Whirlpool Properties, Inc. v. DIR., DIV. OF TAX.
26 A.3d 446
N.J.2011Background
- Whirlpool Properties, Inc. challenged New Jersey's Throw-Out Rule (N.J.S.A. 54:10A-6(B)) in the CBT context, appealing CBT deficiency for 1996–2003.
- The Throw-Out Rule reduces the denominator of the sales factor by excluding untaxed receipts, increasing New Jersey’s CBT liability for multistate taxpayers.
- Untaxed receipts fall into two categories: (a) states lacking jurisdiction to tax due to insufficient business activity; and (b) states that simply do not impose an income or income-like tax.
- New Jersey’s CBT uses a three-factor apportionment (property, payroll, and sales) to determine taxable income for multistate taxpayers.
- The Tax Court and Appellate Division held the Rule facially constitutional; the Supreme Court granted review and held, as modified, that the Rule is facially constitutional only when limited to untaxed receipts from states lacking tax jurisdiction due to insufficient activity or similar congressional action.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the Throw-Out Rule is facially constitutional under Salerno Complete Auto. | Whirlpool argues Salerno standard should be overruled to reject facial validity. | Director urges Salerno as controlling; apportionment rules may be facially valid. | Constitutional with limiting construction |
| Whether the Rule meets the four-part Complete Auto test for apportionment. | Rule distorts apportionment by treating untaxed receipts as taxed by New Jersey. | Rule aligns with nexus, internal/external consistency, and no discrimination when limited as construed. | Constitutional under limiting construction |
| Whether the Rule discriminates against interstate commerce. | Rule burdens out-of-state commerce by favoring in-state receipts. | Rule does not facially discriminate and relief mechanisms exist. | No facial discrimination under limiting construction |
| Whether the Court should construe the statute narrowly to avoid unconstitutionality. | Literal text would cause unconstitutionality in some scenarios. | Statute should be read to preserve constitutionality where possible. | Statute narrowly construed to apply only to untaxed receipts due to lack of jurisdiction |
| Whether the Court should apply Salerno in a tax statute context as opposed to Stevens guidance. | Salerno is outdated for tax challenges. | Salerno remains applicable in New Jersey tax contexts. | Salerno remains the applicable standard for this facial challenge |
Key Cases Cited
- Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983) (facially permissible apportionment framework; three-factor benchmarks; external/internal consistency)
- Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) (four-part test for apportionment: nexus, fair apportionment, nondiscrimination, fair relation)
- Salerno, United States v., 481 U.S. 739 (1987) (facial challenge standard for statutes; rigorous presumption of constitutionality)
- Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978) (apportionment as rough approximation of income sources; supports formula approach)
- Trinova Corp. v. Mich. Dep't of Treasury, 498 U.S. 358 (1991) (recognizes various apportionment formulas; supports flexibility in formula design)