SYLLABUS

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

Whirlpool Properties, Inc. v. Director, Division of Taxation (A-25-10) (066595)

Argued May 4, 2011 -- Decided July 28, 2011

LaVECCHIA, J., writing for a unanimous Court.

At issue is whether N.J.S.A. 54:10A-6(B) (the “Throw-Out Rule” or “Rule”), is facially constitutional under the Due Process Clause, U.S. Const. amend. XIV, § 1, and the Commerce Clause, U.S. Const. art. I, § 8, cl. 3.

New Jersey uses a three-factor formula to calculate a multi-state corporation’s New Jersey Corporate Business Tax (CBT) by apportioning income between New Jersey and the rest of the world. For taxpayers with regular places of business outside of New Jersey, the portion of entire net worth and entire net income that is subject to New Jersey tax is determined by multiplying each by an allocation factor that is the sum of the property fraction, the payroll fraction, and two times the sales fraction, divided by four. N.J.S.A. 54:10A-6. The sales fraction is at issue here. Without the Throw-Out Rule, the sales fraction is calculated by dividing the taxpayer’s receipts (sales of tangible personal property, services, and all other business receipts) in New Jersey by total receipts. N.J.S.A. 54:10A-6(B). The Throw-Out Rule, adopted in 2002 and since repealed, increased a corporation’s New Jersey tax liability by “throwing out” sales receipts that are not taxed by other jurisdictions from the denominator of the sales fraction. That always increases the sales fraction, causing the apportionment formula and resulting CBT to increase.

Whirlpool Properties, Inc. (Whirlpool) is incorporated and has its principal place of business in Michigan and conducts all activities outside of New Jersey. Whirlpool earns income by licensing brand names that it owns and manages. Whirlpool did not file New Jersey tax returns or pay CBT from 1996 to 2003. The Director calculated allocable income using information gleaned from related entities and issued Whirlpool a CBT deficiency assessment of nearly $25 million for those years. Before the Throw-Out Rule became effective, the portion of income allocated to New Jersey for 1996 through 2001 ranged between 0.9546 and 1.3337 percent. Using the Rule, Whirlpool’s 2002 income was allocated to New Jersey 29.2572 percent and 41.8647 percent, respectively.

Whirlpool appealed the assessment to the Tax Court and challenged the constitutionality of the Throw-Out Rule. On motions for partial summary judgment on the Rule’s facial constitutionality, the Tax Court determined that the proper standard of review is set forth in United States v. Salerno, 481 U.S. 739 (1987), which upholds a statute if it can operate constitutionally in some instances. Then, turning to the Rule’s viability under Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), the court focused on fair apportionment. In the end, the Tax Court concluded that the Rule satisfies Salerno by operating constitutionally when income excluded from the sales fraction denominator is generated in part by New Jersey activities, when the Rule has no material effect on the sales fraction, and when the property and payroll fractions substantially temper its impact. The Appellate Division affirmed. Whirlpool Props., Inc. v. Dir., Div. of Taxation, 25 N.J. Tax 519 (App. Div. 2010). Addressing the due process claim, the panel noted that apportionment formulas need only avoid attributing income to the taxing state “out of all appropriate proportion” to business conducted in the state. Explaining that Whirlpool did not contest that it “had a nexus with New Jersey” independent from its “unitary business,” or that “sales to non-taxing states were part of that business,” the panel determined that New Jersey had a “constitutionally sufficient nexus to those sales.” The panel also found that the Throw-Out Rule does not discriminate against interstate commerce because it does not cause double taxation and avoids the “forbidden impact on interstate commerce” of “pressuring” out-of-state corporations to increase New Jersey activity. The Court granted Whirlpool’s motion for leave to appeal. 204 N.J. 35 (2010).

HELD: For corporate taxpayers having a substantial nexus to New Jersey, the Throw-Out Rule may apply constitutionally only to untaxed receipts from states that lack jurisdiction to tax the corporation due to insufficient connection with the corporation or due to congressional action such as 15 U.S.C.A. §§ 381-84 (commonly referred to as “P.L. 86-272”), but not to receipts that are untaxed because a state chooses not to impose an income tax.

1. Under the formula apportionment method used by many states to tax multi-state corporations, all receipts, property, and income of a “unitary business” are included in the tax base and then multiplied by a formula to determine what portion of the tax base the state may tax. The most common is the three-factor formula that averages property, payroll, and sales factors; it has been justified as a practical approximation of the distribution of a corporation’s income sources or social costs. Under the Complete Auto test for analyzing constitutionality under the Commerce and Due Process Clauses, a state’s formula will be sustained when it (1) is applied to an activity that has a “substantial nexus” with the state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to services provided by the state. (pp. 19-23)

2. “Substantial nexus” requires a minimum connection between the state and the transaction it seeks to tax. Fair apportionment requires internal and external consistency. A formula is internally consistent if, when hypothetically applied by all jurisdictions, it would result in a tax on no more than all of the corporation’s income. It is externally consistent only if it reflects a “reasonable sense of how income is generated,” which requires a practical inquiry into the interstate activity taxed in relation to the in-state activity. The discrimination prong reflects the dormant Commerce Clause bar against a state imposing a heavier tax burden on out-of-state businesses than on state residents competing in an interstate market. The fair relation prong examines whether the taxpayer received benefits from the state. Here, the facial constitutionality of the Throw-Out Rule does not turn on the substantial nexus prong because income that is so separate from New Jersey activity that it could not be constitutionally taxed here would not be part of the taxpayer’s unitary business or its tax base regardless of the Throw-Out Rule. Also, for a general revenue tax, the fair relation prong requires only that a taxpayer was accorded the benefits of an organized society. (pp. 23-30)

