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River Systems, Inc. v. State of New Jersey, Department of Treasury, Division of Taxation

358 N.J. Super. 287, 817 A.2d 964 (App. Div. 2003)

TAXATION; CORPORATIONS—A New Jersey corporation cannot utilize the “three factor allocation formula” by basing its allocation on its closely intertwined relationship with sister corporations in another state even if those sister corporations provide the administrative and sales functions for the New Jersey corporation.

Under the New Jersey Corporation Business Tax Act, a New Jersey corporation that maintains a regular place of business outside of New Jersey may allocate a portion of its income to other jurisdictions in computing its taxable New Jersey income. Three separate, but related, corporations challenged the Director of the Division of Taxation’s determination that they did not maintain a regular place of business in New York and that the corporations were not entitled to allocate their New York income for New Jersey tax purposes. The three corporations, which had common officers and shareholders, marketed and sold computer equipment and light bulbs. Two related companies were located in New York. One provided administrative services for the New Jersey corporations, solicited sales of the corporations’ products in New York, and paid its own employees. The other owned the building in which the New York business was conducted. The Director determined, and the Tax Court agreed that because the New York employees were employed by, and under the direct control of, the New York corporation and not the New Jersey corporations, the New Jersey corporations did not maintain a regular place of business outside New Jersey. Therefore, the New Jersey corporations were not entitled to allocate a portion of their income to New York business activities. The New Jersey corporations argued that, even if they did not maintain a regular place of business in New York, they were entitled to use the “three factor allocation formula” to effect a fair and proper allocation of the entire net income and the entire net worth reasonably attributable to New Jersey. The Director held that because the New Jersey corporations had no employees or property outside of New Jersey, they were not entitled to any allocation. The Tax Court agreed that the New Jersey corporations had no regular place of business in New York, had no distinct business activity in New York, and therefore were not entitled to allocate income outside of New Jersey. The Appellate Division affirmed.


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