Tax Changes Funding New Jersey's New 2019 Budget

This past weekend, Governor Phil Murphy and the New Jersey legislature avoided a government shutdown by agreeing to a $37.4 billion compromise budget deal encompassing multiple Assembly bills, which included significant changes to New Jersey’s business taxes. In addition to the changes described below, the deal imposes a “millionaire’s tax” on individuals, estates, and trusts earning $5 million or more by increasing the top marginal Gross Income Tax (“GIT”) rate from 8.97% to 10.75%. The new tax laws also increase the maximum allowable property tax deduction from $10,000 to $15,000, and introduce new taxes such as an “Uber” tax on ride services and an “Air BNB” tax on transient accomodation rentals. The budget deal also provides for a 90-day state tax amnesty program for returns due on or after February 1, 2009 and prior to September 1, 2017.

Business Tax Highlights

• • Assembly bill A-4202 imposes a new surtax under the Corporate Business Tax (“CBT”). Business taxpayers with NJ allocated income in excess of $1 million will be liable for a 2.5% surtax (on top of the current 9% rate) for tax years beginning on or after January 1, 2018 through December 31, 2019, with the surtax reduced to 1.5% for the following two years. The surtax is intended to sunset after four years.

• • The pass-through business income deduction introduced this year as part of federal tax reform (new IRC Section 199A) will be unavailable for CBT or GIT purposes.

• • The bill also decouples New Jersey from certain other 2017 changes to the Internal Revenue Code, including the deduction for repatriated income under IRC Section 965 and any potential elimination of the research and development credit.

• • The bill imposes tax on certain previously excluded intercompany dividends by modifying the dividends-received deduction (“DRD”). For tax years beginning on or after January 1, 2017, this modified dividend exclusion is included in the computation of net operating losses (“NOLs”).

• • The new interest deduction limitation under IRC Section 163(j) will be applied by New Jersey on a pro-rata basis to interest paid to both related and unrelated parties.

• • Effective for tax years beginning on and after January 1, 2019, for CBT apportionment purposes, sales of services will be sourced to New Jersey if, or to the extent that, the benefit of the service is received at a location in New Jersey, subject to certain additional rules.

• • The law expands the 3% Meadowlands regional hotel use assessment to all hotels in the 14 constituent municipalities that participate in the Meadowlands revenue sharing program.

• Mandatory unitary combined reporting under the CBT is now required, effective for tax years beginning on or after January 1, 2019.
  • • Combined reporting applies to groups of companies with common ownership (more than 50 percent voting control, determined by applying the attribution rules of IRC Section 318) that are engaged in a unitary business when one company is subject to tax in New Jersey.
  • • Under the new combined reporting rules, a converted prior NOL may only be used by the entity which generated it. By contrast, there is no similar limitation on the use of tax credits within a combined group.
  • • S corporations may elect out of combined group reporting.
  • Reflecting the intense debates surrounding these rules, the legislature has stated that the combined reporting rules may be subject to corrective legislation later this summer.

Remote Sales Tax Proposal

• • While the final legislation removed a proposed increase in the sales tax rate (which remains at 6.625%), in light of the recent Supreme Court ruling in Wayfair v. South Dakota (states may charge tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state), the legislature passed bill A-4261.

• • The bill enacts the same standard as South Dakota for establishing sales tax nexus: $100,000 in taxable sales or 200 or more distinct transactions, effective October 1, 2018.

• • The bill also places sales tax collection and reporting requirements on “marketplace facilitators,” defined as any business that: (i) provides a forum to a retailer to advertise, promote and list the retailer’s products, and (ii) collects receipts from the customer and remits payment to the retailer.

• The Governor is expected to quickly sign A-4261 into law, which will broaden the state’s sales tax base.

If you have questions with how any of these provisions will impact you or your business, do not hesitate to contact Peter J. Ulrich or Todd M. Kellert directly.