3. Whether the Throw-Out Rule is fairly apportioned depends on what types of receipts are thrown out: (1) receipts not taxed by a state because it lacks sufficient constitutional contact or because of action by Congress setting a lower threshold for what activity is sufficient for a state to tax it, such as P.L. 86-272, which prohibits state income tax on businesses whose only in-state activity is selling or soliciting orders for property shipped into the taxing state; and (2) receipts not taxed because a state chooses not to have an income tax. The Rule is internally consistent because if all states threw out untaxed receipts, no more than 100% of income would be taxed. However, throwing out receipts because a state chooses not to tax is externally inconsistent because that decision is independent of a taxpayer’s business activity and has no bearing on how much income is attributable to New Jersey. On the other hand, the Rule arguably is externally consistent when untaxed receipts are thrown out due to a state’s lack of jurisdiction to tax. While this increases New Jersey’s share, New Jersey may have contributed more to receipts than what is suggested by the sales factor without the Rule; thus, it may be reasonable to allocate a greater percentage to New Jersey. That this interpretation may not always lead to a fair outcome does not render the Rule facially unconstitutional; unfairness may be addressed through an as-applied challenge. Construing the Throw-Out Rule narrowly so that it generally operates constitutionally, the Court interprets the Rule as operating only to throw out receipts from states without taxing jurisdiction. This is consistent with the legislative intent to close a loophole and throw out “nowhere sales” (sales that result in income assigned so it is taxed nowhere) from the sales fraction, causing more income to be assigned where a corporation actually operates. As so construed, the Rule is facially constitutional. (pp. 30-38)

4. Turning to Complete Auto’s remaining prong, the Rule is not facially discriminatory because it applies equally to in-state and out-of-state businesses; and in light of the limiting interpretation, it has no discriminatory effect. Finally, the Court’s construction, which results in a facially constitutional operation regarding fair apportionment, makes it unnecessary to wade deeply into whether the Salerno standard of review should have been applied here. (pp. 38-43)

5. In sum, in applying the Complete Auto test and based on the Court’s limiting interpretation, the Throw-Out Rule is not facially unconstitutional. For corporate taxpayers having a substantial nexus to New Jersey, the Rule may apply constitutionally only to untaxed receipts from states that lack jurisdiction to tax the corporation. (pp. 43-44)

The judgment of the Appellate Division is AFFIRMED AS MODIFIED.

CHIEF JUSTICE RABNER and JUSTICES LONG, ALBIN, RIVERA-SOTO and HOENS join in JUSTICE LaVECCHIA’s opinion.

SUPREME COURT OF NEW JERSEY

A- 25 September Term 2010

066595

WHIRLPOOL PROPERTIES, INC.,

Plaintiff-Appellant,

v.

DIRECTOR, DIVISION OF TAXATION,

Defendant-Respondent.

Argued May 4, 2011 – Decided July 28, 2011

On appeal from the Superior Court, Appellate Division.

Paul H. Frankel argued the cause for appellant (Morrison & Foerster, attorneys; Mr. Frankel and Mitchell A. Newmark, of counsel and on the briefs).

Marlene G. Brown, Senior Deputy Attorney General, argued the cause for respondent (Paula T. Dow, Attorney General of New Jersey, attorney; Lewis A. Scheindlin, Assistant Attorney General, of counsel).

Michael A. Guariglia argued the cause for amici curiae New Jersey State Chamber of Commerce and New Jersey Business & Industry Association (McCarter & English, attorneys).

Marc A. Simonetti submitted a brief on behalf of amicus curiae Council on State Taxation (Sutherland Asbill & Brennan, attorneys; Mr. Simonetti and Jeffrey A. Friedman, on the brief).

JUSTICE LaVECCHIA delivered the opinion of the Court.

We granted leave to appeal to consider a facial challenge to the constitutionality of N.J.S.A. 54:10A-6(B) (the “Throw-Out Rule” or “Rule”), whose application, while it was in effect, increased a multi-state taxpayer’s New Jersey Corporate Business Tax (CBT) liability. See N.J.S.A. 54:10A-1 to -41. Although the Rule has since been repealed, see L. 2008, c. 120, it had substantial impact on multi-state entities such as the taxpayer-appellant in this matter. Whirlpool Properties, Inc. (Whirlpool), a Michigan corporation with its principal place of business in Michigan, raised the present constitutional challenge in its complaint, filed with the Tax Court, appealing a CBT deficiency assessment of $24,883,399.24 imposed by the State Director of the Division of Taxation (“Director”) with respect to tax years 1996 through 2003. In tax years 2002 and 2003, the Director’s application of the Throw-Out Rule resulted in substantially heightened assessments against Whirlpool. In the present challenge, Whirlpool claims the Rule violates the Due Process Clause, U.S. Const. amend. XIV, § 1, and the Commerce Clause, U.S. Const. art. I, § 8, cl. 3.

The constitutionality of using a formula apportionment method for deriving local taxable income has been long established. See Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 165, 103 S. Ct. 2933, 2940, 77 L. Ed.2d 545, 553 (1983). The formula apportionment method apportions a corporation’s income between the taxing jurisdiction and the rest of the world. Ibid. New Jersey’s apportionment methodology utilizes a three-factor formula that weighs a multi-state corporate taxpayer’s property, payroll and sales, a recognizably common, and constitutionally unremarkable, general approach.1 However, this facial challenge focuses pointedly on the less-common Throw-Out Rule, and its effect on the sales factor in New Jersey’s formula.

