New Jersey changes corporate business tax policy


The New Jersey Division of Taxation (Division) recently announced a change in its policy for members of combined groups claiming protection from New Jersey Corporation Business Tax (CBT) under Public Law (P.L.) 86-272.1 Under the revised policy, the Division announced that although a combined group is considered a taxpayer and is taxed as one taxpayer,2 P.L. 86-272 protection will be determined on an entity-by-entity basis. Accordingly, members of a combined group may separately claim protection under P.L. 86-272 on a retroactive basis beginning with tax years ending on or after July 31, 2019.






P.L. 86-272 prohibits states from imposing a net income tax on out-of-state sellers whose only activities in the taxing state are the solicitation of orders for the sale of tangible personal property (TPP).3 For privilege periods ending on and after July 31, 2019, New Jersey requires combined reporting for entities under combined ownership, engaged in a unitary business, and having at least one corporation subject to the CBT.4 Since the adoption of mandatory unitary combined reporting, the Division has interpreted New Jersey’s combined reporting statute to apply P.L. 86-272 protection at the combined group level and not on a member-by-member basis. As such, the Division established a policy that the protections of P.L. 86-272 do not apply to other combined group members if activities of any member of a combined group exceed the protections of the federal law.5




Revised P.L. 86-272 Policy and updated guidance


Businesses and tax practitioners raised concerns over the Division’s previous position on the application of P.L. 86-272 to combined filers, arguing that the policy raised constitutional issues by subjecting certain combined group members to CBT when P.L. 86-272 protections should still apply on a separate entity basis. In response to these concerns, the Division on April 12, 2022 announced a revised policy in guidance published on its website. Under the new policy, P.L. 86-272 protection for a member of the combined group will be determined on an entity-by-entity basis rather than at the group level. As such, the protections afforded under the federal law apply retroactively to each member of a combined group. The guidance further specifies that managerial members of a combined group are permitted to amend the group’s 2019, 2020, and 2021 CBT-100U returns to reflect the change in policy if the combined group followed the return instructions and/or guidance of previous Division technical bulletins when filing their 2019, 2020, or 2021 returns.

As part of its updated guidance, the Division also revised three existing technical bulletins addressing combined reporting to reflect its revised policy on the application of P.L. 86-272 to combined group members specific to three topics: combined group filing methods; included and excluded business entities in a combined group and the minimum tax; and the concept of a combined group as a single taxpayer under the CBT.6






The Division’s change in policy is a welcome development for New Jersey CBT taxpayers, signifying the most recent effort by the Division to address taxpayer concerns regarding the ambiguous application of P.L. 86-272 protections under New Jersey’s adoption of combined reporting. Under the Division’s previous position, the activities of one combined group member could upset P.L. 86-272 protection for the entire combined group, including those group members whose only activity in the state is the solicitation of TPP. By allowing combined group members to claim P.L. 86-272 protection on an entity-by-entity basis, taxpayers may be able to reduce their CBT liability by removing New Jersey non-taxable members’ receipts from their New Jersey allocation factor. CBT filers may take advantage of these benefits by filing amended returns and claiming refunds on the difference in tax paid for the 2019-2021 tax years. At the same time, taxpayers may wish to confirm that New Jersey’s change in position regarding the application of P.L. 86-272 is appropriately being considered when preparing current year returns to the extent software updates do not yet reflect the Division’s change in policy.

The revised policy provides consistency for combined group taxpayers filing on a water’s-edge or worldwide basis, such that the application of P.L. 86-272 now aligns with the Joyce method of allocating income under the combined reporting law.7 Under New Jersey law, both return filing options use the Joyce method for purposes of allocating income, meaning that only the New Jersey sourced receipts from combined group members having New Jersey nexus are included in the numerator of the combined group’s allocation factor.8 In contrast, CBT filers making an election to file as an affiliated group are required to follow the Finnigan method, which includes all New Jersey receipts derived from all combined group members in the allocation factor numerator, regardless of whether they have nexus with New Jersey.9

The policy change will allow certain combined group members to change their status from being a taxable member10 of the combined group to being a non-taxable member, thus allowing the combined group to exclude any New Jersey sourced receipts arising from the non-taxable members of the combined group from the allocation factor. Those entities claiming protection under P.L. 86-272 may experience a significant change in their New Jersey allocation factors and should therefore determine whether filing amended returns would be beneficial for tax years ending on or after July 31, 2019.

