deductions under IRC section 250(a)) will be calculated using an allocation ratio that is separate from a taxpayer’s generally applicable CBT ratio, and which is “equal to the ratio of New Jersey’s gross domestic product (GDP) over the total GDP of every U.S. state (and the District of Columbia) in which the taxpayer has economic nexus.”  Thus, a taxpayer will have two apportionment factors—one applicable to its entire net income base, and one applicable to its taxable GILTI and FDII.

As an example, the Technical Bulletin states that because the current New Jersey GDP ratio is approximately 3.1%, and corporations currently receive a deduction of 50% of the GILTI inclusion, a corporation with nexus in all states and the District of Columbia would pay CBT on approximately 1.6% of its gross income calculated under IRC section 951A.  The Technical Bulletin’s example does not take FDII into consideration.

Taxable GILTI and FDII will be calculated on a new Schedule A-6.

Potential Considerations

Below is a summary of some of the issues raised by the Technical Bulletin.

  • Lack of Individualized Apportionment Relief:  While the Technical Bulletin suggests that all corporations will calculate the amount of GILTI subject to tax under a single approach, future guidance may be necessary to identify circumstances where, consistent with Governor Murphy’s signing statement, “individual CBT taxpayers” may request another approach to the taxation of GILTI.
    • Eversheds Sutherland Observation:  A taxpayer who is adversely affected by the separate allocation ratio outlined in the Technical Bulletin may have a constitutional argument that the use of U.S. (and U.S. state) GDP data is arbitrary and does not bear a rational relationship to the taxpayer’s activities in New Jersey.
      • Although the Division has taken the position that GILTI is a “hybrid of different income items that largely constitutes displaced U.S. income,” many taxpayers earn GILTI from non‑U.S. activities with little or no connection to New Jersey.  The allocation of GILTI based on U.S. (and U.S. state) GDP figures may not properly address issues of factor representation, and thus may cause unconstitutional distortion.
      • States generally apply the unitary business principle to require a taxpayer to apportion all of its unitary business income to the state using one single apportionment method for all of the activities of the unitary business.  To the extent that GILTI is earned from activities of a single unitary business, New Jersey’s requirement that a taxpayer allocate GILTI to the state using a separate and different allocation ratio may raise issues under the unitary business principle as outlined by the U.S. Supreme Court.
  • Calculation of the Allocation Ratio:  The amount of GILTI allocated to New Jersey will depend on the states in which a taxpayer has “economic nexus.”  However, New Jersey law does not provide a bright line economic nexus standard for CBT purposes, and the Technical Bulletin does not address how a taxpayer should determine whether or not it has economic nexus in a particular state.
    • Eversheds Sutherland Observation:  In Lorillard Licensing Company LLC v. Dir., Div. of Taxation, the New Jersey Superior Court, Appellate Division held that New Jersey’s economic nexus standard must be applied to determine whether a taxpayer is “subject to tax” in other jurisdictions for purposes of New Jersey’s (now repealed) Throw-Out Rule.  29 N.J. Tax 275 (App. Div. 2015), certif. denied, 226 N.J. 212 (2016).  Further, the court held that it is irrelevant whether the taxpayer actually filed returns in or paid tax to those other jurisdictions.  This judicial authority may be applicable when determining the states in which a taxpayer has economic nexus for purposes of calculating its GILTI allocation ratio.
  • Combined Reporting:  New Jersey has adopted a combined reporting regime for tax years ending on or after July 31, 2019.  The Technical Bulletin does not address whether an entity filing a combined return may calculate a single allocation ratio based on the total number of states in which any group member has economic nexus (or if each group member with GILTI will have to calculate an allocation ratio separately).
  • Winners and Losers:  New Jersey’s proposed approach, requiring all corporations to allocate GILTI using a ratio based on U.S. (and U.S. state) GDP, will have a disparate impact on taxpayers.  Under the Division’s approach, taxpayers with nexus in numerous states, but having a relatively higher “general” New Jersey apportionment factor, will be treated more favorably than taxpayers conducting business in a small number of states and having a relatively smaller “general” New Jersey apportionment factor.  For instance, based on U.S state GDP data, a taxpayer that is only conducting business in New Jersey, New York, and Connecticut would have a GILTI allocation ratio of approximately 24.7%.  However, it is possible that the taxpayer’s standard New Jersey apportionment factor is much less (or much higher) than 24.7%, depending on its business.
    • Eversheds Sutherland Observation:  Including a rule in future draft regulations to allow a taxpayer to use the lesser of its separately calculated GILTI allocation ratio or its standard New Jersey apportionment factor to allocate its GILTI inclusion would prevent this unfair result.