Without application of the Throw-Out Rule, the sales fraction is calculated by dividing the taxpayer’s New Jersey receipts by total receipts of the corporate taxpayer. N.J.S.A. 54:10A-6(B). The Throw-Out Rule modifies the sales fraction, transforming the fraction into one that divides New Jersey receipts only by taxed receipts. L. 2002, c. 40. The effect is consistent: By throwing out receipts from the denominator, the sales fraction always increases, causing the apportionment formula and the taxpayer’s resultant CBT liability to New Jersey to increase.

Critical to the analysis of the constitutionality of New Jersey’s Throw-Out Rule is the fact that the receipts that may be thrown out fall into two types: (1) receipts that are not taxed because the state lacks the jurisdiction to tax due to insufficient business activity by the taxpayer in that state, and (2) receipts that are not taxed because a state has chosen not to have an income or similar business activity tax, so the degree of business activity by the taxpayer in that state is irrelevant to the imposition or not of such a tax.

A court is duty-bound to give to a statute a construction that will support its constitutionality. We find that the Throw-Out Rule may operate constitutionally, under a fair apportionment analysis, when applied to untaxed receipts from those states that lack jurisdiction to tax the corporate taxpayer due to the insufficient business activity in that state, but not when applied to receipts that are untaxed due to a state’s determination not to have an income or similar business activity tax. We therefore construe the Throw-Out Rule so as to limit the receipts that may be thrown out to untaxed receipts from those states that lack jurisdiction to tax due to the insufficient business activity by the taxpayer in that state. Based on the limiting construction that we give to the statute, we conclude that the Throw-Out Rule is facially constitutional when implemented in such fashion for corporate taxpayers whose activities have a substantial nexus to New Jersey. Accordingly, we affirm, as modified, the judgment of the Appellate Division.

I.

Fundamental constitutional principles limit a state’s ability to tax out-of-state entities. Reduced to its most straightforward formulation, a state simply cannot “‘tax value [that is] earned outside its borders.’” Container Corp., supra, 463 U.S. at 164, 103 S. Ct. at 2939, 77 L. Ed. 2d at 552 (“Under both the Due Process and the Commerce Clauses of the Constitution, a State may not, when imposing an income-based tax, ‘tax value earned outside its borders.’” (quoting ASARCO Inc. v. Idaho State Tax Comm’n, 458 U.S. 307, 315, 102 S. Ct. 3103, 3108, 73 L. Ed.2d 787, 794 (1982))). Because many major corporations have operations “in more than one State, [] arriving at precise territorial allocations of ‘value’ is often an elusive goal, both in theory and in practice.” Ibid.

One method of deriving local taxable income is through the utilization of a formula apportionment method, which apportions a corporation’s income “between the taxing jurisdiction and the rest of the world on the basis of a formula taking into account objective measures of the corporation’s activities within and without the jurisdiction.” Id. at 165, 103 S. Ct. at 2940, 77 L. Ed. 2d at 553. Subject to some constraints, the United States Supreme Court has ruled it permissible, under Due Process and Commerce Clause considerations, to use a formula apportionment method to derive local taxable income for multi-state corporations. See id. at 182, 103 S. Ct. at 2949, 77 L. Ed. 2d at 564. New Jersey’s corporate business tax scheme follows that general approach. Accordingly, a full explanation of that scheme at the outset will provide necessary context for analysis of the issues this case presents.

A.

New Jersey’s CBT requires every domestic or foreign corporation to

pay an annual franchise tax . . . for the privilege of having or exercising its corporate franchise in this State, or for the privilege of deriving receipts from sources within this State, or for the privilege of engaging in contacts within this State, or for the privilege of doing business, employing or owning capital or property, or maintaining an office, in this State.

[N.J.S.A. 54:10A-2.]

The tax is assessed based on a corporation’s entire net worth and entire net income. N.J.S.A. 54:10A-5. For taxpayers with regular places of business outside of New Jersey, the portion of entire net worth and entire net income that is subject to New Jersey tax is “determined by multiplying such entire net worth and entire net income, respectively, by an allocation factor which is the property fraction, plus twice the sales fraction plus the payroll fraction and the denominator of which is four[.]”2 N.J.S.A. 54:10A-6. The property fraction is determined by dividing the average value of the taxpayer’s property in New Jersey by the average value of the taxpayer’s property everywhere. N.J.S.A. 54:10A-6(A). Similarly, the payroll fraction is determined by dividing the taxpayer’s New Jersey payroll by total payroll. N.J.S.A. 54:10A-6(C).

Without the Throw-Out Rule, the sales fraction is calculated by dividing the taxpayer’s New Jersey receipts by total receipts. N.J.S.A. 54:10A-6(B). Receipts from sales, services, rents, royalties, and other business receipts in New Jersey are “divided by the total amount of the taxpayer’s receipts, similarly computed, arising during such period from all sales of its tangible personal property, services, rentals, royalties and all other business receipts, whether within or without the State.”3 N.J.S.A. 54:10A-6(B). The Throw-Out Rule modifies the sales fraction by excluding receipts assigned to jurisdictions in which the taxpayer is not subject to income or similar business activity taxes4 from the denominator of the sales fraction. The Business Tax Reform Act of 2002 amended the CBT to include the Throw-Out Rule by adding the following to the final paragraph of N.J.S.A. 54:10A-6(B):

provided however, that if receipts would be assigned to a state, a possession or territory of the United States or the District of Columbia or to any foreign country in which the taxpayer is not subject to a tax on or measured by profits or income, or business presence or business activity, then the receipts shall be excluded from the denominator of the sales fraction.

