Current through Register Vol. 56, No. 18, September 16, 2024
(a) The definition of
unitary business for New Jersey corporation business tax purposes is defined at
N.J.S.A.
54:10A-4(gg). New Jersey
construes the term "unitary business" to the broadest extent permitted under the
United States Constitution.
1. A determination as
to whether an entity forms part of a unitary business with another entity is based
on the facts and circumstances of each case. Such analysis is both quantitative and
qualitative.
2. A unitary business is
characterized by significant flows of value evidenced by factors, such as functional
integration, centralization of management, and economies of scale. These factors
provide evidence of whether the business activities operate as an integrated whole
or exhibit substantial mutual interdependence.
i.
One or more related business organizations engaged in business activity--entirely
within this State or both within and without this State--are unitary if there is
interdependence in their functions. The United States Supreme Court has expressed
the constitutional test using a variety of language; in some cases holding that a
finding of unitary relationship requires "contribution or dependency" between
businesses, in others requiring "substantial mutual interdependency" or "flow of
value," and also finding that it requires functional integration, centralized
management, or economy of scale.
3. The participants in an economic enterprise
under common ownership may also be considered a unitary business if there is unity
of operation and use. See Butler Brothers v. McColgan, 315 U.S. 501, 508 (1942).
Unity of operation and use indicates the existence of interdependence of
functions.
4. An affiliated
group/commonly controlled group may be engaged in one or more unitary businesses.
Therefore, an affiliated group/commonly controlled group may contain more than one
combined group and file more than one New Jersey combined return.
5. If the entities meet either the
"Interdependence of Functions Test" or the "Unity of Use and Management Test," the
entities are part of the unitary business.
(b) Interdependence of Functions Test - any of the
following circumstances demonstrate that an interdependence of functions may exist:
1. The principal activities of the entities are in
the same general line of business. Examples of the same line of business are
manufacturing, wholesaling, retailing, servicing, and/or repairing of tangible
personal property; transportation; or finance (these examples are for illustration
purposes and are not meant to be all inclusive). In determining whether two entities
are in the same general line of business, consideration is given to the nature and
character of the basic operations of each entity. This includes, but is not limited
to, sources of supply, goods or services produced or sold, labor force, and market.
Two entities are in the same general line of business when their operations are
sufficiently similar to reasonably conclude that the entities are likely to depend
upon or contribute to one another;
2.
The principal activities of the entities are different steps of a vertically
structured business. For example, in a natural resource business-exploration, mining
and drilling, production, refining, marketing, and transportation to market (whether
wholesale or retail);
3. Centralized
management, as may be evidenced by executive-level policy made by a central person,
board, or committee and not by each entity in areas such as, but not limited to,
purchasing, accounting, finance, tax compliance, legal services, human resources,
health and retirement plans, product lines, capital investment, and
marketing;
4. Goods or services, or
both, are not supplied at arm's length prices between, or among, entities. Existence
of arm's-length pricing between entities, however, does not indicate lack of
unity;
5. The existence of benefits from
joint, shared, or common activity by entities. A discount, costsaving, or other
benefit can result from joint purchases, leaseholds, or other forms of joint,
shared, or common activities between or among entities;
6. The relationship of joint, shared, or common
activity to income-producing operations. When determining whether there exists a
joint, shared, or common activity that is indicative of a unitary relationship,
consideration is given to the nature and character of the basic operations of each
entity. Such consideration includes, but is not limited to, the entity's sources of
supply, its goods or services produced or sold, and its labor force and market.
These considerations are used to determine whether the joint, shared, or common
activity is directly beneficial to, related to, or reasonably necessary to the
income-producing activities of the unitary business;
7. Transfers or sharing of technical information
or intellectual property, such as patents, copyrights, trademarks and service marks,
trade secrets, processes or formulas, know-how, research, or development, provide
evidence of a unitary relationship when the information or property transferred or
shared is significant to the business' operations;
8. Significant common or intercompany financing,
including the guarantee by, or the pledging of the credit of, one or more business
entities for the benefit of another business entity or entities, if the financing
activity serves an operational purpose;
9. Significant sales, exchanges, or transfers of
products, services, and/or intangibles between corporations related by common
ownership; and
10. The exercise of
control by one entity over another entity is indicative of a unitary
relationship.
(c) Unity of
Operations and Use Test. "Unity of use" means there is functional integration among
the entities and is evidenced generally by shared support functions. "Unity of
operations" is evidenced, generally, by centralized management or utilization of
centralized policies. These unities exist if each entity that is to be included in
the unitary business benefits or receives goods, services, support, guidance, or
direction arising from the actions of common staff resources or common executive
resources, personnel, third-party providers, or operations under the direction of
such common resources. The tests are overlapping and the indicators of each test
also indicate the existence of interdependence of functions. The existence or
non-existence of the following factors will assist in the determination of whether
unity of use and management exist with respect to a combined group. The existence or
non-existence of any one factor, by itself, is normally not determinative of whether
there is a unity of use and management. Factors that may be considered include, but
are not limited to:
1. Common
purchasing;
2. Common
advertising;
3. Common employees,
including sales force;
4. Common
accounting;
5. Common legal
support;
6. Common retirement
plan;
7. Common insurance
coverage;
8. Common marketing;
9. Common cash management;
10. Common research and development;
11. Common offices;
12. Common manufacturing facilities;
13. Common warehousing facilities;
14. Common transportation facilities;
15. Common computer systems and support;
16. Common or significant financing
support;
17. Common management (meaning
that one or more officers or directors of the parent corporation are also officers
or directors of the subsidiary);
18.
