On September 27, 2018, the New Jersey Senate and General Assembly passed legislation amending certain provisions of the New Jersey Corporation Business Tax (“CBT”) reform bill that was enacted earlier this year (“Technical Amendments”). In July, Governor Phil Murphy and the New Jersey Legislature enacted a $37.4 billion budget package (the “Budget Bill”) that implements sweeping changes to the CBT.  Among these changes are mandatory unitary combined reporting, market-based sourcing, and a new four-year surtax on corporations with over $1 million of allocated taxable net income. The Technical Amendments, which are awaiting Governor Murphy’s signature, make several changes to the Budget Bill.  A summary of the most noteworthy provisions contained in the Budget Bill and Technical Amendments is below.

Mandatory Unitary Combined Reporting

The Budget Bill adopts mandatory unitary combined reporting. This change represents a significant departure from New Jersey’s current law, which requires taxpayers to compute their CBT on a separate-entity basis.  As a result of the Technical Amendments, the combined reporting provisions, which were initially effective for tax years beginning on or after January 1, 2019, are now effective for tax years ending on or after July 31, 2019.

Composition of the Combined Group

Business entities will be required to file on a combined basis if they are engaged in a unitary business and have common ownership, which means that more than 50 percent of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners, regardless of whether the owners are members of the combined group. The attribution rules of section 318 of the Internal Revenue Code (“IRC”) apply for purposes of the common ownership test.  The Budget Bill defines a “unitary business” as:

A single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership that are sufficiently interdependent, integrated and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value among the separate parts.

The Budget Bill further provides that the term will be construed to the “broadest extent permitted under the Constitution of the United States.” Thus, the traditional “hallmarks” of a unitary business—functional integration, centralized management, and economies of scale—must be considered, and U.S. Supreme Court case law on unitary business concepts will be instructive in evaluating the composition of a New Jersey combined reporting group.

The combined group is determined on a water’s-edge basis, but the Budget Bill provides an election to determine the combined group on either a worldwide or affiliated group basis, which is binding for the succeeding five years. The water’s-edge group includes the income and apportionment factors of each member that (1) is incorporated in the U.S., unless 80% or more of its property and payroll is located outside the U.S., (2) regardless of where incorporated, has 20% or more of its property and payroll in the U.S., (3) earns more than 20% of its income, directly or indirectly, from intangible property or related service activities that are deductible against the income of other members of the combined group, and (4) has income as defined under the CBT and nexus in New Jersey.  Certain regulated entities are excluded from a combined group (e.g., certain insurance companies and utilities).

The combined group’s “managerial member” (generally a common parent corporation that is also a taxable member of the combined group) is responsible for filing the combined unitary tax return on behalf of the taxable members of the combined group and paying any tax due on behalf of such taxable members. Each taxable member of a combined group (i.e., each member that is subject to the CBT) is jointly and severally liable for the tax due.

Computing Combined Income and Allocation Factors

Each taxable member of a combined group must determine its entire net income from the unitary business as its share of the entire net income of the combined group. To determine the entire net income of the combined group, the entire net income of each taxable member and each nontaxable member of the combined group derived from the unitary business is aggregated.  In computing the combined group’s entire net income, income from intercompany transactions between members of the combined reporting group are either eliminated (e.g., dividends) or deferred in a manner similar to the federal consolidated return rules under Treas. Reg. § 1.1502-13.

For allocation purposes, the Budget Bill adopts the Joyce approach to apportioning combined group income by requiring each taxable member to include in its sales fraction denominator the New Jersey receipts of all combined group members, and only the taxable member’s New Jersey receipts in its sales fraction numerator. Receipts derived from intercompany transactions among combined group members are eliminated for purposes of computing the sales fractions of the taxable members.  The current rules related to the computation of a taxpayer’s allocation factor otherwise will continue to apply in the combined reporting context.

