The New Jersey Supreme Court, in an opinion released this morning, ruled that New Jersey's throwout rule is constitutional, generally. See Whirlpool Properties v. Director, Div. of Taxation, N.J. S. Ct. Docket No. 66,595 (July 28, 2011). A copy of the court's decision is attached. Importantly, however, the court limited its ruling in that throwout may apply constitutionally only to untaxed receipts from states that lack jurisdiction to tax the corporation due to insufficient nexus or on account of P.L. 86-272, but not to receipts that are untaxed because a state chooses not to impose an income tax. So, for example, receipts sourced to Nevada are not required to be thrown out if the taxpayer's activities in that state exceed mere solicitation.
The court's decision could significantly limit the application of throwout. The throwout rule statute, of course, requires a taxpayer to exclude receipts from the sales-fraction denominator if sourced to a state in which the taxpayer is "not subject to a tax." New Jersey's nexus rules are among the broadest in the country. If these same nexus standards were applied in determining whether a taxpayer "is subject to a tax" in another state for throwout purposes, a taxpayer will have sufficient constitutional nexus nearly everywhere, and throwout arguably should not apply. Time will tell how the Division of Taxation intends to apply the decision.
Click here to read the NJ Supreme Court Decision