On August 26, 2019, the New Jersey Division of Taxation (DOT) placed on its website clarifying guidance regarding its Technical Bulletin (TB) 92, Sourcing IRC Section 951A (GILTI) and IRC Section 250 (FDII) Replacing TB-85(R) (TB-92),¹ which was released on August 22, 2019. The guidance updates the DOT's two prior pronouncements from the past week on the reporting 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. (See Tax Alert 2019-1522)

The first guidance appeared on the DOT's website on August 20, 2019, in which the DOT stated it would issue guidance on the sourcing of revenues relating to GILTI and FDII that would reflect a sales factor dilution method (the Aug. 20 Notice). See Tax Alert 2019-1499.

On August 22, 2019, the DOT issued TB-92, which appeared to contradict the approach described in the Aug. 20 Notice.

The DOT's August 26, 2019 clarification appears to line up with the guidance set out in the Aug. 20 Notice. Under that notice, taxpayers in most, if not all, cases would be able to apply the sales factor dilution approach for revenues related to GILTI. Additionally, the notice stated that FDII relates to income that was previously included in the taxpayer's tax base and likely would not be counted again in its sales factor.

TB-92, together with this latest guidance, has broad tax planning and compliance implications for New Jersey CBT taxpayers reporting material GILTI and FDII for federal income tax purposes.

Background

On August 22, 2019, the DOT issued TB-92, which provided revised guidance for the CBT treatment of GILTI and FDII, superseding its previously issued guidance in TB-85(R). The DOT stated in TB-92 that both GILTI and FDII are potentially includable in the sales factor numerator, differing from the informal views contained in its three-sentence guidance set forth in the Aug. 20 Notice, which excluded GILTI from the New Jersey numerator of the sales factor. The seemingly inconsistent DOT positions articulated in TB-92 and the Aug. 20 Notice created much confusion in the New Jersey taxpayer community and caused many taxpayers, particularly New Jersey-based entities, to express immediate concerns that following the guidance in TB-92 could result in a significant increase of their overall apportionment to New Jersey.

Responding to these concerns, on August 26, 2019, the DOT, in a brief website posting, clarified its views on the inclusion of GILTI and FDII related items in the sales factor under TB-92. The DOT stated:

• "First, while FDII has been newly identified under the IRC as a special category of income, the [DOT] recognizes that the income already existed for both Federal and New Jersey tax purposes. Our intent is that FDII continue to be classified, sourced and apportioned as appropriate under existing NJ statutes and regulations.
• Second, while the [DOT] is not aware of any specific situation that would require GILTI or FDII related amounts to be included in the numerator of the apportionment factor, we are also not certain that no such situations exist; hence the use of the term "if applicable" in … TB[-92]. We welcome input both on this issue and in general as we work cooperatively to draft final regulations that are reasonable and equitable to the business community and the State."²

The DOT concluded by stating in this latest notice that it will issue an update to TB-92 and that its immediate guidance in this new notice was intended to clarify any misinterpretations of TB-92 among taxpayers.

Implications

The latest DOT guidance resolves much, but not all, of the ambiguity that resulted from the issuance of the Aug. 20 Notice and TB-92. Although this change may reduce the CBT burden associated with GILTI and FDII for some taxpayers, others could see an increased New Jersey tax burden. Considering the evolving guidance the DOT has issued over the course of the last few days, taxpayers should carefully review any future guidance issued by the DOT on this very complex issue, including formal proposed regulations the DOT has promised will be issued shortly.

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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 August 27, 2019)).

² N.J. Div. of Tax., Clarification of Technical Bulletin TB-92, (available on the internet here (last accessed August 26, 2019)).