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New Jersey Natural Gas Co. v. Director, Division of Taxation

24 N.J. Tax 59 (Tax Ct. 2008)

TAXATION; APPORTIONMENT — Once a court finds that a Section 8 apportionment of a corporation’s income by the Division of Taxation was fair and proper, the taxpayer-corporation is not entitled to receive the benefit of a Section 6 apportionment.

A New Jersey gas utility company provided services to both New Jersey and out-of-state customers. For several tax years, it sought a more favorable tax calculation based upon its balance sheet inside New Jersey when compared to its worldwide payroll, known as a Section 6 allocation. The Director of the New Jersey Department of Treasury disallowed this categorization, and calculated the utility’s tax liability based upon 100% apportionment of income to New Jersey with a corresponding credit for taxes paid to other states, known as Section 8 treatment. The company challenged the Director’s Section 8 treatment to the New Jersey Tax Court, primarily contending that it maintained a regular place of business out of state.

The Tax Court ruled in favor of the Director. The company had alleged that a sole Connecticut employee, a supervisor in volume accounting who worked from her own home, sufficed to constitute a permanent place of business outside of New Jersey. The Court held that this was not the case, as the company neither owned, leased nor paid rent or utility charges for the employee’s home office. The Court found that New Jersey’s regulations require a company to regularly maintain and be responsible for those maintenance expenses and must either own or rent an alleged regular place of business in its own name. The Court also found other out-of-state storage facilities insufficient to be considered regular places of business because not one regular employee was staffed at any of them, as required to qualify under the applicable regulations.

It concluded that the company need not receive the benefit of a Section 6 apportionment once a court finds that the Section 8 apportionment of its income by the Director was fair and proper, even though less monetarily advantageous. The Court found insufficient unfairness or inadequacy to override the discretion vested in the Director to effect an apportionment that fairly and reasonably reflects the company’s activities in New Jersey. Further, it found that the utility failed to prove by clear and cogent evidence that a Section 8 apportionment by the Director, with credits, was out of proportion to its New Jersey business or led to a grossly distorted result. The Court thereby concluded that the Director’s discretion in utilizing a Section 8 analysis was externally consistent and met constitutional standards.

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