Deduction for Certain Publicly-Traded Companies Affected by Combined Reporting

Publicly-traded companies may claim a deduction if an aggregate increase to the members’ net deferred tax liability or an aggregate decrease to the members’ net deferred tax assets or an aggregate change from a net deferred tax asset to a net deferred tax liability results from the application of the combined reporting provisions. The deduction may be taken over the 10-year period “beginning with the combined group’s first privilege period beginning on or after January 1 of the fifth year” after the Budget Bill’s effective date (i.e., January 1, 2024).  A combined group intending to claim this deduction must file a statement with the Director of the Division of Taxation.

Market-Based Sourcing

The Budget Bill adopts a market-based approach to source receipts from the sale of services. Under this approach, receipts from the sale of services are sourced to New Jersey “if the benefit of the service is received at a location in [New Jersey].”  If the benefit of the service is received “both at a location within and outside of [New Jersey], the portion of the sale that is allocated to [New Jersey] is based on the percentage of the total value of the benefit of the Service received at a location in [New Jersey] or a reasonable approximation to the total value of the benefit of the service received in all locations both within and outside [New Jersey].”  If the state or states of assignment cannot be determined, for individual customers who are not sole proprietors, the benefit of the service is deemed to be received at the customer’s billing address.  For all other customers (e.g., business customers), the benefit of the service is deemed to be received at the location from which the services were ordered in the customer’s regular course of operations, and if that location cannot be determined, the benefit is deemed to be received at the customer’s billing address.

While market-based sourcing is often touted as creating efficiencies through its destination-based sourcing approach, given the widely divergent state-by-state approaches to market-based sourcing, efficiencies are rarely produced and New Jersey is unlikely to be an exception to this.  While the Budget Bill employs a “benefit received” market-based sourcing rule and attempts to provide various sourcing hierarchies, the provisions leave many questions unanswered.  For example, how does a taxpayer determine a “location” of receipt? Should this be done based on billing address, IP address, or some other methodology? What type of effort is required to move from one step in the hierarchy to the next (e.g., when the states of assignment cannot be determined)?  We expect that New Jersey (like many other states) will craft regulations to further expand on its market-based sourcing standard and taxpayers should be prepared to carefully review and comment on any draft regulations that are proffered.

Temporary Surtax

The Budget Bill (as amended by the Technical Amendments) imposes a new four-year surtax on corporate taxpayers with allocated taxable net income in excess of $1 million. Allocated taxable net income is generally taxable income (after New Jersey modifications) allocated or apportioned to New Jersey, including the application of the net operating loss provisions discussed below, as applicable.  The surtax is imposed at a 2.5% rate for tax years beginning on or after January 1, 2018 through December 31, 2019, and at a 1.5% rate for tax years beginning on or after January 1, 2020 through December 31, 2021. Tax credits (except for credits for installment payments, estimated payments or overpayments from a prior tax year) are not allowed against the surtax.  For taxpayers impacted by the surtax, the New Jersey corporate income tax rate clocks in at 11.5% in the initial two-year period (up from 9%), which is one of the highest in the nation.

Net Operating Loss Provisions

Under current law, the New Jersey net operating loss (“NOL”) carryover deduction is computed and applied on a “pre-allocation” basis (i.e., before applying New Jersey’s apportionment formula). Effective for tax years ending on or after July 31, 2019, the New Jersey NOL carryforward deduction will be applied on a “post-allocation” basis. The Budget Bill provides a series of transition rules to convert a taxpayer’s unused “pre-allocation” NOL carryovers to a “post-allocation” NOL deduction, known as a “prior net operating loss conversion carryover,” that can be used for tax years ending on or after July 31, 2019.  In the combined reporting context, New Jersey only permits a prior net operating loss conversion carryover deduction to offset the allocated net income of the corporation that sustained the original net operating loss—the deduction cannot be shared with other members of the combined reporting group.  This is consistent with New Jersey’s long-standing limitation on the use of NOLs.  However, as a general matter, post-allocation NOLs computed under the new rules may be shared among combined group members.  The Budget Bill states that additional prior net operating loss conversion carryover application rules will be established by regulation.

