Lorillard Tobacco Company v. Marita R. Sciarrotta, Director of the New Jersey Division of Taxation

This Court has struck down state taxing schemes that amount to economic protectionism, incentivizing in-state activities and burdening out-of-state activities, as violative of the Commerce Clause of the United States Constitution. See, e.g., Oregon Waste Systems, Inc. v. Department of Environmental Quality, 511 U.S. 93 (1994), Fulton Corp. v. Faulkner, 516 U.S. 325 (1996), and Comptroller of the Treasury of Maryland v. Wynne, 575 U.S. 542 (2015). This Court has likewise struck down a state taxing scheme that indirectly taxes out-of-state income or transactions lacking a sufficient connection or nexus with the taxing state as violative of the Due Process Clause of the Fourteenth Amendment. See, e.g., Hunt-Wesson, Inc. v. Franchise Tax Board, 528 U.S. 458 (2000). Under New Jersey’s corporate business tax, a royalty payor was disallowed otherwise deductible royalty expenses paid to a related party, with the amount of the disallowance determined by the extent of the related party royalty recipient’s New Jersey activity. The more New Jersey activity conducted by the related party royalty recipient, the lower the tax burden on the royalty payor; conversely, the less New Jersey activity by the related party royalty recipient, the higher the tax burden on the royalty payor. The New Jersey courts upheld this scheme. The Questions presented are: (1) Whether New Jersey’s scheme for taxing royalty payments, that conditions the deductibility of related-party royalty payments on the extent of