In another taxpayer victory, the New Jersey Superior Court, Appellate Divisionheld that an intangible holding company was not required to throw out any of its so-called “nowhere receipts” from an affiliated tobacco company in computing the denominator of its receipts factor.1 In Lorillard Licensing Company LLC v Dir., Div. of Taxation, the court held that New Jersey’s economic nexus standard2 must be applied to determine whether a corporation is “subject to tax” in other jurisdictions for purposes of New Jersey’s Throw-Out Rule. Further, the court held that it is irrelevant whether the corporation actually filed returns in or paid tax to those other jurisdictions. The Appellate Division agreed with the Tax Court that “New Jersey has no legitimate interest in considering the tax policy and practices of other States when determining whether to apply the Throw-Out Rule.”

This may not be the last we hear from the courts on this issue. The Division may appeal to the New Jersey Supreme Court “as of right” if there is a substantial constitutional question or at the discretion of the court.


New Jersey’s Throw-Out Rule was enacted as part of the 2002 Business Tax Reform Act (BTRA).3 The Throw-Out Rule requires that in computing the receipts factor of the corporation business tax (CBT) apportionment formula, the denominator is reduced by the receipts attributed to states where the corporation is not “subject to tax” increasing the New Jersey apportionment percentage. The intent of the Throw-Out Rule was to address purported “nowhere” sales and the perceived problem of corporations apportioning income to states that did not impose income or franchise taxes. Of course, “nowhere” sales is just rhetoric, as all sales can be appropriately sourced somewhere. The Throw-Out Rule was eventually thrown out by the Legislature effective for years beginning on or after July 1, 2010.4

The first case to reach the New Jersey Supreme Court challenging the Throw-Out Rule, Whirlpool Properties, Inc. v. Dir., Div. of Taxation,5 involved a company that licensed its intellectual property to both affiliates and unrelated third parties. The court rejected Whirlpool Properties’ position that the Throw-Out Rule was facially unconstitutional, but narrowed application of the Throw-Out Rule to apply “only to untaxed receipts from those states that lack jurisdiction to tax the corporation.”

Lorillard challenged the Division’s application of the Throw-Out Rule on the basis that in determining whether receipts were required to be thrown out of the denominator the same economic nexus rule that was found to be constitutional inLanco should be deemed to apply in all jurisdictions and, accordingly, since Lorillard would be “subject to tax” in those jurisdictions, there would be no receipts required to be thrown out. The Division’s position was that actual taxation, not merely the ability to tax, determines whether the Throw-Out Rule applies, and that the licensing agreement (that was the basis for subjecting Lorillard to CBT) did not make the taxpayer subject to tax by other jurisdictions. The Tax Court found that the Director’s position “tests the limits of his credibility” and held for the taxpayer.6

Sutherland Observations

This decision may only resolve Throw-Out issues for intangible holding companies—since Lanco only addressed nexus for certain intangible holding companies that license to affiliates. The New Jersey courts have not expanded the application of the economic presence nexus standard outside of the intangible holding company context.7

While there are still some unknowns surrounding the application of the Throw-Out Rule, taxpayers adversely impacted by the Throw-Out Rule need to consider filing refund claims for open years. In addition, some taxpayers may have entered into closing agreements that left open the possibility of a refund depending on the outcome of challenges to the Throw-Out Rule. Those taxpayers should revisit their closing agreements in light of today’s decision.

Stay tuned. Perhaps the next decision (or lack of an appeal) will finally snuff out the Throw-Out Rule.