T +1 212 542 9960
T +1 732 516 7637
T +1 215 531 8612
T +1 215 814 1743
T +1 215 531 8699
Jamie C. Yesnowitz
T +1 202 521 1504
T +1 312 302 8617
T +1 513 345 4540
On Oct. 17, 2019, the New Jersey Division of Taxation (Division) issued Technical Bulletin TB-93 (Bulletin), announcing its interpretation of the unitary business principle for taxpayers filing combined returns for New Jersey Corporation Business Tax (CBT) purposes.1
The Bulletin’s release follows the implementation of sweeping tax reform enacted in 2018, which imposed mandatory unitary combined reporting for tax periods ending on or after July 31, 2019.2
Intended to provide guidance to businesses determining which entities are included in a combined group, the Bulletin explains the Division’s interpretation of the term “unitary business.” Specifically, the Bulletin applies two alternative general tests for determining which entities are included in a unitary business: the “interdependence of functions” test and the “unity of operations and use” test.
Effective for tax periods ending on or after July 31, 2019, New Jersey requires combined reporting for entities under combined ownership, conducting a “unitary business,” and having at least one corporation subject to the CBT.3
Under New Jersey law, a “unitary business” is defined as a single economic enterprise made up either of separate parts of a single business entity or a group of entities under common ownership that are sufficiently interdependent to produce a sharing or exchange of value.4
“Common ownership” occurs when more than half of the voting control of each entity of a combined group is owned by a common owner or owners.5
A “combined group” includes entities under common ownership that are engaged in a unitary business.6
Adhering to the above statutory definitions, the Division explains that it will interpret the term “unitary business” as broadly as allowed under the U.S. Constitution. Where compatible with New Jersey and U.S. Supreme Court case law, the Division favors consistency regarding the existence of a unitary business with other mandatory unitary combined reporting states.
Reliance on U.S. Supreme Court precedent
In addition to its reliance on New Jersey law and the Multistate Tax Commission model regulations on unitary businesses,7
the Division cites to multiple U.S. Supreme Court decisions discussing unitary business concepts in order to set forth criteria for determining whether a unitary business relationship exists. In particular, the Division references six specific Supreme Court cases addressing different aspects of the unitary business principle.8
Citing to the Court’s decision in Mobil Oil Corp. v. Vermont
, the Division announced that it will look to the flow of value between entities – considering factors such as functional integration, centralization of management, and economies of scale – to determine if business activities operate as an integrated whole or exhibit substantial mutual interdependence.9
Against this backdrop, the Division announced that to determine whether related businesses are unitary, the businesses would only need to meet one of two alternative tests: (i) the interdependence of functions test; or (ii) the unitary of operation and use test.
Interdependence of functions test
In adopting the interdependence of functions test, the Division embraces Supreme Court precedent regarding the prerequisites for unitary combination. Recognizing that the Court has employed a variety of terms when discussing this test, the Division establishes that a “unitary relationship requires ‘contribution or dependency’ between businesses; ‘substantial mutual interdependency’ or ‘flow of value,’ functional integration, centralized management, or economy of scale.”
The Bulletin provides a variety of examples enumerating each of the circumstances under which the interdependence of function test will be satisfied:
Unity of operations and use test
- Same line of business: Entities are in the same line of business if the principal activities of the entities share the same nature and character in their basic operations. The fact that entities depend upon or contribute to one another suggests that they are engaged in the same general line of business. Examples of the same line of business include manufacturing, wholesaling, retailing, transportation, and finance.
- Vertically structured business: Entities are part of a vertically structured business if their principal activities constitute different steps in a vertical process. The Bulletin provides an example of the steps involved in the production of natural resources, ranging from exploration and mining to marketing and transportation.
- Centralized management: Entities are centrally managed if there is centralized executive-level policymaking by a central person or the same group of individuals. Examples of relevant policy areas include accounting, finance, tax compliance, legal services, human resources, health and retirement plans or marketing.
- Non-arm’s-length pricing: Entities are part of a non-arm’s length transaction where goods or services are exchanged at below-market prices, although the Bulletin qualifies that arm’s-length pricing is not necessarily an indication that the entities are not unitary.
