New Jersey Technology Companies Whipsawed by the Tax Code
New Jersey has made a number of changes to how corporations calculate Corporate Business Tax (“CBT”). Specifically, the “throw-out” rule and the “regular place of business” requirements were both eliminated. Further, prior to 2012, a three-factor allocation formula, consisting of 25% property, 25% payroll, and 50% sales, was used to allocate an entity’s income. For taxable periods starting on or after January 1, 2012, a single factor 100% sales allocation will be phased in (with full 100% sales allocation starting 2014). Generally, both the elimination of the two “fallback rules” as well as a shift to a single-factor sales factor allocation will be beneficial to taxpayers, as corporate business taxpayers will be responsible only for tax on those receipts actually sourced to New Jersey.
However, while positive to taxpayers on the whole, the elimination of the throw-out rule, the regular place of business requirement, and the shift to a single-factor sales factor allocation may have unintended devastating consequences to technology companies participating in the New Jersey Technology Business Tax Certificate Transfer Program.
Briefly, the Technology Business Tax Certificate Transfer Program enables approved technology and biotechnology businesses to sell their unused net operating loss (“NOL”) carryovers and unused research and development (“R&D”) tax credits for at least 80% of their value. The Division of Taxation required technology sellers of NOLs to calculate their 2010 apportionment, solely for valuing the NOLs for sale, as if the throw-out rule and regular place of business rule were no longer in effect. We anticipate the Division of Taxation to apply a similar approach with the phase in of single-sales factor. When monetizing the benefits of the program, this could result in a drastically different NOL value than what technology companies may be counting on. (Note that the R&D credit valuation will not be impacted.)
While New Jersey’s heart is in the right place in lowering overall corporate tax, technology companies relying on selling NOLs may discover expected capital infusion to be much less than anticipated.
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