Date: October 23, 2023Attorney: Martin D. Hauptman

New Jersey court rules addback regulation’s unconstitutionality cured by 2020 amendment.

In a recent ruling, the New Jersey Tax Court addressed the constitutionality of a pre-2020 royalty addback regulation and found that it could be remedied by applying the rule’s amended version from 2020. The regulation in question, N.J. Rev. Stat. § 54:10A-4.4(b), mandates that any entity conducting business in New Jersey must add back otherwise deductible royalties paid to a related member when calculating their allocable entire net income (ENI). The only exception is if the payor can prove, by clear and convincing evidence, that the addback is unreasonable.

N.J. Admin. Code § 18:7-5.18(b)(3) further clarifies that adjustments are deemed unreasonable to the extent that New Jersey tax was already paid on the income stream. Notably, in 2020, the regulation included all taxes paid on the income stream for consideration.

The court ruled that any deficiencies in N.J. Admin. Code § 18:7-5.18(b)(3) were effectively addressed and cured by the 2020 amendments. Consequently, the court made the decision to retroactively apply the 2020 version of the rule to all prior tax years.

This ruling has significant implications for businesses operating in New Jersey, as it clarifies the applicability and constitutionality of the royalty addback regulation, providing greater legal clarity and consistency in tax calculations.

N.J. Rev. Stat. § 54:10A-4.4(b) 

N.J. Admin. Code § 18:7-5.18(b)(3) 

N.J. Admin. Code § 18:7-5.18(b)(3) 

Dkt. No. 008305-2007, 09/13/2023