[L. 2002, c. 40, § 8, repealed by L. 2008, c. 120, § 2; but see L. 2002, c. 40, § 6, repealed by L. 2008, c. 120, § 1 (limiting tax liability caused by exclusion of receipts for certain taxpayers).]

The sponsor’s statements indicated that the purpose of the Throw-Out Rule was to counteract tax evasion by closing tax loopholes:

Tax loopholes allow multi-state corporations to transfer their profits to related out-of-State and offshore companies. Many of these companies use these loopholes to reduce their net income to little or nothing, thus avoiding [] New Jersey taxation.

The corporation business tax does not reach some out-of-state companies that do business here. Instead, these companies are able to take advantage of the state’s lucrative market, extensive infrastructure, and geographic prominence, while paying no corporate taxes to New Jersey.

[A. 2501 (Sponsors’ Statement), 210th Leg. (N.J. June 6, 2002); S. 1556 (Sponsor’s Statement), 210th Leg. (N.J. May 30, 2002).]

In describing the specific need for the Throw-Out Rule, both the Assembly Budget Committee and the Senate Budget and Appropriations Committee gave the same explanation:

The more goods that are shipped out of New Jersey, the lower [the sales] factor is. Some of those sales are made in states where the corporation is not subject to tax because the corporation has no operations in those states. These sales are typically referred to as “nowhere sales” because they result in income being assigned so that it is taxed nowhere. The bill closes this loophole by “throwing out” the “nowhere sales” from the denominator of the sales fraction, which causes more of the income of the corporation to be assigned to states where the corporation actually has operations.

[A. Budget Comm., Statement to A., No. 2501 (June 27, 2002); see S. Budget & Appropriations. Comm., Statement to S., No. 1556 (June 27, 2002).]5

With the enactment of the Throw-Out Rule, the sales fraction was transformed; formerly a ratio of New Jersey receipts to total receipts, it became a ratio of New Jersey receipts to taxed receipts. When a receipt is thrown-out, the sales fraction always increases, causing the apportionment formula and the resultant CBT liability to increase.

If the apportionment formula leads to an allocation that “does not properly reflect the activity, business, receipts, capital, entire net worth or entire net income of a taxpayer reasonably attributable to the State,” the Director may adjust the allocation factor by a variety of means, such as excluding or including other factors and assets. N.J.S.A. 54:10A-8. Notably, N.J.S.A. 54:10A-8 (“Section 8 Relief”) authorizes the Director to exercise discretion to adjust a taxpayer’s apportionment formula.

In sum, New Jersey employs a three-factor apportionment formula that weighs a multi-state corporate taxpayer’s property, payroll and sales. For purposes of this facial challenge, our focus is on the Throw-Out Rule’s effect on the “sales factor.” We turn next to the intersection of that Rule with appellant’s tax assessment.

B.

Whirlpool is a corporation that is both incorporated under the laws of and is located in the State of Michigan; it has no physical presence in New Jersey, and it conducts all of its activities outside of New Jersey. The company owns and manages brand names that it licenses to its parent, Whirlpool Corporation (a New Jersey taxpayer), as well as to other affiliates and third parties. Whirlpool earns its income based on the number of goods bearing its brand that are produced by licensee plants, none of which are located in New Jersey. Whirlpool did not file any tax returns in New Jersey and did not pay CBT from 1996 to 2003. During that time Whirlpool’s parent did not deduct the royalties that it paid to Whirlpool when reporting to New Jersey for New Jersey tax purposes.

The Director of the Division of Taxation issued Whirlpool an assessment after calculating its allocable income based on information gleaned from Whirlpool’s related entities. Using the Throw-Out Rule, the Division allocated to New Jersey 29.2572 percent and 41.8647 percent of Whirlpool’s 2002 and 2003 income, respectively. By comparison, before the Throw-Out Rule came into application, the portion of Whirlpool’s income that was allocated to New Jersey for tax years 1996 through 2001 ranged between .9546 percent and 1.3337 percent.

Whirlpool, and three other companies that have since settled,6 brought actions in the Tax Court appealing their tax assessments and challenging the constitutionality of the Throw-Out Rule. When each plaintiff and the Division filed cross-motions for summary judgment on the issue of the facial constitutionality of the Throw-Out Rule, the Tax Court consolidated the matters to dispose of the common issue.

The Tax Court determined first that the proper standard for a facial challenge to a tax statute’s constitutionality is the one established in United States v. Salerno, which upholds a statute if it can be shown to operate constitutionally in some, even if not all or most, instances. Pfizer Inc. v. Dir., Div. of Taxation, 24 N.J. Tax 116, 123-24 (Tax 2008) (citing United States v. Salerno, 481 U.S. 739, 107 S. Ct. 2095, 95 L. Ed.2d 697 (1987); Gen. Motors Corp. v. City of Linden, 150 N.J. 522, 532 (1997)). The Tax Court then turned to the Throw-Out Rule’s viability under the four-pronged Complete Auto test. Id. at 125-26 (citing Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 1079, 51 L. Ed.2d 326, 331 (1977)). Based on the parties’ emphasis in argument, the court’s analysis predominantly focused on whether the tax is fairly apportioned and fairly related to the services provided by the taxing state. Id. at 128 n.5.

In the end, the Tax Court found three general circumstances where the Throw-Out Rule operates constitutionally, satisfying the Salerno standard:

(1) where the income being excluded from the denominator of the sales fraction is generated in whole or in part by activities in New Jersey, (2) where the application of the Throw[-O]ut Rule has no material effect on the sales fraction because the income generated in the nontaxing state is insignificant in relation to the total income of the corporation, and (3) where the property and payroll fractions substantially temper the impact of the sales fraction on the allocation factor (even though the sales fraction is double-weighted under N.J.S.A. 54:10A-6).

