• Dock sales and drop shipments. If you sold tangible personal property through a dock sale and the goods were picked up outside New Jersey, you may be able to exclude all of the related receipts from your New Jersey sales-fraction numerator. In addition, if you sold drop shipped products on behalf of a customer, if your customer was based outside New Jersey, then none of the receipts from the drop shipment transactions are includable in your sales-fraction numerator—even if the products were delivered to locations within New Jersey.⁵
• Interest and intangible expense addback. Whether intercompany interest and intangible expenses are subject to addback remains uncertain in light of pending litigation. Specifically, in Lorillard Tobacco Company v. Director, Division of Taxation,⁶ the Tax Court recognized a broad addback exception for intercompany interest and royalties. But the appellate court reversed and remanded the case back to the Tax Court to consider various constitutional issues.⁷ If you added back any intercompany interest or intangible expenses,⁸ you should file refund claims to preserve your rights.
• No tax on partnership income. If you own 50% or less of a partnership, you may be able to take the position that no tax is due on your distributive share as long as your commercial domicile is outside New Jersey.⁹
• Foreign corporations not taxable on certain income. In Infosys Limited of India Inc. v. Director, Division of Taxation,¹⁰ the Tax Court ruled that a foreign corporation’s income is not subject to CBT unless it is reported on Line 29 of its federal 1120-F return. Foreign corporations that paid CBT on foreign-source income or domestic income protected by a U.S. tax treaty may have a refund opportunity. Our prior coverage of Infosys can be viewed at reedsmith.com and reedsmith.com.
• Resurrecting NOL carryovers. Under New Jersey’s statute, a taxpayer’s NOL carryovers are reduced by the amount of any dividends received—even if the dividends qualify for the dividend received deduction.¹¹ However, this rule may not apply if the payor and payee are nonunitary.
• DPAD deduction for software development and food processing. For tax years prior to 2018, federal law provided an income-tax deduction for domestic production activities.¹² New Jersey allows taxpayers to claim the deduction for CBT purposes if they are engaged in certain manufacturing activities.¹³ The Division’s audit policy is to disallow the deduction for taxpayers engaged in software development and food processing.¹⁴ This policy, however, conflicts with the plain language of the statute. Accordingly, software developers and food manufacturers that added back the federal deduction in computing their CBT may be entitled to a refund.
• Reduce gain on sale of subsidiary. If you sold stock of a subsidiary with undistributed earnings, you may be entitled to adjust your basis in the stock and, thus, reduce your gain on the sale. This opportunity follows from MCI Communication Services, Inc. v. Director, Division of Taxation,¹⁵ in which the Tax Court ruled that certain federal consolidated-return rules apply for CBT purposes. For our prior coverage of MCI, please visit reedsmith.com.
• No nexus for Intangible Holding Companies? The Division’s longstanding economic-nexus standard for CBT was called into question by the Tax Court’s decision in Crown Packaging Technology, Inc. v. Director, Division of Taxation,¹⁶ which involved an intangible holding company that received royalty income from the use of its intangibles in the state. For our prior coverage of Crown, please visit reedsmith.com.

If you have any questions about the issues described in this alert, please contact one of the authors. 

1. See, e.g., Exec. Order No. 103 (March 9, 2020) (declaring State of Emergency); P.L. 2020, c. 19, Sec. 2 (extending statute of limitations for assessment of state taxes to 90 days after the conclusion of the state of emergency); Exec. Order 170, Appendix (July 31, 2020) (extending statute of limitations for refund claims due on or after March 9, 2020); Exec. Order 275, Appendix (Nov. 23, 2021) (extending statute of limitations for refund claims due on or after March 9, 2020 to April 1, 2022).
2. See New Jersey Division of Taxation, Division Procedures and Tax Collection, Extension of Time to File a Claim for a Refund or Credit (EO-275), available at state.nj.us (last visited Dec. 5, 2021).
3. See N.J.S.A. 54:10A–6(B)(6) (as in effect prior to P.L. 2018, c. 48 and P.L. 2018, c. 131).
4. See N.J.A.C. 18:7–8.10(a)(3); see also Xpedite Sys., Inc. v. Director, Division of Taxation, 2020 N.J. Super. Unpub. LEXIS 59 (N.J. Super. Ct. App. Div. Jan. 9, 2020).
5. Stryker Corp. v. Director, Division of Taxation, 18 N.J. Tax 270 (N.J. Tax 1999), aff’d 755 A.2d 1200 (N.J. Super. Ct. App. Div. 2000), aff’d 773 A.2d 674 (N.J. 2001).
6. 31 N.J. Tax 153 (N.J. Tax Ct. 2019).
7. 2021 N.J. Super. Unpub. LEXIS 2212 (N.J. Super. Ct. App. Div. Sept. 21, 2021).
8. Note that New Jersey switched from separate-company reporting to combined reporting beginning with the 2019 tax year. As a result, intercompany expenses between members of a combined group are now eliminated. N.J.S.A. 54:10A–4.4(e); N.J.S.A. 54:10A–4(k)(2)(I).
9. N.J.SA. 54:10A–4(aa), (gg).
10. 2017 N.J. Tax Unpub. LEXIS 72 (N.J. Tax Ct. Nov. 28, 2017), aff’d on reconsideration, 2018 N.J. Tax Unpub. LEXIS 39 (N.J. Tax Ct. March 19, 2018).
11. N.J.S.A. 54:10A–4(k)(6)(C) (as in effect prior to July 1, 2018).
12. See generally I.R.C. § 199 (as in effect for the 2015–2017 privilege periods).
13. See N.J.S.A. 54:10A–4(k)(2)(J) (as in effect for the 2015–2017 privilege periods).
14. See N.J.A.C. 18:7–5.2(a)1.xx.
15. 2015 N.J. Tax Unpub. LEXIS 58 (N.J. Tax Ct. July 20, 2015), aff’d, 2018 N.J. Super. Unpub. LEXIS 1401 (N.J. Super. Ct. App. Div. June 15, 2018), certif. denied, 2018 N.J. LEXIS 1283 (N.J. Oct. 16, 2018 ).
16. 2019 N.J. Tax Unpub. LEXIS 8 (N.J. Tax Ct. Feb. 26, 2019).

Client Alert 2021-318