I'm a bit confused by your statements.  First, you said "losses are not being applied on the state.". You now say "carryover is noted on the NJ BUS-2 form but tax is computed on the gain less the carry over."

Based on your last response, it does sound like it's flowing through to NJ.  Can you be more specific about the amounts, what you expected, and what you see?

As you may be aware, NJ taxes gross income and limits losses for different categories of income.