[Id. at 132.]

The Tax Court further noted that the Director’s obligation to provide Section 8 Relief, when necessary to ensure fair allocation of income under the Due Process and Commerce Clauses, “in itself provides a basis for sustaining the facial constitutionality of a statute that might, under certain circumstances, result in an unfair apportionment of income to this State.”7 Id. at 138.

Whirlpool filed a motion for leave to appeal, which the Appellate Division denied; however, we granted leave to appeal and remanded the matter to the Appellate Division for its consideration of the merits. Whirlpool Props., Inc. v. Dir., Div. of Taxation, 196 N.J. 591 (2008). On remand, the Appellate Division affirmed, holding that the Throw-Out Rule is facially constitutional. Whirlpool Props., Inc. v. Dir., Div. of Taxation, 25 N.J. Tax 519, 524 (App. Div. 2010).

The panel agreed that the Salerno standard applied in this facial challenge to the tax statute. Id. at 528. It then addressed the alleged facial due process violation, observing that apportionment formulas “need not avoid every possibility” of taxing extraterritorial income, but “need only avoid attributing income to the taxing state ‘out of all appropriate proportion to the business transacted by the appellant in that state.’” Id. at 531 (quoting Hans Rees’ Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123, 135, 51 S. Ct. 385, 389, 75 L. Ed. 879, 908 (1931)). The panel was unable to identify an example of an allocation formula struck down as facially unconstitutional, “much less authority to indicate the exact percentage of disproportion that would have to be the likely result in at least the majority of cases” for such a finding. Id. at 531-32. Rather, it observed that the “variation among businesses in organization . . . inhibits the prospect of actually demonstrating that a given formula will yield allocations for most out-of-state taxpayers that are unconstitutionally disproportionate.” Id. at 532. The panel explained that Whirlpool did not contest that it “had a nexus with New Jersey that was independent of [its] unitary business, and [did] not contest that [its] sales to non-taxing states were part of that business.” Ibid. The panel concluded that “[t]hose were the only conditions needed for New Jersey to have a constitutionally sufficient nexus to those sales.” Ibid.

With respect to the Commerce Clause claims, the Appellate Division addressed whether the Throw-Out Rule discriminated against interstate commerce. Applying established principles, the Appellate Division concluded that the Throw-Out Rule

does not expose any income to multiple taxation . . . and it does not tax in-state and out-of-state sales in a discriminatory manner. Thus, although the [Throw-Out] Rule might reduce or eliminate the relative financial benefit to the taxpayer of sales in non-taxing states compared to sales in taxing states, it does not make them less remunerative. It avoids the “forbidden impact on interstate commerce” of “pressuring” out-of-state corporations to increase their business activity here at the expense of activity elsewhere.

. . . The only constraint in devising a tax system is that “no State may discriminatorily tax the products manufactured or the business operations performed in any other State[.]” The Throw[-O]ut Rule does not facially do so.

[Id. at 534-35 (citations omitted).]

We granted leave to appeal to Whirlpool on October 21, 2010. Whirlpool Props., Inc. v. Dir., Div. of Taxation, 204 N.J. 35 (2010).8

II.

Whirlpool’s appeal takes issue with application of the Salerno standard for determining a statute’s facial constitutionality. It argues that City of Chicago v. Morales disapproved of Salerno’s generous formulation of the standard for facial constitutionality. 527 U.S. 41, 55 n.22, 119 S. Ct. 1849, 1858, 144 L. Ed.2d 67, 79-80 (1999). Indeed, Whirlpool asserts that if the Salerno standard is applicable to tax discrimination cases, a tax statute could never be found to be facially unconstitutional because a discriminatory tax always applies constitutionally to the favored local interest. Further, Whirlpool asserts that the Supreme Court has sustained facial discrimination challenges in tax cases even where the statute was not unconstitutional in all circumstances, citing Fulton Corp. v. Faulkner, 516 U.S. 325, 346, 116 S. Ct. 848, 861, 133 L. Ed.2d 796, 814 (1996), and Kraft General Foods, Inc. v. Iowa Department of Revenue & Finance, 505 U.S. 71, 82, 112 S. Ct. 2365, 2372, 120 L. Ed.2d 59, 69 (1992).

Whirlpool views the Throw-Out Rule as systematically subjecting commerce in states without income tax to a higher burden than commerce in taxing states and, thus, contends that the Throw-Out Rule does not treat the “similarly-situated” similarly. And, it claims that the Throw-Out Rule results in tax that is not fairly apportioned. According to Whirlpool, the Rule causes not merely imprecise taxation; rather, the Throw-Out Rule precisely expands the sales fraction to attribute to New Jersey any transaction that takes place outside of New Jersey that is not taxed by another jurisdiction for any reason. Whirlpool also asserts that there is no nexus between the thrown-out transactions and New Jersey.

The Director, on the other hand, argues that New Jersey already has adopted the Salerno standard for facial challenges to a statute’s constitutionality, citing Linden, supra, 150 N.J. at 532. He additionally contends that Salerno has not been overruled by City of Chicago, supra, 527 U.S. 41, 119 S. Ct. 1849, 144 L. Ed.2d 67, or diminished by Kraft, supra, 505 U.S. 71, 112 S. Ct. 2365, 120 L. Ed.2d 59. Thus, he argues that Salerno and Linden remain good law and provide the correct constitutional standard for reviewing a tax statute.

