N.J. Admin. Code § 18:7-21.2

Current through Register Vol. 56, No. 9, May 6, 2024

Section 18:7-21.2 - Unitary business

(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).

N.J. Admin. Code § 18:7-21.2

Adopted by 54 N.J.R. 1819(a), effective 9/19/2022