On August 22, 2019, the New Jersey Division of Taxation (DOT) released Technical Bulletin (TB) 92, Sourcing IRC Section 951A (GILTI) and IRC Section 250 (FDII) Replacing TB-85(R) (TB-92).¹ TB-92 revises the DOT's 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. TB-92 abandons the DOT's originally proposed sourcing method for GILTI and FDII, which was based on a combination of comparative gross domestic product (GDP) and separate apportionment. In this latest guidance, the DOT now appears to be adopting an ambiguous method of apportioning GILTI and FDII (discussed later). The guidance in TB-92 seems to deviate from the notice the DOT posted on its website on August 20, 2019, in which it said it would issue guidance on GILTI and FDII sourcing that would reflect a sales factor dilution method. Applying a sales factor dilution method would have been much more consistent with the sourcing approaches followed by other states that conform to the federal income tax treatment of GILTI and FDII for purposes of their corporate income tax laws. (See EY Tax Alert 2019-1499 for an analysis of this notice.)

Although TB-92 reflects a significant policy shift by the DOT from its previously issued guidance for apportionment purposes (and marks the fifth distinct iteration of guidance in this area),² it reaffirms that New Jersey will treat GILTI and FDII as taxable business income. With all the confusion created by the latest notice, the New Jersey taxpayer community will likely raise concerns and the latest guidance in TB-92 may be subject to further revision.

TB-92 has broad implications for New Jersey tax planning and compliance for entities with material GILTI and FDII.

Background

In December 2018, the DOT issued its first notice on GILTI and FDII in TB-85 Tax Conformity to IRC Section 951A (GILTI) and IRC Section 250 (FDII). There, the DOT first stated that GILTI would be treated as regular business income of a New Jersey taxpayer and not as a deemed dividend that could be eligible for New Jersey's dividend received deduction. Thereafter, on December 24, 2018, the DOT issued revised notice TB-85(R), in which it introduced a special separate method of apportioning the revenue related to GILTI and FDII that divided New Jersey GDP by the GDP of the states in which the affected taxpayer was subject to state taxation. TB-85, in essence, revived a throw-out approach that had already been the subject of New Jersey litigation.

In response to this unique GILTI/FDII sourcing and apportionment methodology, many taxpayers filed requests for discretionary alternative apportionment relief with the DOT under N.J.S.A. 54:10A-8 (Section 8 relief). In those requests, not only did taxpayers request apportionment relief, they also challenged whether the DOT's method appropriately reflected the apportionment of GILTI/FDII-related income to the State.³

New guidance

In response to taxpayer requests, representatives of the New Jersey's Treasurer's office, the Governor's office and the DOT met with taxpayer representatives in July and August 2019. After these meetings, the DOT issued a three-sentence notice in which it stated it would significantly revise its GILTI and FDII apportionment guidance to reflect a sales factor dilution method. Contrary to the brief notice in which the DOT stated that "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,"⁵ the guidance in TB-92 states that both GILTI and FDII are potentially includable in the sales factor numerator.

TB-92 describes GILTI and FDII as "a hybrid of different income items [ … ] sourced under the category of 'all other business receipts' pursuant to N.J.S.A. 54:10A-6(B)(6) and [perhaps more to the point] N.J.A.C. 18:7-8.12(e)." N.J.A.C. 18:7-8.12(e) specifically requires taxpayers to source income that is earned from intangibles and not otherwise sourced under different rules to the commercial domicile of the taxpayer, unless such income is integrated in the taxpayer's multistate business. In this context, TB-92 states that, "generally speaking, GILTI and FDII are integrated in the business of the taxpayer," seemingly referring back to N.J.A.C. 18:7-8.12(e). Although GILTI and FDII are said to be integrated into a taxpayer's business, TB-92 prohibits taxpayers (unless they file on a worldwide basis or under certain water's-edge filing circumstances) from "look[ing] through to underlying sales of the controlled foreign [corporation] (CFC) that generated the GILTI when determining how to source the new GILTI receipt." Considering that the DOT does not consider GILTI to be dividend income, the position seems rather surprising since one would think (and the original guidance suggested) that taxpayers could recognize the geographic sourcing from which the GILTI receipts were derived. Since any such income, by definition, must be derived from foreign activities (not only outside of New Jersey but outside of the United States), it would seem that revenues attributed to GILTI would rarely be includable in the numerator of a New Jersey sales factor.