According to the Director, apportionment formulas are facially valid from a due process perspective as long as the taxing state has a nexus with the taxpayer and the activity being taxed. He points out that apportionment formulas, including those very different from the benchmark three-factor formula of averaging property, payroll, and sales, have been found to meet constitutional requirements. Trinova Corp. v. Mich. Dep’t of Treasury, 498 U.S. 358, 111 S. Ct. 818, 112 L. Ed.2d 884 (1991). In a facial challenge, the Director emphasizes that a plaintiff must show that a tax is “out of all appropriate proportion to the business transacted” in the State or leads “to a grossly distorted result.” Container Corp., supra, 463 U.S. at 170, 103 S. Ct. at 2942, 77 L. Ed. 2d at 556; see Hans Rees’, supra, 283 U.S. 123, 51 S. Ct. 385, 75 L. Ed. 879. “Insignificant” variations and imprecision in apportionment of income are acceptable, according to the Director, because merely showing that a formula “may result in taxation of some income that did not have its source in the taxing state” is insufficient to facially invalidate a statute on constitutional grounds. See Container Corp., supra, 463 U.S. at 169-70, 103 S. Ct. at 2942, 77 L. Ed. 2d at 556.

Against such standards, the Director argues that the Throw-Out Rule meets Due Process and Commerce Clause dictates. He contends that the Throw-Out Rule fairly and rationally includes a fractional share of the untaxed profit that multi-state corporations enjoy in New Jersey from “nowhere” income. The Director asserts that the Rule is not discriminatory in nature, and Whirlpool has failed to provide any factual support to show otherwise in this facial challenge. He urges, moreover, that the Rule does not subject sales outside the State to greater taxation than sales within the state, nor does it result in subjecting income to multiple taxation. He further claims that, because the Throw-Out Rule provides for Section 8 and other relief, the Rule does not automatically result in increased CBT liability for multi-state corporate taxpayers.

III.

A.

New Jersey is not unique in using a formula apportionment method of taxing multi-state corporations; many states follow a similar approach. See id. at 162-63, 103 S. Ct. at 2939, 77 L. Ed. 2d at 551 (recognizing use of methodology). The practice has a long history. See, e.g., Butler Bros. v. McColgan, 315 U.S. 501, 62 S. Ct. 701, 86 L. Ed. 991 (1942); Erie Ry. Co. v. Pennsylvania, 88 U.S. (21 Wall.) 492, 22 L. Ed. 595 (1875). Under this method, the receipts, property, and income of a “unitary business,” both in-state and out-of-state, are included in the tax base and then multiplied by a state’s apportionment formula to determine what portion of the tax base the state may tax. In other words, this method

calculates the local tax base by first defining the scope of the “unitary business” of which the taxed enterprise’s activities in the taxing jurisdiction form one part, and then apportioning the total income of that “unitary business” between the taxing jurisdiction and the rest of the world on the basis of a formula taking into account objective measures of the corporation’s activities within and without the jurisdiction.

[Container Corp., supra, 463 U.S. at 165, 103 S. Ct. at 2940, 77 L. Ed. 2d at 553.]

In sum, a taxing state using the apportionment formula method need not show a specific connection with any particular income-generating activity. The link is supplied by a state’s connection to the unitary business operations as a whole and, thus, the state may tax its proportionate share of the taxpayer’s entire income.

The constitutionality of the formula apportionment method is well established. Id. at 165, 103 S. Ct. at 2940, 77 L. Ed. 2d at 553. Further, as the Supreme Court’s “Commerce Clause analysis of apportionment formulas has made clear, the inclusion of income in the pre-apportioned tax base of a state apportionment formula does not amount to extra territorial taxation.” Shell Oil Co. v. Iowa Dep’t of Revenue, 488 U.S. 19, 30-31, 109 S. Ct. 278, 284, 102 L. Ed.2d 186, 199. It is the apportioned fraction of total income that is taxed, not any particular source of income in the tax base. Ibid. The Court has acknowledged limitations inherent in the use of a formula apportionment method. See Container Corp., supra, 463 U.S. at 192, 103 S. Ct. at 2954, 77 L. Ed. 2d at 570 (describing allocation of income among jurisdictions as akin to “slicing a shadow”). The method, “unlike separate accounting, does not purport to identify the precise geographical source of a corporation’s profits; rather, it is employed as a rough approximation of a corporation’s income that is reasonably related to the activities conducted within the taxing State.” Moorman Mfg. Co. v. Bair, 437 U.S. 267, 273, 98 S. Ct. 2340, 2344, 57 L. Ed.2d 197, 204 (1978). Nonetheless, this “rough approximation” is constitutionally satisfactory.

The Supreme Court has approved a variety of apportionment formula types. See Container Corp., supra, 463 U.S. at 164, 103 S. Ct. at 2939, 77 L. Ed. 2d at 552; see, e.g., Trinova Corp., supra, 498 U.S. 358, 111 S. Ct. 818, 112 L. Ed.2d 884 (approving three-factor test); Moorman, supra, 437 U.S. 267, 98 S. Ct. 2340, 57 L. Ed.2d 197 (approving single-factor test). The most prevalent type is the three-factor formula that averages property, payroll, and sales factors and is described as “something of a benchmark against which other apportionment formulas are judged.” Container Corp., supra, 463 U.S. at 170, 103 S. Ct. at 2943, 77 L. Ed. 2d at 556 (citations omitted). “The standard three-factor formula can be justified as a rough, practical approximation of the distribution of either a corporation’s sources of income or the social costs which it generates.” Gen. Motors Corp. v. District of Columbia, 380 U.S. 553, 561, 85 S. Ct. 1156, 1161, 14 L. Ed.2d 68, 73 (1965). Since no specific apportionment formula is required and formulas diverging from the three-factor formula have been sanctioned, states have some leeway when crafting apportionment formulas.