- Existence of benefits from joint, shared, or common activity: Entities are the beneficiaries of joint, shared, or common activities if they receive a discount or any other benefit by working or coordinating together.
- Relationship of joint, shared, or common activity to income-producing operations: Entities are interdependent in their functions if there is a joint, shared, or common activity that is “directly beneficial to, related to, or reasonably necessary” to the production of income. The Division considers the sources of supply, goods or services produced or sold, and the entity’s labor force and market in making this determination.
- Exercise of control: Entities are unitary if one entity exercises control over another entity.
In adopting the “unity of operation and use” test, the Bulletin cites to the Court’s decision in Butler Brothers v. McColgan
The Division notes that the touchstone for a unity of operations is the functional integration between entities, indicated generally by shared support functions. Similarly, unity of use is evidenced by centralized management or use of centralized policies. Many of the factors considered under this test overlap with factors considered in the “interdependence of functions” test. The Bulletin provides 22 examples of non-exclusive factors to consider in determining whether unity of operations and use exist in a combined group, noting that no one factor is by itself determinative. The Division will consider factors such as common purchasing; common employees; common advertising or marketing; common back office functions (such as accounting, legal or financing support); common offices or facilities; common management (such as sharing common officers or directors); control of major policies; inter-entity transactions; or required budgetary or capital asset purchase approval.
Special circumstances Holding companies
The Division clarifies that the above tests also apply in determining whether a holding company is included in the unitary business of a combined group. For example, the Bulletin specifically notes that a passive holding company holding merely intangible assets is in a unitary business with other entities when the assets are used by a commonly controlled economic enterprise.
Intellectual property/intercompany financing
Additionally, the transfer or sharing of technical information or intellectual property that is significant to the operations between entities further indicates evidence of a unitary business when the information or property shared is “significant to the businesses’ operations.” Financing between entities is also evidence of a unitary relationship when there is “significantly common or intercompany financing” such as the pledging of credit for the benefit of another business entity, if the financing activity serves an operational purpose.
Limited portion of entity engaged in a “unitary business”
The Division addresses the possibility that a portion of a combined group member’s business operations may be independent of the unitary business activity of the combined group. In this case, the remaining portion of the group member’s business operations may be subject to tax separately if the member conducts business in New Jersey individually or with another combined group. Instead of filing a separate return, however, the group member is required to complete a Schedule X to report its separate activity income and calculate the appropriate taxable net income as reported on Schedule A of the taxpayer’s CBT-100.
Finally, the Bulletin states that formal regulations on unitary combined reporting are forthcoming. It is unclear whether the Division will provide additional guidance in the meantime.
With the advent of a unitary combined reporting regime in New Jersey, an understanding of a unitary business is vital to determining which affiliated entities are now required to file combined CBT returns,11
if they are not otherwise electing to file a combined return on an affiliated group basis.12
The Bulletin provides helpful guidance as to how New Jersey plans to interpret complex statutory definitions and apply the unitary business principle, but questions remain regarding specific implementation. In a relatively short number of pages, the Bulletin provides a substantial amount of information regarding complex unitary business concepts. The Bulletin adopts U.S. Supreme Court jurisprudence discussing the scope and limitations of the unitary business principle. The cases provide practical guidance on which type of entities are unitary according to their operations and functions.
In addition to the case law cited, the Bulletin provides a non-exhaustive list of examples of unitary businesses. The examples include policies, interactions, and relationships between entities that may create a unitary business relationship and thus require combined reporting. While the Division provides many general examples of a unitary business relationship, specific details are relatively scant. The examples help clarify some clear-cut fact patterns, but in practice, relationships between entities are nuanced and complex. Particularly for larger businesses with complex entity structures, tracking and categorizing the interactions with other entities is likely to present a more burdensome administrative task.
Along with the difficulties in determining which entities are in a unitary business relationship, combined reporting often introduces substantial compliance challenges. As mentioned above, a member of a combined group having income separate from and independent of the group’s unitary activities must complete a Schedule X, which is used to calculate the New Jersey taxable income for the entity’s separate activity. It is also important to note that one commonly controlled group may be involved in multiple different unitary businesses, thus requiring the filing of multiple combined returns.
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.