In a notice released August 20, 2019, the New Jersey Division of Taxation (DOT) announced that it would shortly issue new guidance revising its previously issued guidance on the apportionment of global intangible low-taxed income (GILTI) under IRC Sections 951A and 250 and foreign-derived intangible income (FDII) under IRC Section 250 for New Jersey Corporation Business Tax (CBT) purposes. The notice indicates that the DOT will abandon its originally proposed sourcing method, which was based on a combination of comparative gross domestic product (GDP) and separate-based sourcing. Instead, it will adopt a sales factor dilution method, which will source GILTI and FDII geographically, like other revenues. Although this notice suggests a significant policy shift by the DOT from its previously issued guidance for apportionment purposes,¹ it does not appear to suggest any change in New Jersey's treatment of GILTI and FDII as regular business income subject to taxation in the state.

The notice of impending guidance has broad implications for New Jersey tax planning and compliance for entities with material GILTI and FDII.

Background

In December 2018, the DOT issued TB-85 Tax Conformity to IRC Section 951A (GILTI) and IRC Section 250 (FDII) (reissued as TB-85(R)), articulating its interpretation of GILTI as regular business income rather than as a deemed dividend that could be eligible for New Jersey's dividend received deduction. In addition, TB-85(R) introduced a unique approach to apportioning GILTI and FDII to New Jersey that relied on a separate special accounting method that divided New Jersey GDP by the GDP of the states in which the affected taxpayer was subject to state taxation.

The DOT's GDP sourcing and separate apportionment methodology resulted in numerous taxpayer requests for discretionary alternative apportionment relief under N.J.S.A. 54:10A-8 (Section 8 relief). In those requests, taxpayers challenged whether the DOT's method appropriately reflected income to the state.²

New guidance

Given these requests, the DOT apparently has decided to revise the allocation methodology of GILTI and FDII. Specifically, the DOT's notice states:

"Taxpayers must report the [GILTI] and the [FDII] and the corresponding IRC Section 250(a) deductions on Schedule A.³ To help prevent distortion to the allocation [apportionment] factor and arrive at a reasonable and equitable level of New Jersey tax, the Schedule J⁴ must include the net amount of the GILTI in the denominator and the net FDII income amounts in the numerator (if applicable) and denominator. A new Technical Bulletin is expected to be released later this week that will provide further detail."⁵

The DOT's notice effectively requires taxpayers to include GILTI and FDII, net of the IRC Section 250 deductions, in New Jersey's sales factor denominator, rather than separately applying separate apportionment on Schedule A-6. The notice also indicates that FDII may, in certain circumstances, be included in the sales factor numerators, although the circumstances under which this would occur are unclear. The most significant departure from the prior guidance is that apportioned GILTI and FDII are not reported as separately apportioned items of income on page 1, line 3c of New Jersey Form CBT-100.

Implications

Taxpayers preparing their 2018 New Jersey CBT filings should re-examine their computation of GILTI and FDII (if applicable) in light of this new guidance. Because the notice renders several lines and a section of the existing return obsolete, taxpayers may need to prepare for the DOT's possible reissuance of CBT return forms and/or instructions.

In addition to revising their filings, taxpayers with material net GILTI and FDII reported to New Jersey should review their New Jersey tax modeling and revise accordingly. Although this change may reduce the CBT burden associated with GILTI and FDII for certain taxpayers, it could also result in an increased New Jersey tax burden for others.

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ENDNOTES

¹ Technical Bulletin TB-85(R), Tax Conformity to IRC Section 951A (GILTI) and IRC Section 250 (FDII)) (Dec. 24, 2018). See also Tax Alert 2019-0101.

² N.J.S.A. 54:10A-8 empowers the DOT to provide alternative apportionment relief to taxpayers when New Jersey's statutory apportionment methods do not appropriately reflect income derived from the state.

³ Taxpayers calculate entire net income on Schedule A of New Jersey Form CBT-100.

⁴ Taxpayers calculate the New Jersey allocation factor on New Jersey Schedule J to the Form CBT-100.

⁵ See New Jersey Division of Taxation, Corporation Business Tax Reform Information (available on the internet here (last accessed on Aug. 20, 2019)).