Control of major policies (for example, the parent corporation's board of directors
requires that it approve any acquisition by either the parent or subsidiary of any
interest in any other company; or the parent corporation's board of directors
requires that it approve any lending in excess of a minimum amount to any one or
more of either the parent or subsidiary's suppliers);
19. Inter-entity transactions (for example, a
subsidiary corporation licenses the use of personal property it developed to the
parent corporation and the parent corporation uses the property in its production
activities);
20. Common policy or
training manuals (for example, the parent corporation's employee handbook applies to
all of a subsidiary's employees; or the subsidiary's employees are required to
attend the parent corporation's employee training courses; or disciplinary
procedures are the same for both corporations' employees, even if the appeal process
is only through their respective entities);
21. Required budgetary approval (for example, the
parent corporation's board of directors requires that it approve the budget and
expenditure plans of the subsidiary on a periodic basis); and
22. Required capital asset purchases approval (for
example, the parent corporation's board of directors requires that it approve any
capital expenditures by the subsidiary in excess of a minimum set amount).
(d) Without limiting the scope of a
unitary business, the presumptions and inferences concerning whether, and when, two
or more corporations under common ownership will be deemed to be engaged in a
unitary business, as explained at (d)1 through 5 below, do not purport to set forth
all the indicators of a unitary business, as that determination is to be made
pursuant to U.S. Constitutional principles.
1.
Without limiting the scope of a unitary business as determined in other situations,
business activities conducted by corporations under common ownership that are in the
same general line of business, such as a multi-state grocery chain, will generally
constitute a unitary business. Business activities conducted by corporations under
common ownership that comprise different steps in a vertically structured business
will generally constitute a unitary business. For example, a business engaged in the
exploration, development, extraction, and processing of a natural resource and the
subsequent sale of a product based upon the extracted natural resource, is engaged
in a single unitary business.
2. When
the common ownership standard is first met by reason of merger, acquisition, or
business formation, it is presumed that a unitary business relationship exists.
Unity is generally presumed for newly acquired or newly formed entities.
i. Where a voting interest is directly or
indirectly acquired by, or in, a corporation, or in a member of a corporation's
combined group, that results in achieving the common ownership standard, there is
presumption of unity where the combined group and the acquired corporation had been
previously engaged in an otherwise unitary relationship but did not meet the common
ownership standard.
ii. Where a member,
or one or more other members of the member's combined group, forms a new corporation
it shall be presumed that the formed corporation(s) is engaged in a unitary business
with the forming corporation(s) from the date of its formation.
3. A parent holding company, that directly or
indirectly controls one or more operating company subsidiaries engaged in a unitary
business, shall be deemed to be engaged in a unitary business and includable in a
combined report with the subsidiary or subsidiaries. An intermediate holding company
shall be deemed to be engaged in a unitary business with the parent and subsidiary
or subsidiaries and includable in a combined report with them.
4. Transfers or sharing of technical information
or intellectual property, such as patents, copyrights, trademarks and service marks,
trade secrets, processes or formulas, know-how, research, or development, provides
evidence of a unitary relationship when the information or property transferred or
shared is significant to the businesses' operations. Similarly, a unitary
relationship is indicated when there is significant common or intercompany
financing, including the guarantee by, or the pledging of the credit of, one or more
business entities for the benefit of another business entity or entities, if the
financing activity serves an operational purpose.
5. Other indicators of a unitary business
conducted between corporations related by common ownership include, but are not
limited to, sales, exchanges, or transfers of products, services, and/or intangibles
between such corporations. When such evidence exists, this evidence is not negated
by the use of market-based or "arm's length" pricing as to the transactions by the
corporations in question.
(e)
It is possible that a portion of a member's business operations are independent of
the unitary business activity of the combined group. Only the income, attributes,
and allocation factors related to the portion of a company's operations that are
part of a unitary business of the combined group are included in the calculation of
the combined group's entire net income and allocation factor. The remaining
(independent) portion of a member's business operations may be subject to tax
separately from the combined group if such member conducts business in New Jersey
individually or with another combined group (if it is engaged in a unitary business
with that combined group that also conducts business in New Jersey).
1. In lieu of filing a separate return to report
such income, such member of a combined group must complete Schedule X to report the
separate portion of its business operations (and provided those operations are not
part of another combined group). Schedule X will be used to calculate the New Jersey
taxable net income of that separate activity income that must be reported on
Schedule A of the New Jersey combined return.
(f) If a member of a combined group is completely
spun off from the group, that spun-off business entity and the combined group must
show, to the Director's satisfaction, that a unitary business relationship no longer
exists. However, the Director may impose such conditions necessary to prevent the
evasion of tax, for example, provide notice to the Division of a change in combined
group composition as further explained at N.J.A.C. 18:7-21.29pursuant to
N.J.S.A.
54:10A-4.10(h).
(g) Former members of a combined group will no
longer be presumed unitary if sold to an unrelated third party. However, the
Director may impose such conditions necessary to prevent the evasion of tax, for
example, provide notice to the Division of a change in combined group composition as
further explained at N.J.A.C. 18:7-21.29pursuant to
N.J.S.A.
54:10A-4.10(h).