The Division intends to promulgate regulations addressing the allocation of GILTI and FDII consistent with the approach outlined in the Technical Bulletin.  Under New Jersey law, the Division will prepare draft regulations, and take comments on such draft regulations, prior to issuing regulations in final form.  As such, New Jersey taxpayers who are especially disadvantaged by New Jersey’s current approach to taxing GILTI and FDII may want to consider preparing comments, either now or shortly after draft regulations are released, outlining their concerns.

The New Jersey Tax Court rejected the taxpayer’s argument that the partnership filing fee, which requires a partnership with New Jersey source income to pay a per-partner fee of $150 (capped at $250,000), violated the Commerce Clause. The Tax Court held that the filing fee is not facially discriminatory because all partnerships must pay the fee regardless of the location of the partnership or partner, or the nature of the partnership’s business, provided the partnership earns New Jersey source income. The Tax Court also held that the plaintiff failed to prove that the filing fee, in practical effect, discriminates against interstate commerce. The Tax Court ruled that the filing fee did not “implicate or violate” the Commerce Clause because the fee is imposed to cover the government’s cost of processing and reviewing the New Jersey returns of partnerships and their partners, which, according to the Tax Court, is a purely intrastate activity.

Targa Resources Partners, L.P. v. Director, Division of Taxation, 010749-2015 (N.J. Tax 2018)

Ferrellgas Partners, L.P. v. Director, Division of Taxation, 007051-2014 (N.J. Tax 2018)

The New Jersey Tax Court upheld the New Jersey Division of Taxation’s use of the 25/50/25 sourcing rule for “certain services” against a provider of mass messaging services by fax, email and voice. Specifically, the court upheld the Division’s determination of a 76% receipts factor, which consisted of 25% for all transactions originating in New Jersey, 50% for all transactions performed in New Jersey, and 1% for the percentage of transactions that terminated in New Jersey. Because the court determined that the taxpayer performed its service entirely in New Jersey, it stated that a 100% receipts factor could also have been appropriate under a cost-of-performance sourcing method.


Xpedite Sys., Inc. v. Division of Taxation, No. 018847-2010

In the midst of a budget showdown between New Jersey’s Legislature and Governor Murphy, on June 25, 2018, the Legislature passed a replacement bill that seeks to raise revenue with a temporary Corporation Business Tax “surtax” on corporations meeting certain income thresholds and by limiting New Jersey’s dividend exclusion. The Legislature also responded to the Tax Cuts and Jobs Act (TCJA) passed by the United States Congress late last year by decoupling from the IRC § 199A qualified business income deduction. However, the current version of the bill fails to address other TCJA provisions, such as the tax on global intangible low-taxed income and the foreign-derived intangible income deduction. With the Governor threatening to veto the bill, the Legislature and the Governor are expected to continue negotiations over the next few days as the end of June deadline for the budget approaches.

View the full legal alert.

In Kraft Foods Global, Inc. v. Director, Division of Taxation, 2018 WL 2247356 (May 17, 2018), the New Jersey Superior Court, Appellate Division, recently upheld a New Jersey Tax Court decision denying a taxpayer an exception to the state’s interest add-back requirement in determining the taxpayer’s corporate net income subject to New Jersey’s corporation business tax (CBT). This case highlights the unintended tax consequences that may result from financing arrangements between related entities.

Like many states, New Jersey uses federal taxable income as a starting point for the CBT and then has several modifications to federal taxable income to arrive at New Jersey taxable income. One of these modifications is the related party interest add-back provision, which provides that “[e]ntire net income shall be determined without the exclusion, deduction or credit of … [i]nterest paid, accrued or incurred for the privilege period to a related member….”  N.J.S.A. 54:10A–4(k)(2)(I).

There are five statutory exceptions to the interest add-back requirement. In Kraft Foods, the only exception relied upon by the taxpayer was the “Unreasonable Exception,” which requires the taxpayer to establish “by clear and convincing evidence, as determined by the director, that the disallowance of a deduction is unreasonable.” In support of its argument, the taxpayer argued that its parent company simply “pushed down” loans from bondholders because the parent company could secure a better interest rate on the open market than the taxpayer.

The appellate court upheld the determination of the Tax Court that the taxpayer did not qualify for the Unreasonable Exception. While acknowledging that legislative history supported the taxpayer’s contention that the Unreasonable Exception may apply to a “pushed down” loan, even in the absence of a guarantee of the third-party debt, the appellate court found that the taxpayer did not meet its evidentiary burden. According to the court, the taxpayer produced no document suggesting that it was ultimately responsible for the third-party debt. The taxpayer’s promise to pay its parent company did not contain a guarantee to the third-party bondholders, nor did the promissory notes the taxpayer signed on behalf of its parent contain payment terms or a schedule for principal payments. Thus, according to the appellate court, it was reasonable for the Director to determine that the parent’s debt to the bondholders “was not, legally or effectively, ‘pushed down’” to the taxpayer. Kraft Foods Global, Inc. v. Director, Division of Taxation, 2018 WL 2247356 (May 17, 2018).

