NJ Add-Back of Certain Taxes Limited by Tax Court
In a recent court case (PPL Electric Utilities Corp. v. Director, Division of Taxation, New Jersey Tax Court, No. 000005-2001, October 2, 2014), the New Jersey Tax Court held that the Pennsylvania Capital Stock Tax (which is based on net worth) and the Pennsylvania Gross Receipts Tax (which is imposed on utilities) are fully deductible for purposes of computing a company’s New Jersey Corporation Business Tax (“CBT”) liability.
The CBT Act requires a corporation’s federal taxable income to be adjusted to include the add-back of certain state taxes. Specifically, taxes paid or accrued or measured by profits or income, business presence or business activity must be added back. The Tax Court concluded that the Pennsylvania Capital Stock Tax was not subject to the add-back because it was in substance a property tax. Further, the court noted that the Pennsylvania Gross Receipts Tax was based solely on the amount of electricity sold by the plaintiff, regardless of whether or not profit is realized from such sales and not based upon a taxpayer’s business presence or business activity in Pennsylvania. Thus, the Gross Receipts Tax was also not subject to the add-back. A question remains whether taxpayers can use the PPL decision to avoid the CBT add-back for similar taxes imposed by other states.
If significant Pennsylvania Capital Stock or Gross Receipts taxes were added back on recent prior CBT returns, you should consider filing a refund claim with New Jersey. The New Jersey time limit for refunds is generally four years from the date a CBT return is filed. If you have any questions on the PPL case or wish to discuss a potential refund claim, please contact your state and local tax advisor.