New Jersey clarifies unitary business principle


Matthew DiDonato
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Bridget McCann
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Drew VandenBrul
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Patrick Skeehan
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Tom Boyle
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Jamie C. Yesnowitz
Washington, D.C.
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Chuck Jones
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Lori Stolly
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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.

Background 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:

  • 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.

Unity of operations and use test In adopting the “unity of operation and use” test, the Bulletin cites to the Court’s decision in Butler Brothers v. McColgan.10 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.

Commentary 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.

1 N.J. Tax Technical Bulletin TB-93, The Unitary Business Principle and Combined Returns, N.J. Division of Taxation, Oct. 17, 2019.
2 For a detailed analysis of New Jersey’s 2018 tax overhaul, see GT SALT Alert: “New Jersey adopts mandatory combined reporting, market-based sourcing.”
3 N.J. REV. STAT. §§ 54:10A-4(z); 54:10A-4.6.
4 N.J. REV. STAT. § 54:10A-4(gg). “Unitary business” means a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value among the separate parts. The statutory definition is largely based on the Multistate Tax Commission’s Model definition of a unitary business, with certain state-specific variations. 
5 N.J. REV. STAT. § 54:10A(aa). Common owners may be either corporate or non-corporate and do not need to be members of a combined group. Noting that voting control may be direct or indirect, the Division applies IRC Sec. 318 in the determination of common owners.
6 N.J. REV. STAT. § 54:10A(z).
7 MTC Reg. IV.1(b), Principles for Determining the Existence of a Unitary Business.
8 The Bulletin cites the following cases: Butler Brothers v. McColgan, 315 U.S. 501 (1942); Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425 (1980); Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983); Allied-Signal Inc. v. Director, Division of Taxation, 504 U.S. 768 (1992); Barclays Bank PLC v. Franchise Tax Board of California, 512 U.S. 298 (1994); and MeadWestvaco Corp. v. Illinois Dept. of Revenue, 553 U.S. 16 (2008).  
9 445 U.S. 425 (1980).
10 315 U.S. 501 (1942).
11 The Division has issued guidance discussing both included and excluded business entities in a combined group. N.J. Tax 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, revised May 15, 2019. 
12 Under New Jersey’s combined reporting rules, a combined group will use the water’s edge group filing method as the default filing method (including only entities with significant business operations in the United States), unless the managerial member of the combined group makes an election to file a combined CBT return on a worldwide group basis or an affiliated group basis. N.J. REV. STAT. § 54:10A-4.11. Under the worldwide group election, the combined group includes all the income and allocation factors of all worldwide business entities comprising the unitary combined group, regardless of the source. Under the affiliated group election, the unitary business concepts do not apply. The elections are binding for the tax year of the election, plus five subsequent tax years. See N.J. Tax Technical Bulletin TB-89(R), Combined Group Filing Methods, N.J. Division of Taxation, revised June 28, 2019.

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