“The Constitution does not ‘invalidat[e] an apportionment formula whenever it may result in taxation of some income that did not have its source in the taxing State[.]’” Container Corp., supra, 463 U.S. at 169-70, 103 S. Ct. at 2942, 77 L. Ed. 2d at 556 (citations omitted) (emphasis in original). Indeed, the Supreme Court has never held an apportionment formula unconstitutional on its face. See Jerome Hellerstein & Walter Hellerstein, State Taxation, ¶ 8.12[1] (3d ed. 2008). The main restriction is that the “factor or factors used in the apportionment formula must actually reflect a reasonable sense of how income is generated.” Container Corp., supra, 463 U.S. at 169, 103 S. Ct. at 2942, 77 L. Ed. 2d at 556.

Complete Auto marked a modernization in tax jurisprudence, shedding past formalisms and establishing a new four-part test to analyze apportionment formulas for constitutional infirmities. See D.H. Holmes Co., Ltd. v. McNamara, 486 U.S. 24, 30, 108 S. Ct. 1619, 1623, 100 L. Ed.2d 21, 27 (1988) (explaining that “Complete Auto abandoned the abstract notion that interstate commerce ‘itself’ cannot be taxed by the States”). While the Complete Auto test originally addressed Commerce Clause concerns, it has been interpreted to also encompass Due Process requirements. Trinova Corp., supra, 498 U.S. at 373, 111 S. Ct. at 828, 112 L. Ed. 2d at 904 (citations omitted). The test will sustain a state tax using a formula apportionment method “[(1)] when the tax is applied to an activity with a substantial nexus with the taxing State, [(2)] is fairly apportioned, [(3)] does not discriminate against interstate commerce, and [(4)] is fairly related to the services provided by the State.” Complete Auto, supra, 430 U.S. at 279, 97 S. Ct. at 1079, 51 L. Ed. 2d at 331.

B.

Turning to the first prong of the test, the substantial nexus showing reflects the Due Process and Commerce Clause requirement that “a State may not, when imposing an income-based tax, ‘tax value earned outside its borders.’” Container Corp., supra, 463 U.S. at 164, 103 S. Ct. at 2939, 77 L. Ed. 2d. at 552 (quoting ASARCO, supra, 458 U.S. at 315, 102 S. Ct. at 3108, 73 L. Ed. 2d at 796). Rather, “there [must] be some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.” Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 777, 112 S. Ct. 2251, 2258, 119 L. Ed.2d 533, 545 (1992) (quoting Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-45, 74 S. Ct. 535, 539, 98 L. Ed. 744, 748 (1954)) (internal quotation marks omitted).

The requisite “nexus” is supplied if the corporation avails itself of the “substantial privilege of carrying on business” within the State; and “[t]he fact that a tax is contingent upon events brought to pass without a state does not destroy the nexus between such a tax and transactions within a state for which the tax is an exaction.”

[Mobil Oil Corp. v. Comm’r of Taxes, 445 U.S. 425, 437, 100 S. Ct. 1223, 1231, 63 L. Ed.2d 510, 520-21 (1980) (alteration in original) (quoting Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444-45, 61 S. Ct. 246, 250, 85 L. Ed. 267, 271 (1940)).]

Although Due Process and Commerce Clause concerns overlap, their requirements are not perfectly co-extensive. “A tax may be consistent with due process and yet unduly burden interstate commerce.” Quill Corp. v. North Dakota, 504 U.S. 298, 313 n.7, 112 S. Ct. 1904, 1914, 119 L. Ed.2d 91, 107 (1992) (citations omitted). Thus, the nexus required for Due Process is merely the purposeful direction of activities to the state, whereas the Commerce Clause requires more of a connection. A state cannot “tax a purported ‘unitary business’ unless at least some part of it is conducted in the State.” Container Corp., supra, 463 U.S. at 166, 103 S. Ct. at 2940, 77 L. Ed. 2d at 553 (citations omitted).

With regard to the second prong, there are two requirements to fair apportionment: internal consistency and external consistency. Container Corp., supra, 463 U.S. at 169, 103 S. Ct. at 2942, 77 L. Ed. 2d at 556. An apportionment formula is internally consistent when, “if applied by every jurisdiction, it would result in no more than all of the unitary business’ income being taxed.” Ibid. This component “looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate.” Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 185, 115 S. Ct. 1331, 1338, 131 L. Ed.2d 261, 271-72 (1995). The internal consistency analysis examines the hypothetical functioning of a tax formula, not its real world effects on a taxpayer. See, e.g., Moorman, supra, 437 U.S. at 278-79, 98 S. Ct. at 2347, 57 L. Ed. 2d at 208 (approving single-factor apportionment test notwithstanding risk of actual double taxation because most other states were using three-factor tests).

External consistency, the “second and more difficult requirement,” Container Corp., supra, 463 U.S. at 169, 103 S. Ct. at 2942, 77 L. Ed. 2d at 556, is satisfied only if “the factor or factors used in the apportionment formula [] actually reflect a reasonable sense of how income is generated.” Ibid. External consistency looks “to the economic justification for the State’s claim upon the value taxed, to discover whether a State’s tax reaches beyond that portion of value that is fairly attributable to economic activity within the taxing State.” Jefferson Lines, supra, 514 U.S. at 185, 115 S. Ct. at 1338, 131 L. Ed. 2d at 272. Stated simply, the question is whether the state’s tax law reasonably reflects the activity within its jurisdiction. The external consistency test requires a “practical inquiry” into the inter-state activity taxed in relation to the activity in the taxing jurisdiction. Goldberg v. Sweet, 488 U.S. 252, 264-65, 109 S. Ct. 582, 590-91, 102 L. Ed.2d 607, 618-19 (1989).