The IRS intends to issue regulations pertaining to states’ attempts to subvert the state and local tax deduction cap.

  • The Tax Cuts and Jobs Act imposed a $10,000 ($5,000 for married individuals filing separately) limit on state and local tax deductions for federal income tax purposes.
  • Certain states, including New York, New Jersey, and Connecticut, have enacted legislation to allow taxpayers to claim a federal tax deduction in excess of the SALT cap.
  • The pending regulations will emphasize that federal income tax substance-over-form principles, not state laws, dictate the characterization of the charitable contributions.

View the full legal alert.

By Sam Trencs and Open Weaver Banks

The New Jersey Tax Court held that New Jersey could not impose corporation business tax on a foreign corporation’s foreign source income that was not included in the federal tax base because of a treaty benefit. Although New Jersey is permitted to adopt a legislative addback for exempt foreign source income, it did not, and therefore, it is presumed that federal taxable income is the starting point for computing New Jersey entire net income for purposes of the New Jersey corporation business tax. Infosys Limited of India, Inc. v. Director, Division of Taxation, Dkt No. 012060-2016 (N.J. Tax Nov. 28, 2017).

By Douglas Upton and Andrew Appleby

The New Jersey Tax Court determined that credit card issuers must source to New Jersey all of their interest and interchange fee receipts, and half of their credit card service fees, from New Jersey accountholders. The Tax Court concluded that the Division of Taxation’s regulations required the taxpayers to source their interest receipts based on the location of their cardholders, rejecting the taxpayers’ argument that the interest receipts were not so integrated with a business carried on in New Jersey as to acquire a New Jersey tax situs. The Tax Court further determined that credit card interchange fees constituted interest for corporation business tax purposes, noting that the taxpayers treated the interchange fees as an original issue discount for federal income tax purposes and that the interchange fees amounted to a fee charged for the use of money. The Tax Court also held that the Division of Taxation’s 25/50/25 sourcing regulation (i.e., sourcing 25% of receipts to the where the service originates, 50% to where the service is performed, and 25% to where the service terminates) applied to source 50% of credit card service fees from New Jersey cardholders to New Jersey because the service was performed where the cardholder received the benefit of such service, in New Jersey.  Finally, the Tax Court found that the Division of Taxation could not apply the throwout rule to any of the taxpayers’ receipts because the Division of Taxation failed to point to any state that would not have jurisdiction to tax the taxpayers’ sales if New Jersey’s economic nexus standard applied.  Bank of Am. Consumer Card Holdings v. N.J. Div. of Taxation, __ N.J. Tax __, 2016 WL 5899786 (N.J. Tax. Ct. Oct. 6, 2016).

By Zachary Atkins and Open Weaver Banks

The New Jersey Tax Court held that apportioning all of a company’s income to New Jersey for corporate business tax purposes, even with the allowance of a credit for taxes paid to separate-return states, failed to fairly reflect the company’s business activities in New Jersey.  The court also rejected the company’s contention that it was entitled to use a three-factor formula. Prior to 2011, corporate taxpayers without a “regular place of business” outside New Jersey were required to use a 100% apportionment factor, while taxpayers that maintained a regular place of business outside the state were required to use a three-factor apportionment formula. The company in question, which was headquartered in New Jersey, did not have a regular place of business outside the state and so was required to use the 100% apportionment factor.  The Division of Taxation responded to the company’s request for relief on audit by allowing a credit for taxes paid to separate-return states. The tax court concluded that the 100% apportionment factor, even with the credit, did not fairly reflect the company’s in-state business activities because it produced tax liabilities that were, depending on the year, double or triple the tax liabilities produced by the three-factor formula. Nonetheless, that in itself did not entitle the company to use the three-factor formula, the court said. The court agreed with the Division that strict application of the three-factor formula would have produced an unfair result because, while the company’s offices, employees and operations were in New Jersey, the three-factor formula would have resulted in apportionment factors of approximately 30%.  The court noted, too, that because the company was in the business of offering equipment lease financing to customers of related entities, the leased equipment—located in all 50 states—reduced the company’s property factor. The court remanded the case to the Division so that further adjustments to the statutory apportionment factor could be considered. Canon Fin. Servs., Inc. v. Director, Div. of Taxation (N.J. Tax Ct. Oct. 13, 2016)