By Kenneth H. Silverberg
The anxiously-awaited decision of the NJ Supreme Court in Whirlpool Properties, Inc. was issued yesterday. Taxpayers won half a loaf, but they clearly got the smaller half. Still, most multistate corporations that paid New Jersey income tax between 2002 and 2008 are now entitled to a partial refund.
The Whirlpool decision points out that the throwout rule increased New Jersey’s share of a corporation’s income in two situations:
- when sales are made to a state that has no income tax; and
- when sales are made to a state in which the corporation has too little business activity to have tax nexus (“nowhere sales”).
The analysis of constitutionality is very different in these two situations. The court concluded that another state’s decision to have no corporate income tax does not entitle New Jersey or any other state to tax a greater share of worldwide income. That, the justices believe, interferes with the sovereignty of another state, is unrelated to the extent of the corporation’s New Jersey activity, and therefore violates the Commerce Clause.
However, in the second category, nowhere sales throwouts, the justices stated that New Jersey obviously contributed more to making the sale in question than did the no-nexus destination state. Therefore increasing the New Jersey sales factor may not lead to a fair outcome in every case, but the “systematic distortion would not render the result facially unconstitutional.”
The justices suggested that Whirlpool’s litigation strategy may have been its undoing. They note that some other taxpayer who elects to challenge the throwout by stating it was unconstitutional as applied to them might have gotten a different result. However, Whirlpool and its counsel elected to challenge the throwout as unconstitutional on its face. Such a challenge is easier to litigate, because the argument can be made with hypothetical facts rather than the real facts of the case. However, the burden of proof facing the taxpayer is more strict – to succeed in a “facial” challenge, the taxpayer must prove that there is no possible set of circumstances in which the tax passes muster. Here, Whirlpool failed to do that.
So what about your refund claim? If you made a lot of sales to Nevada customers between 2002 and 2008, you’ll get a nice refund. But if most of your refund claim is based on nowhere sales, the Whirlpool decision doesn’t do much good for you. Unless you’re willing to litigate it yourself and claim the throwout was unconstitutional as applied to your particular facts.
The full text of the decision can be downloaded at http://www.nixonpeabody.com/linked_media/publications/whirlpool.pdf.