Milgram defends tax law from companies' challenge

John O'Brien Jun. 4, 2008, 3:52pm


TRENTON, N.J. (Legal Newsline) - The Throwout Rule will not be thrown out of New Jersey, Attorney General Anne Milgram happily learned Thursday.

Milgram's office helped defend the state Division of Taxation against a challenge from a group of companies that claim the 2002 rule violated the due process, commerce and supremacy clauses of the US. Constitution.

Those companies - Pfizer, General Engines Company, Federated Brands and Whirlpool Properties - were supported by New Jersey's Chamber of Commerce and Business and Industry Association.

"This is an important decision because it upholds legislation designed to maintain taxpayer fairness and equitable allocation in New Jersey's Corporation Business Tax," Milgram said.

"The law closes loopholes that have been exploited to deprive New Jersey of tax revenue."

The Throwout Rule amended the Corporation Business Tax Act, changing a tax allocation formula and preventing businesses from shifting taxable income out of the state. The companies said it was pre-empted by federal tax laws.

"I conclude, that under the Due Process and Commerce clauses, the Throwout Rule is constitutional on its face because, in at least some circumstances, it can operate in a manner that satisfies the requirements for constitutionality as set forth by the U.S. Supreme Court in the decisions discussed above," wrote Judge Harold Kuskin of the state's Tax Court in a 27-page opinion.

"These circumstances include, but are not necessarily limited to, the following: (1) where the income being excluded from the denominator of the sales fraction is generated in whole or in part by activities in New Jersey, (2) where the application of the Throwout Rule has no material effect on the sales fraction because the income generated in the non-taxing state is insignificant in relation to the total income of the corporation, and (3) where the property and payroll fractions substantially temper the impact of the sales fraction on the allocation factor."

Milgram said tax assessments performed by the State against the four companies total nearly $50 million.

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