This provision will require taxpayers to consider whether their net GILTI/FDII is "integrated" with their multistate business. In this instance, the net GILTI/FDII amounts will have to be sourced within and outside New Jersey via a reasonable method. When the net GILTI/FDII is not integrated into the taxpayer's multistate business, the income will be sourced to the taxpayer's commercial domicile.

On the other hand, TB-92 states that worldwide and water's-edge filers may look through to the underlying CFC receipts from which GILTI income is derived for New Jersey apportionment purposes " … when the CFCs are included as members of the combined group on the same New Jersey combined return as a taxpayer that must also include the GILTI in income for federal purposes." In support of this statement, TB-92 notes that, statutorily, "the CFC's receipts are included in the denominator of the combined group allocation factor only when the CFCs (sic) are included in the same New Jersey combined return as the members required to include the GILTI in income for federal purposes."⁶ Per TB-92, since "GILTI income is excluded from the combined group's ENI [entire net income], as prescribed in TB-88, [ … ] GILTI must be excluded in the allocation factor. This is to prevent the double taxation and double counting of the income and receipts derived from the same source since the CFC's income is already included in the combined group's ENI." DOT announced in TB-92 that it is developing another schedule to attach to the New Jersey Form CBT-100 (Schedule A-8) to prevent the double counting of such income.

TB-92 provides that taxpayers with CFCs engaged in non-unitary businesses must report such GILTI/FDII revenues on Schedule X to the New Jersey CBT-100. According to the DOT guidance, "[t]his is in lieu of filing a separate return to report the separate portion of the member's business operations."

TB-92 also directs 2018 CBT-100 and BFC-1 filers that had their 2018 tax years end before July 31, 2019, not to fill out Schedule A-6. Lines included in the original return forms are adjusted as set out below:

• CBT-100 and BFC-1, Page 1, line 3c, "Total allocated net income — Add lines 3a and 3b"
• CBT-100, Page 1, line 7, "Investment Company — Enter 40% of the total of line 1 plus line 3b"
• CBT-100, Page 1, line 8, "Real Estate Invest. Trust — Enter 4% of the total of line 1 plus line 3b"
• CBT-100 and BFC-1, Schedule A, lines 10a and b, disregard the instruction to carry the amounts onto Schedule A-6
• CBT-100, Schedule A, line 37b has been blanked out. Treat this line as if the entry is zero.
• BFC-1, Schedule A, line 38b has been blanked out. Treat this line as if the entry is zero.
• CBT-100 and BFC-1, Schedule J must include the net amount of the GILTI income and the net amount of the FDII income, as applicable.⁷

Taxpayers that have already submitted their 2018 CBT-100, CBT-100-R, or BFC-1 returns for tax year 2018 will likely need to file amended returns to comply with the changes listed in TB-92. The technical bulletin instructs those taxpayers to submit their amended return with "GILTI Amended Return" written on top of the return.

Implications

The latest DOT guidance adds ambiguity to this very complicated area of federal/state tax compliance. First, taxpayers preparing their 2018 New Jersey CBT filings (many of which are due soon) should re-examine their computation of GILTI and FDII income and the sourcing of the revenues related to such amounts (if applicable) in light of this new guidance. Given the lack of clarity in how and when to source GILTI and FDII to New Jersey, taxpayers should consult with their tax advisors on possible sourcing options and potential tax exposure resulting from the revised guidance. 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 N.J. Div. of Tax., TB-92, Sourcing IRC Section 951A (GILTI) and IRC Section 250 (FDII) Replacing TB-85(R), (Aug. 22, 2019) (available on the internet here (last accessed Aug. 22, 2019)).

² N.J. Div. of Tax., TB-85, Tax Conformity to IRC Section 951A (GILTI) and IRC Section 250 (FDII)) (Dec. 24, 2018). (See N.J. DOT list of tax publications available on the internet here (last accessed Aug. 22, 2019)). See also Tax Alert 2019-0101.

³ 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.

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

⁵ See N.J. Div. of Tax., Corporation Business Tax Reform Information (available on the internet here (last accessed on Aug. 20, 2019)).

⁶ N.J. Div. of Tax., TB-92, Sourcing IRC Section 951A and IRC Section 250 (FDII), referencing N.J.S.A. 54:10A-4.7.

⁷ TB-92. (adjusted for formatting).