New Jersey Update

Unitary Business Definition

Pursuant to the administrative guidance, a unitary business is defined to mean “a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value among the separate parts.” The unitary business definition “will be construed to the broadest extent permitted” under the U.S. Constitution.

A taxpayer that meets either the “interdependence of functions test” or the “unity of operations and use tests” is part of the unitary business.

Interdependence of Functions Test

The presence of any of the following factors indicates that an interdependence of function exists:

• Same line of business (e.g., wholesaling, retailing, manufacturing)
• Primary activities comprise steps of a vertically structured business
• Central management
• Goods or services among entities not provided at an arm’s-length price (mere existence of arm’s length pricing between entities does not indicate lack of unity)
• Existence of benefits from joint, shared, or common activity
• Relationship of joint, shared, or common activity to income-producing operations
• Exercise of control by one entity over another.

Unity of Operations and Use Tests

Unity of operations means that there is functional integration evidenced by shared support functions. Unity of use “is evidenced generally by centralized management or use of centralized policies.” The unities are present if each entity “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 resources.”

Factors to be considered include—

• common employees, including sales force;
• common policy or training manuals;
• common accounting or legal;
• common retirement plan or insurance coverage;
• common advertising or marketing;
• common cash management or financing support;
• common purchasing or research and development;
• common offices, manufacturing, warehousing, or transportation facilities;
• common computer systems and support;
• common management (i.e., one or more officers or directors of the parent are also officers or directors of the subsidiary);
• control of major policies (e.g., 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 that it approve any lending in excess of a minimum amount to any one or more of either the parent or subsidiary’s suppliers);
• interentity transactions;
• required budgetary approval; and
• required capital asset purchases approval.

Holding Companies

The unitary test applies to the determination of whether a holding company is excluded or included in a unitary business of a combined group. “A passive holding company that is in a commonly controlled economic enterprise and holds intangible assets that are used by the enterprise in a unitary business is deemed to be engaged in the unitary business, even though the holding company’s activities are primarily passive,” according to TB-93.

Indeed, the determination of whether a group of related companies is considered a unitary business requires a critical review of an enterprise’s unique facts and circumstances. Taxpayers potentially affected by the enactment of New Jersey’s combined reporting rules should consult with their tax advisors for further assistance, as these rules are complex.