September 16, 2019

September 16, 2019

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BREAKING NEWS: New Jersey Is GILTI, Again!

Taxpayers may have celebrated too soon when the New Jersey Division of Taxation announced that it was withdrawing TB-85 and the GDP-based apportionment regime for global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) in favor of a more fair apportionment regime. Read our first post on T8-85 here.

Yesterday, the Division issued a new Technical Bulletin (TB-92) on the state’s treatment of GILTI and FDII that is quite troubling. The guidance provides that GILTI and FDII should be included in the general business income apportionment factor and sourced as “other business receipts” to New Jersey. The guidance then provides that “to compute the New Jersey allocation factor on Schedule J, the net amount of GILTI and the net FDII income amounts are included in the numerator (if applicable) and the denominator. This is to help prevent distortion to the allocation factor and arrive at a reasonable and equitable determination of New Jersey tax.” 

As an initial matter, the Division considers FDII a new category of income, which is not the case – FDII is income from certain non-US sales that has always been included in income. The Tax Cuts and Jobs Act created the FDII deduction, which is based on such sales but FDII is not a new type of income. Thus, it seems particularly unreasonable that FDII would be subject to special apportionment rules and included on a net basis (really a net, net basis because instead of including gross receipts the guidance would include incomenet of a deduction) when other sales are included on a gross basis. This seems to be a blatant violation of the foreign commerce clause. It also seems unreasonable that FDII would be sourced as “other business receipts” and not based on the property or service actually sold by the taxpayer.

Furthermore, there Division provided no guidance on how GILTI and FDII should be included in the numerator of the apportionment formula. The Bulletin provides only that the taxpayer cannot look through to the underlying sales of the CFC (unless they are members of the combined group) when allocating GILTI and FDII. This is troubling because, in certain circumstances, other business receipts are sourced to the commercial domicile of the taxpayer. This would harm NJ-based companies and was likely not the intention of the Division.

© 2019 McDermott Will & Emery

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About this Author

Stephen P. Kranz Lawyer McDermott Will
Partner

Stephen P. Kranz is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He engages in all forms of taxpayer advocacy, including audit defense and litigation, legislative monitoring, and the formation and leadership of taxpayer coalitions.  Steve is at the forefront of state and local tax issues, including developments arising in the world of cloud computing and digital goods and services.  He assists clients in understanding planning opportunities and compliance obligations for all states and all tax types. ...

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Kathleen Quinn, McDermott Will, State Tax Matters Lawyer, Corporate Development Attorney
Associate

Kathleen Quinn focuses her practice on state and local tax matters. She has represented corporations and individuals in New York State and New York City income tax controversies. She also has advised clients on the state and local consequences of corporate restructurings and other business transactions.

Previously, Kathleen worked at a Big Four accounting firm, where her practice focused exclusively on state and local tax.

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