The Technical Amendments add a limitation on the use of NOLs following certain ownership changes. Specifically, where there is a 50% or more change in a corporation’s ownership because of the redemption or sale of stock, and the corporation changes the trade or business that gave rise to the NOL, NOLs sustained before such changes may not be deducted from income earned after such changes.  This limitation does not apply between New Jersey combined reporting group members.

Other Notable Provisions

Internal Revenue Code Conformity

In response to the Tax Cuts and Jobs Act (i.e., federal tax reform), the Budget Bill decouples from the 20% deduction available to pass-through entities set forth in section 199A of the IRC. In addition, New Jersey conforms to the interest deduction limitation of IRC section 163(j), which will be applied on a pro rata basis to interest paid to both related and unrelated parties, regardless of whether the related parties are subject to New Jersey’s related-member addback provision.  New Jersey already decouples from the bonus depreciation provisions of IRC section 168(k) (which were modified by the Tax Cuts and Jobs Act to provide for 100% expensing).  As discussed in a prior blog post related to New York’s response to federal tax reform, the section 163(j) interest deduction limitation was intended by Congress to operate in conjunction with the revised section 168(k) to encourage investment in the U.S. but discourage such investments through strictly debt financing (see New York’s FY 19 Budget is “GILTI” of Undermining Federal Tax Policy Objectives). By conforming to both section 163(j) and 168(k), New Jersey is among the states that have ignored this federal policy objective.

The Technical Amendments conform to the deduction allowed under section 250 of the IRC related to foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI), provided the corresponding income to which the deduction relates has not been excluded or exempted pursuant to any other CBT provision. While the conformity to the IRC section 250 deductions is welcome, taxpayers should still consider whether GILTI is properly includable in the CBT base in the first instance (on U.S. constitutional or other grounds) and, if so, how best to represent GILTI in the New Jersey allocation factor.

95% Dividends Received Deduction

In a move that seems focused on addressing the Tax Cuts and Jobs Act’s deemed repatriation provision, for tax years beginning after December 31, 2016, the Budget Bill reduces the dividends received deduction from 100% to 95% with respect to dividends received from 80% or more owned subsidiaries. The Technical Amendments clarify that for tax years beginning on or after December 31, 2016 and before January 1, 2019, the portion of deemed dividends included in entire net income shall be determined using the lower of the taxpayer’s three-year average allocation factor for its 2014–2016 tax years or 3.5%.  A parent corporation is entitled to exclude from its entire net income any dividend distributions made “up the chain” through lower-tier subsidiaries that paid tax on those dividends, based on the distributing subsidiary’s allocation factor.

Changes to the Treaty Exception to New Jersey’s Intangible Expense Addback

New Jersey law currently provides an exception to the state’s intangible expense add-back requirement for expenses paid to a related member in a foreign nation which “has in force a comprehensive income tax treaty with the United States” (the “Treaty Exception”). The Budget Bill narrows the scope of the Treaty Exception by requiring that the related member be “subject to tax in the foreign nation on a tax base that included the [intangible expense]” and that the related member’s income is “taxed at an effective tax rate equal to or greater than a rate of three percentage points less than the rate of tax applied to taxable interest by” New Jersey.

The Technical Amendments clarify that, with the enactment of combined reporting, New Jersey’s addback statute will not apply to transactions between related members included in a New Jersey combined reporting group.


The Budget Bill and Technical Amendments significantly overhaul the CBT and may result in substantial changes for many taxpayers. Taxpayers are advised to take stock of the notable changes discussed above and carefully evaluate how they may impact their New Jersey tax profile on a prospective basis.  We hope to see some guidance from the New Jersey Division of Taxation before these changes go into effect.

Contact the Authors: Maria Eberle, Lindsay LaCava, David Pope and Michael Tedesco