The discrimination prong of the test addresses the basic dormant Commerce Clause proscription against states using taxes to promote in-state businesses at the expense of out-of-state businesses. “[T]he Commerce Clause prohibits a State from imposing a heavier tax burden on out-of-state businesses that compete in an interstate market than it imposes on its own residents who also engage in commerce among States.” Am. Trucking Ass’ns, Inc. v. Scheiner, 483 U.S. 266, 282, 107 S. Ct. 2829, 2839, 97 L. Ed.2d 226, 242 (1987); see also Fulton, supra, 516 U.S. at 330, 116 S. Ct. at 853, 133 L. Ed. 2d at 804 (“In its negative aspect, the Commerce Clause ‘prohibits economic protectionism.’” (citation omitted)); Pennsylvania v. West Virginia, 262 U.S. 553, 596, 43 S. Ct. 658, 665, 67 L. Ed. 1117, 1132 (1923) (The “power to lay and collect taxes . . . cannot be exerted in a way which involves a discrimination against [interstate] commerce.”).

The discrimination analysis first distinguishes between facially discriminatory taxes and those that have discriminatory effects or purpose. Facially discriminatory state taxes explicitly put greater burdens on out-of-state businesses or provide more favorable terms to in-state businesses. For example, subsidies or tax breaks only available to in-state businesses facially discriminate and such “[s]tate laws discriminating against interstate commerce on their face are ‘virtually per se invalid.’” Fulton, supra, 516 U.S. at 331, 116 S. Ct. at 854, 133 L. Ed. 2d at 805 (quoting Or. Waste Sys., Inc. v. Dep’t of Envtl. Quality of Or., 511 U.S. 93, 99, 114 S. Ct. 1345, 1350, 128 L. Ed.2d 13, 21 (1994), and citing City of Philadelphia v. New Jersey, 437 U.S. 617, 624, 98 S. Ct. 2531, 2535, 57 L. Ed.2d 475, 481 (1978)).

The analysis is more nuanced when a tax does not facially discriminate against out-of-state interests but nonetheless disparately impacts interstate commerce. Even a neutral law can be discriminatory if it is made with a “discriminatory purpose or discriminatory effect.” Bacchus Imps., Ltd. v. Dias, 468 U.S. 263, 270-71, 104 S. Ct. 3049, 3054-55, 82 L. Ed.2d 200, 208-09 (1984) (citations omitted) (finding neutral tax exemption for fruit wines discriminatory because motivated by intent to benefit local pineapple wine industry). Unlike fair apportionment analysis, which tolerates imperfect approximation short of “grossly distorted” results, there is no de minimus exception for discrimination and claims of discrimination need not be accompanied by specific factual proofs. Id. at 269, 104 S. Ct. at 3054, 82 L. Ed. 2d at 208 (“It is well settled that ‘[w]e need not know how unequal the Tax is before concluding that it unconstitutionally discriminates.’” (alteration in original) (citation omitted)). That said, when a “statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental,” the balancing test in Pike v. Bruce Church, Inc. applies. 397 U.S. 137, 142, 90 S. Ct. 844, 847, 25 L. Ed.2d 174, 178 (1970).

Finally, the fourth prong, fair relation, examines whether the taxpayer received benefits from the taxing state. The fair relation prong “imposes the additional limitation that the measure of the tax must be reasonably related to the extent of the contact[.]" Commonwealth Edison Co. v. Montana, 453 U.S. 609, 626, 101 S. Ct. 2946, 2958, 69 L. Ed.2d 884, 900 (1981) (citations omitted). Although this language may suggest a proportionality requirement between the benefits provided and the tax paid, see id. at 651-52, 101 S. Ct. at 2971, 69 L. Ed. 2d at 916 (Blackmun, J., dissenting), that is not the case for general revenue taxes like net income taxes. “The only benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purposes.” Id. at 623, 101 S. Ct. at 2956, 69 L. Ed. 2d at 897-98 (citation omitted); D.H. Holmes, supra, 486 U.S. at 32, 108 S. Ct. at 1624, 100 L. Ed. 2d at 28.

IV.

A.

In applying the four-pronged Complete Auto test to this matter, certain parts of the test are of little consequence, and receive only the following brief analysis.

This is a facial challenge to the Throw-Out Rule. The substantial nexus prong is not pertinent because it goes to whether it is fair for a state to tax a taxpayer. The state could not constitutionally tax a taxpayer who did not have sufficient contacts with the state regardless of the Throw-Out Rule. The Throw-Out Rule only affects the apportionment of the tax base and thus, the substantial nexus prong is not implicated in a challenge to the Throw-Out Rule. Further, income that is so separate from a taxpayer’s activity in New Jersey that New Jersey could not constitutionally tax it would not be part of the taxpayer’s unitary business and would not be in the tax base regardless of the Throw-Out Rule. See, e.g., Allied-Signal, supra, 504 U.S. 768, 112 S. Ct. 2251, 119 L. Ed.2d 533 (holding state could not tax sale of stock that was unrelated to unitary business). Thus we need not give the substantial nexus prong further attention.9

Similarly, the facial constitutionality of the Throw-Out Rule does not hinge on the fair relation prong. For a general revenue tax, the fair relation prong requires only that a taxpayer has been accorded the general benefits of civilized society. Any more ext