New Jersey Tax Court Finds Two Pennsylvania Taxes Are Not Required To Be Added Back

By and on October 31, 2014

In a Corporation Business Tax (CBT) case, PPL Electric Utilities Corporation v. Director, Division of Taxation, Dkt. No. 000005-2011 (N.J. Tax. Ct. Oct. 2, 2014), the Tax Court of New Jersey found for the taxpayer and held that the Pennsylvania Gross Receipts Tax and Pennsylvania Capital Stock Tax were not required to be added back in computing New Jersey entire net income.

The case involves a 1993 amendment to the CBT statute regarding adding back taxes deducted in computing federal taxable income.  Prior to 1993, the New Jersey statutes required taxpayers to add-back only certain federal taxes and the CBT in computing New Jersey entire net income.  The amendment added a requirement that taxpayers add-back to federal taxable income taxes paid to states other than New Jersey “on or measured by profits or income, or business presence or business activity.”  N.J.S.A. 54:10A-4(k)(2)(C).  According to legislative history cited by the court, prior to the amendment “corporations which [did] business in several states [paid] a lower effective rate of tax on their New Jersey activities than [did] corporations which only [did] business in New Jersey.”  The court explained that the amendment corrected the inequity “by requiring multi-state taxpayers to add-back state taxes similar to that of the CBT.”

The Tax Court concluded that the Pennsylvania Gross Receipts Tax is not subject to the tax add-back, finding that the tax is:  (1) “based solely on the amount of electricity sold, regardless of whether income or profit is realized from such sales and not based upon the taxpayer’s business presence or business activity in Pennsylvania;” and (2) “passed through to the ultimate consumer of electricity.”  The court held that the Pennsylvania Capital Stock Tax was not subject to the tax add-back because it was in substance a property tax.

Interestingly, the Tax Court found that the New Jersey Division of Taxation’s (Division) interpretation of the tax add-back was not only incorrect but also discriminatory.

The 1993 amendment was passed because previously, solely New Jersey taxpayers were taxed on a higher tax basis than similarly situated multi-state taxpayers . . . .  Here, Taxation’s interpretation of the statute discriminates against multi-state taxpayers because they would be required to add-back the Pennsylvania Corporate Income Tax as well as other non-CBT-type taxes imposed by other states, such as the Pennsylvania Gross Receipts Tax and the Pennsylvania Capital Stock Tax, while solely New Jersey taxpayers are only required to add-back CBT-type taxes.  This court finds that the Legislature did not intend to cure one inequity by imposing another.

Given the number of different types of state taxes in existence, this case may have broad ramifications for multi-state taxpayers subject to the CBT.  We have seen the Division make similar adjustments to other companies on audit and this decision should be helpful in disputing those adjustments.  Additionally, multi-state taxpayers may have refund opportunities for similar taxes that they have previously added back.

Arthur R. Rosen
Arthur R. Rosen focuses his practice on tax planning and litigation relating to state and local tax matters for corporations, partnerships and individuals. Formerly the deputy counsel of the New York State Department of Taxation and Finance, as well as counsel to the governor's Temporary Sales Tax Commission and tax counsel to the New York State Senate Tax Committee, Arthur has also held executive tax management positions at Xerox Corporation and AT&T. He has worked in accounting and law firms in New York City. Read Arthur Rosen's full bio.


Richard C. Call
Richard C. Call focuses his practice on state and local tax litigation before administrative and judicial bodies, at all levels and in multiple states, with respect to income, franchise, gross receipts, and sales and use taxes. He also advises clients on the state and local tax consequences of business restructurings, as well as the impact of new state legislation on current business operations. Read Richard C. Call's full bio.

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