On October 2, in PPL Electric Utilities Corporation v. Director, Division of Taxation, No. 000005-2011, the New Jersey Tax Court determined that federal deductions for the taxpayer’s payments of Pennsylvania gross receipts tax and Pennsylvania capital stock tax are not subject to addback in New Jersey. As a result, taxpayers that added back those taxes (either voluntarily or upon audit), and taxpayers that added back similar taxes paid to other states, should consider filing claims for refunds. Note that New Jersey has a four-year statute of limitations period for filing refund claims, and some taxpayers’ statute of limitations periods for the year ending December 31, 2009, if paid on the last day of the extension period, will expire on October 15, 2014.
Background and the Taxes at Issue
New Jersey requires taxpayers to add back to their New Jersey entire net income certain taxes that the taxpayers deducted for federal purposes. Specifically, New Jersey tax law requires taxpayers to add back taxes paid to a state or a locality that are “on or measured by profits or income, or business presence or business activity.” N.J.S.A. 54:10A-4(k)(2)(C).
The taxpayer, PPL Electric Utilities Corporation, was a Pennsylvania corporation that paid taxes in multiple jurisdictions, including Pennsylvania. When calculating its New Jersey entire net income, the taxpayer added back to federal taxable income many of the state taxes, but not the Pennsylvania gross receipts tax and capital stock tax. Upon audit, the New Jersey Division of Taxation (the Division) required the taxpayer to add back the Pennsylvania gross receipts tax and capital stock tax to its New Jersey entire net income.
The New Jersey Tax Court’s Decision
The New Jersey Tax Court first held that the Pennsylvania gross receipts tax was not subject to New Jersey’s addback provision. Pennsylvania imposes its gross receipts tax on electric distribution companies and electric generation suppliers on their gross receipts from sales of electric generation supply in Pennsylvania, unrelated to the privilege of doing business in that state.
The court framed the relevant question as whether the tax at issue was “measured by profits or income, or business presence or business activity.” Looking to Pennsylvania case and administrative law explaining the gross receipts tax, the court determined that the Pennsylvania gross receipts tax was not a tax measured on profits, income, business activity, or presence. Rather, the court determined that the tax was an excise tax and rejected the Division’s position that the tax was akin to a franchise tax imposed for the privilege of doing business. The court explained that the tax was based on the amount of electricity sold, regardless of whether a taxpayer realized income or profit from the sales.
Sutherland Observation: Even though the gross receipts tax statute indicates it is imposed on corporations “engaged in. . . business. . . in Pennsylvania,” the Tax Court found that it was not “based on the taxpayer’s business presence or business activity in Pennsylvania.”
While the Tax Court’s decision did not set forth a general rule prohibiting the addback of gross receipts taxes, taxpayers should consider the Court’s analysis and whether they may be entitled not to add back (i.e., entitled to a deduction for) other gross receipts taxes paid. For example, while the Ohio commercial activity tax imposition statute refers to the “privilege” of doing business in Ohio, the tax is levied, determined, and calculated based on gross receipts regardless of whether income or profit is realized, similar to the Pennsylvania gross receipts tax.
The court agreed with the taxpayer that the capital stock tax was a property tax, relying on United States Supreme Court and Pennsylvania precedent. Notably, the court explained that the “[m]ere use of income in measuring the value of the stock does not require the capital stock tax to be added-back.” Furthermore, the Division’s own administrative guidance provided that property taxes are not considered to be based on business presence or activity.The court further held that the Division could not require the taxpayer to add back the Pennsylvania capital stock tax in calculating its New Jersey entire net income. The Pennsylvania capital stock tax is imposed on companies formed or doing business in Pennsylvania that are companies with capital stock, joint-stock associations, limited liability companies, business trusts, and all other entities classified as corporations for federal income tax purposes. Pennsylvania calculates the capital stock tax due by multiplying the capital stock rate by a company’s “capital stock value,” which is determined by reference to a company’s five-year average net income and its net worth.
The court agreed with the taxpayer that the capital stock tax was a property tax, relying on United States Supreme Court and Pennsylvania precedent. Notably, the court explained that the “[m]ere use of income in measuring the value of the stock does not require the capital stock tax to be added-back.” Furthermore, the Division’s own administrative guidance provided that property taxes are not considered to be based on business presence or activity.
Sutherland Observation: Interestingly, the Tax Court relied upon N.J. Administrative Code § 18:7-8.7(f) to assist with establishing the types of taxes that are “on or measured by profits or income, or business presence or business activity.” While section 18:7-8.7(f) provides an interpretation of that phrase, the regulation was not interpreting that phrase as it appears in the addback provision. Instead, it interprets New Jersey’s former “Throw Out Rule,” codified at N.J.S.A. 54:10A-6(B) (2002-2010). The Throw Out Rule related to apportionment, not to modifications to entire net income. In fact, section 18:7-8.7(f) was not promulgated until 2003, three years after the tax periods at issue in PPL Electric Utilities Corporation. Reliance on the regulation makes sense, however, because it would be difficult to conceive of a situation in which the phrase “on or measured by profits or income, or business presence or business activity” could have one meaning for addback purposes and a different meaning for apportionment purposes.
Finally, the court determined that the Division’s attempt to require the taxpayer to add back the Pennsylvania gross receipts tax and capital stock tax for New Jersey corporation business tax (CBT) purposes discriminated against multistate taxpayers, because it would force multistate taxpayers to add back taxes imposed by other states, while only requiring New Jersey taxpayers to add back “CBT-type taxes."
Sutherland Observation: The court’s decision provides potential refund opportunities for New Jersey taxpayers. Taxpayers paying the Pennsylvania gross receipts tax, the capital stock tax, or other similar taxes in other jurisdictions should consider whether they have improperly added back such taxes in calculating their entire net income. New Jersey’s statute of limitations runs from four years from the date of payment of the tax.
The Division of Taxation is entitled to appeal the Tax Court’s decision.
The court’s decision provides New Jersey taxpayers with guidance regarding the taxes that should be added back to New Jersey entire net income. Taxpayers should consider whether they have improperly added such taxes back to entire net income in previous years and whether a refund opportunity exists.