By: John J. Eagan and Robert C. Gabrielski

The Decision

On October 12, 2006, the New Jersey Supreme Court in Lanco, Inc. v. Director, Division of Taxation, affirmed an Appellate Division decision which held that the State of New Jersey could impose Corporate Business Tax (N.J.S.A. 54:10A-1 to 41) (“CBT”) on an out-of-state corporation without a physical presence in New Jersey. Specifically, Lanco, a Delaware corporation, derived income from licensing intangibles (i.e., trademarks, trade names and service marks) to an affiliate conducting retail operations in New Jersey.


The determining issue in Lanco was whether or not a taxpayer must have a physical presence in New Jersey in order to constitute the required “substantial nexus” necessary to satisfy the Commerce Clause under Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Lanco had no offices, employees, or real or tangible personal property in New Jersey, although it did license to Lane Bryant, Inc., a sister company,1 the right to use Lanco’s intangible property in Lane Bryant’s retail operations in return for royalty payments. Some of Lane Bryant’s retail operations are in New Jersey.

Tax Court

The New Jersey Tax Court (“Tax Court”) reasoned that Lanco could not be subject to the CBT in New Jersey since it did not have a physical presence in New Jersey and that to subject Lanco to tax in New Jersey would violate the Commerce Clause. Lanco, Inc. v. Director, Division of Taxation, 21 N.J. Tax 200 (N.J. Tax Ct. 2003). In arriving at its judgment, the Tax Court analyzed Quill, concluding that the Commerce Clause requires a physical presence of the taxpayer in New Jersey in order for New Jersey to impose the CBT. The Tax Court reasoned that the Quill case extended not only to the sales and use taxes addressed in Quill, but also to the CBT.

Appellate Division

On appeal, the Appellate Division reversed the Tax Court and held that New Jersey could impose the CBT on Lanco because Lanco derived income from sources attributable to New Jersey. Lanco, Inc. v. Director, Division of Taxation, 379 N.J. Super. 562 (App. Div. 2005). The Appellate Division also analyzed Quill and held that the physical presence requirement only applied to sales and use taxes, not to income taxes; thus, the decision in Quill did not prevent the imposition of the CBT.

Supreme Court

The Supreme Court, in a brief per curiam opinion, affirmed the decision of the Appellate Division substantially for the reasons stated in the Appellate Division opinion; however, the Supreme Court further analyzed the Quill decision and clarified that “the better interpretation of Quill is the one adopted by those states that limit the Supreme Court’s holding to sales and use taxes. That interpretation reflects the language of Quill. In Quill, the Court did not attempt to equate the substantial-nexus requirement with a universal physical-presence requirement.” The New Jersey Supreme Court remanded the case to the New Jersey Tax Court for additional proceedings.

New Jersey Corporate Business Tax History

The New Jersey Corporate Income Tax (“CIT”), enacted in 1973, was imposed on corporations that derived income from sources in New Jersey but were not subject to the CBT. Under the New Jersey Division of Taxation’s interpretation of the nexus rules, the CIT essentially became obsolete and was repealed for all tax years on or after January 1, 2002 as part of the Business Tax Reform Act of 2002 (“Reform Act of 2002”). The Reform Act of 2002 extended the CBT to corporations deriving income from sources within New Jersey and from contacts in New Jersey. This tax treatment is outlined in the New Jersey Administrative Code § 18:7-1.9, in the CBT-100 Return Instructions, and Schedule N: Nexus-Immune Activity Declaration. Thus, although the New Jersey Appellate Division and the New Jersey Supreme Court further adopted the rule that an out-of-state corporation could be subject to CBT in New Jersey even though it does not have a physical presence in New Jersey, those decisions are consistent with the Division of Taxation’s administrative history of taxing out-of-state corporations deriving New Jersey source income.

The Impact

The potentially broad scope of the Lanco opinion could be that all out-of-state companies deriving income from New Jersey sources might be subject to CBT in New Jersey. Because there is no physical presence requirement for New Jersey to impose CBT, any kind of connection to New Jersey, however minimal or remote, may cause a corporation to be subject to New Jersey CBT tax.

Based on Lanco, the types of activities that could subject corporations to the CBT tax in New Jersey could include the following:

  • Licensing franchises, trademarks, trade names, service marks, patents and other intangibles for use with respect to products sold in New Jersey to related or unrelated parties;
  • Licensing software for use in New Jersey;
  • Selling digital products or providing remote services to customers located in New Jersey; or
  • Other arrangements where a corporation or a person derives revenue from use of its intangible property in New Jersey, even though the corporation itself has no office, employees, real or tangible personal property in the state.

This list is by no means exhaustive, particularly given the emergence of the Internet as a business vehicle. As the courts further interpret the impact and applicability of the Lanco decision, there will be some additional insight and possible clarification of the decision.

This Alert only provides a brief summary of the Lanco decision and its possible impact. Please feel free to contact any member of the Norris McLaughlin, P.A. Tax Law Group for advice and planning suggestions concerning the Lanco decision.

1 It is important to note that the fact that the companies were affiliated corporations was not material to the constitutional issue that the activity under the license agreement made Lanco subject to tax in New Jersey. Lanco, Inc. v. Director, Division of Taxation, 379 N.J. Super. 562, 564 (App. Div. 2005).