TRENTON -- Attorney General Anne Milgram and Division of Law Director Robert Gilson announced today that the State has successfully defended against a challenge to the constitutionality of New Jersey’s corporate tax allocation formula pursued by Pfizer Inc. and three other companies.
In an action consolidated by the Tax Court of New Jersey, Pfizer Inc., General Engines Company, Inc., Federated Brands, Inc. and Whirlpool Properties, Inc. claimed that, on its face, the so-called “throw-out” provision of New Jersey’s Corporation Business Tax Act violates the due process, commerce and supremacy clauses of the U.S. Constitution.
The throw-out rule, enacted in 2002 via an amendment to the Corporation Business Tax Act, resulted in a change in New Jersey's corporate tax allocation formula and closed a loophole which taxpayers could use to shift significant taxable income out of the state. In challenging the rule, Pfizer and the other three corporate plaintiffs argued that the throw-out provision was not rational, unfairly apportioned taxable income and was pre-empted by federal tax legislation. The New Jersey State Chamber of Commerce and the New Jersey Business and Industry Association formally joined the case in support of the four corporate challengers as amicus or “friends of the court.”
In an extensive written decision, the Tax Court rejected the challengers’ arguments and explained the constitutional bases supporting New Jersey’s 2002 enactment of the throw-out rule, which can deter significant loss of revenue to the state.
”This is an important decision because it upholds legislation designed to maintain taxpayer fairness and equitable allocation in New Jersey's Corporation Business Tax,” said Attorney General Milgram. “The law closes loopholes that have been exploited to deprive New Jersey of tax revenue.”
Taking each claim in turn, the Court described the constitutionality of the throw-out rule and noted that it clearly ”can operate in a manner that satisfies the requirements for constitutionality as put forth by the United States Supreme Court in the decisions” construing the due process, commerce and supremacy clauses.
Corporate tax assessments by the state against Pfizer, General Engines, Federated Brands and Whirlpool total approximately $50 million.
The four companies must now pursue their challenges to the throw-out rule as applied to each taxpayer. In other words, these companies -- as well as other taxpayers who may challenge the throw-out provision -- must demonstrate that the rule distorts their taxable income to New Jersey.
Senior Deputy Attorney General Marlene Brown of the Division of Law's Treasury Section handled the case on behalf of the State. Chief William J. Bryan, Chief Lee Evans and Conferee Marlene Barnhart-Mohr of the Division of Taxation assisted in the litigation.
View Tax Court Decision (79K pdf)
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