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On Sunday evening, lawmakers approved a series of tax increases, many of which will impact businesses, to fund the FY 2019 NJ budget ($37.4 billion) that was signed into law. Most notably, the budget deal comes with an increase in the corporate business tax, the inclusion of combined reporting and an increase in the income tax rate for those making more than $5 million per year.
NJBIA remained strongly opposed to increasing those taxes, as they limit New Jersey’s affordability and competitiveness for business. Our Government Affairs team spent the weekend in Trenton speaking with legislators to communicate the impact of these proposals on NJBIA’s membership.
Below, I have included a recap of these provisions, as well as a number of other issues which await further action by the Governor.
Legislation Approved by the Governor – The following bills were conditionally vetoed by Governor Murphy and signed into law after the Legislature concurred with the Governor’s recommendations:
Corporation Business Tax (CBT) Changes – A-4202
The new law makes a number of changes to the way in which New Jersey taxes corporations. It includes a four-year CBT surtax on taxpayers with New Jersey allocated income that exceeds $1 million. For tax years beginning on or after January 1, 2018 through December 31, 2019, the surtax is 2.5 percent. For tax years beginning on or after January 1, 2020 through December 31, 2021, the surtax is 1.5 percent.
The law also institutes combined reporting for groups of companies with common ownership that are engaged in a unitary business where one company is subject to tax in New Jersey. Additionally, the new law includes market-based sourcing, which requires services to be sourced to the location in which the service is received. Both of these provisions are effective for tax years beginning on or after January 1, 2019.
While a previous version of the bill included a special dividend tax and surcharge on repatriated income, these provisions were not included in the final bill. However, the dividends-received deduction (DRD) is changed for tax years beginning after December 31, 2016 by reducing the amount of the exclusion from 100 percent to 95 percent for 80 percent-owned subsidiaries.
Additionally, the law includes a number of provisions related to the taxation of dividends, the decoupling of certain provisions from the Internal Revenue Code and changes associated with federal tax reform.
Gross Income Tax (GIT) Changes – A-3088
Under A-3088, New Jersey establishes a multimillionaires tax with a new top income tax bracket of 10.75 percent for income over $5 million.
The new law taxes investment management services, or what has been previously referred to as an imposition of a carried interest fairness fee. However, the carried interest fee does not go into effect until Connecticut, Massachusetts, and New York enact similar legislation.
Additionally, the law contains an increase in the state’s income-tax deduction for property taxes from $10,000 to $15,000, an increase of the Earned Income Tax Credit to 40 percent of the federal credit over three years and a new child and dependent-care tax credit.
Tax Amnesty – A-3438
The new law requires the Director of the Division of Taxation to establish a 90-day State tax amnesty period that ends no later than January 15, 2019. The program applies to any taxpayers with liabilities for returns that were due on or after February 1, 2009 and prior to September 1, 2017, and allows them to avoid any penalties with the exception of criminal and civil fraud penalties.
Legislation Awaiting Further Action by the Governor – The following bills have been approved by the Legislature and await further action by the Governor:
Jersey City Employer Payroll Tax Bill – A-4163
Under A-4163, any municipality having a population over 200,000 may impose and collect an employer payroll tax of up to 1 percent. Currently, Newark is the only municipality that imposes and collects an employer payroll tax. This bill would allow Jersey City to do the same. A-4163 would only become effective upon the enactment of S-2, which makes changes to the State’s school funding law, by eliminating growth caps and phasing-out adjustment aid.
PA/NJ Reciprocal Income Tax Agreement – S-878
The bill requires the termination of any reciprocal personal income tax agreement to be done through legislative approval and signed by the Governor. Currently, the Governor can end such an agreement without legislative approval.
In September of 2016, then Governor Christie announced that he would be ending the Reciprocal Income Tax Agreement between New Jersey and Pennsylvania, which had been in place since 1977. Ultimately, the agreement remained in effect because $200 million in savings in the state budget had been realized through healthcare reforms.
Internet Sales Tax – A-4261
After the Supreme Court ruling late last month in South Dakota v. Wayfair, Inc., the Legislature introduced and passed legislation that provides for the collection of sales tax from certain remote sellers. This bill requires a seller with no physical presence in New Jersey to collect sales tax on the purchase.
The bill applies to sellers that have over $100,000 in taxable sales or 200 or more separate sales. Additionally the bill imposes sales tax collection and reporting requirements on a “marketplace facilitator.” If approved by the Governor, the legislation would take effect on October 1, 2018.
I will continue to provide updates on these complex changes as additional information becomes available. If you have any questions, please feel free to reach out to me at email@example.com.