On appeal from the Tax Court of New Jersey, reported at 24 N.J. Tax 116 (Tax 2008).
The opinion of the court was delivered by: A. A. RODRÍGUEZ, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Rodríguez, Yannotti and Chambers.
In these back-to-back appeals, consolidated for purposes of this opinion, we consider various facial challenges to the constitutionality of N.J.S.A. 54:10A-6, a subsection of the Corporation Business Tax Act (CBT), N.J.S.A. 54:10A-1 to -41, known as the "Throwout Rule." We affirm and hold that the Throwout Rule is facially constitutional in that it does not offend the Due Process, Commerce, or Supremacy Clauses of the U.S. Constitution.
Plaintiff Whirlpool Properties, Inc. (Whirlpool), a subsidiary of Whirlpool Corp., is a Michigan corporation with its principal place of business in that state. Plaintiff Pfizer, Inc. (Pfizer), a pharmaceutical company, is incorporated in Delaware with its principal place of business in New York. This dispute commenced when the Director of the Division of Taxation (Director) assessed a deficiency against Pfizer for 2003 of $705,521.50 and a deficiency against Whirlpool for 1996 through 2003 totaling $24,883,399.24. Pfizer and Whirlpool filed actions to challenge the constitutionality of the Throwout Rule, N.J.S.A. 54:10A-6, which the Director had used in calculating the deficiencies.*fn1 Both plaintiffs moved for partial summary judgment, arguing the Throwout Rule is facially unconstitutional. The Director cross-moved for partial summary judgment on the same question. All parties consented to a joint hearing.
The Tax Court denied plaintiffs' motions and granted the Director's cross-motions. Pfizer, Inc. v. Dir., Div. of Tax'n, 24 N.J. Tax 116 (Tax 2008). The Tax Court found that the Throwout Rule facially satisfied the requirements of the Due Process, Commerce, and Supremacy Clauses of the U.S. Constitution on the grounds that it would operate constitutionally in some instances and that another tax statute, N.J.S.A. 54:10A-8, permitted the Director to give discretionary relief whenever the Throwout Rule did not operate constitutionally.
We denied plaintiffs' motions for leave to file interlocutory appeals. However, the Supreme Court granted the motions and summarily remanded to the Appellate Division for consideration on the merits. Pfizer, Inc. v. Dir., Div. of Tax'n, 196 N.J. 590 (2008); Whirlpool Props., Inc. v. Dir., Div. of Tax'n, 196 N.J. 591 (2008).
The Throwout Rule applies to any corporation that "maintains a regular place of business outside this State other than a statutory office." N.J.S.A. 54:10A-6. It uses a formula to determine the "allocation factor," which is the portion of a corporation's income that is deemed to be taxable for having a sufficient relation to the State. Ibid. The statute averages three elements. The first is the "property fraction." N.J.S.A. 54:10A-6(A). The second, and the one at issue in these appeals, is the "sales fraction." N.J.S.A. 54:10A-6(B). The third is the "payroll fraction." N.J.S.A. 54:10A-6(C).
The numerator of the "sales fraction" is income on the taxpayer's sales of tangible property shipped to a point within New Jersey, and on its services, rentals, royalties on the use of patents or copyrights, and "other business receipts" (exclusive of dividends) within the State. N.J.S.A. 54:10A-6(B). The denominator is "the total amount of the taxpayer's receipts" from such activity, "whether within or without the State." Ibid. The "allocation factor" ultimately is the average of the property fraction, the payroll fraction, and twice the sales fraction. N.J.S.A. 54:10A-6. It is multiplied against the taxpayer's "entire net income" to yield the taxpayer's New Jersey taxable income.
In 2002, the Legislature added the "Throwout Rule" to the statutory scheme. L. 2002, c. 40, § 8. It addressed what the Legislature considered the CBT's failure to address the "nowhere sales" problem, which was that corporations were managing to allocate an increasing proportion of their income to states that did not have a corporate income or franchise tax ("non-taxing states"). S. Budget & Approps. Comm., Statement to S. 1556 (June 27, 2002); A. Budget Comm., Statement to A. 2501 (June 27, 2002). The intent was to apply the CBT to "the full extent permitted under" the U.S. Constitution and federal statutes. Ibid.
The Throwout Rule, under challenge here, excluded the income from the sales fraction's denominator:
[I]f receipts would be assigned to a state, a possession or territory of the United States or the District of Columbia or to any 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, then the receipts shall be excluded from the denominator of the sales fraction.
Thus, the formula was altered by eliminating from the denominator receipts from non-taxing states. This rendered a larger amount of income taxable by the CBT.
The statute has been amended to eliminate the Throwout Rule after the date of the operative facts in these cases.*fn2 This decision by the ...