New Jersey Supreme Court Holds Throwout Rule Is Facially Constitutional, But Unconstitutionally Applied


On July 28, 2011, the New Jersey Supreme Court denied a taxpayer's claim that New Jersey's Throwout Rule (which excludes certain sales from the denominator of the sales apportionment factor) is facially unconstitutional. Whirlpool Props., Inc. v. Div. of Tax'n, Case No. 066595 (N.J. July 28, 2011). However, the court held that the application of the Throwout Rule to sales sourced to a state that has jurisdiction to tax the sales (but chooses not to) leads to an unconstitutional result. In addition, the court held that, while facially constitutional based on the narrow interpretation, the Throwout Rule remains subject to an as-applied constitutional challenge when there is distortion.

What is the Throwout Rule?

New Jersey’s Corporate Business Tax (CBT) provides that every corporation with a regular place of business outside of New Jersey is subject to tax on its entire New Jersey net worth and income. A taxpayer determines its entire New Jersey net worth and income by using an apportionment formula composed of a property factor, a payroll factor and a double receipts factor.1 For tax years 2002 through 2010, taxpayers were required to compute the receipts factor by applying a Throwout Rule.2 Without the Throwout Rule, the receipts factor is calculated by dividing the taxpayer’s New Jersey receipts by total receipts. The Throwout Rule modifies the receipts factor by excluding from the denominator receipts assigned to jurisdictions in which the taxpayer is not “subject to tax.”3 The Throwout Rule transformed the receipts factor from a ratio of New Jersey receipts to total receipts, to a ratio of New Jersey receipts to total taxed receipts.

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