It is interesting to note that the Division’s change in policy regarding P.L. 86-272 protection comes after a recent New Jersey Tax Court decision in Procacci Brothers Sales Corp. v. Director.11 In Procacci, a wholesale produce distributor’s acceptance of produce in New Jersey returned prior to acceptance by customers was insufficient to impose the CBT based on P.L. 86-272 protection. In addition, sending trucks into New Jersey to pick up the produce was an unprotected but de minimis activity that did not affect P.L. 86-272 protection. The taxpayer lost its P.L. 86-272 protection for one of the tax years at issue when in addition to the pickups of returned produce, it occasionally sent trucks into New Jersey to obtain produce from a related entity to deliver the produce to an out-of-state warehouse. The Procacci case, decided for tax years prior to the advent of mandatory unitary combined reporting in New Jersey, highlights the fact-specific determinations required in determining whether P.L. 86-272 protection may exist.

Finally, it should be noted that the Division’s policy change on P.L. 86-272 protection does not appear to change the Division’s position on the imposition of the minimum tax on those combined group members protected by P.L. 86-272.12 Under New Jersey law, the minimum tax applies to taxable members of a combined group, or group members having New Jersey nexus.13 Accordingly, any member of the combined group that has nexus with New Jersey is still subject to the minimum tax. Conversely, if the group member does not have nexus with New Jersey, they are not subject to the minimum tax.



1 Revision to Division Policy on Combined Groups and P.L. 86-272, N.J. Division of Taxation, rev. Apr. 20, 2022,
2 Citing N.J. REV. STAT. §§ 54:10A-4(h); 54:10A-4(z).
3 15 U.S.C. § 381-384.
4 N.J. REV. STAT. §§ 54:10A-4(z); 54:10A-4.6.
5 Under the Department’s previous policy, “[i]f one member in the combined group has nexus and sufficient activities in New Jersey to be taxed based on income, no member that has nexus with New Jersey may claim P.L. 86-272 protection.” Revision to Division Policy on Combined Groups and P.L. 86-272, N.J. Division of Taxation, rev. Apr. 20, 2022; 2021 Instructions for Corporation Business Tax Unitary Return, N.J. Division of Taxation.
6 N.J. Technical Bulletin TB-86(R), Included and Excluded Business Entities in a Combined Group and the Minimum Tax of a Taxpayer that is a Member of a Combined Group, N.J. Division of Taxation, rev. Apr. 20, 2022; N.J. Technical Bulletin TB-89(R), Combined Group Filing Methods, N.J. Division of Taxation, rev. Apr. 20, 2022; N.J. Technical Bulletin TB-100(R), The Combined Group as a Taxpayer under the Corporation Business Tax Act, N.J. Division of Taxation, rev. Apr. 20, 2022.
7 Elective worldwide group returns include all of the combined group’s worldwide income and allocation factors, regardless of source. Water’s-edge group returns, the default filing method for combined groups, include only entities having significant business operations within the U.S., with several inclusions and exceptions. N.J. REV. STAT. § 54:10A-4.11(a); N.J. Technical Bulletin TB-89(R), N.J. Division of Taxation, rev. Apr. 20, 2022.
8 N.J. REV. STAT. § 54:10A-4.7(a); N.J. Technical Bulletin TB-89(R).
9 N.J. REV. STAT. § 54:10A-4.11(c); N.J. Technical Bulletin TB-89(R).
10 The term “taxable member” is referenced in the instructions to the CBT return as “a member that is subject to tax pursuant to the Corporation Business Tax Act (1945), P.L. 1945, c. 162 (C.54:10A-1 et seq.)” Also see N.J. REV. STAT. § 54:10A-4(ff).
11 New Jersey Tax Court, Dkt. No. 015626-2014, May 25, 2021. For further discussion, see GT SALT Alert: New Jersey rules on application of P.L. 86-272.
12 See N.J. Technical Bulletin TB-86(R), N.J. Division of Taxation, rev. Apr. 20, 2022.
13 N.J. REV. STAT. § 54:10A-4(x).




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