NJBIA today testified in continued support of a bill that will make New Jersey’s corporate tax policies more competitive with other states by changing the way global intangible low-taxed income (GILTI) and net operating losses (NOLs) are treated under state law.
Bill A-5323 (Pintor Marin, D-29) was advanced unanimously by Assembly Budget Committee today. It’s Senate-counterpart, S-3737 (Sarlo, D-36) also advanced tonight.
In prepared written testimony, NJBIA Chief Government Affairs Officer Christopher Emigholz explained that most states do not tax income earned abroad by U.S.-controlled corporations as aggressively as New Jersey.
Neighboring Pennsylvania does not tax GILTI, while New York and Connecticut only tax 5% of GILTI.
New Jersey, however, is a national outlier that only allows corporations to deduct 50% of GILTI from their tax base.
“Aside from the questions on the appropriateness of states taxing foreign income at all, New Jersey should not be more aggressive on this possibly inappropriate tax than any other state in the nation,” Emigholz said. “Especially when we are fortunate to have as many multi-national corporations located and creating great jobs here.” SINGLE SALE FACTS
Opponents of the bill have incorrectly stated the location of a corporation is irrelevant when it comes to tax liability because New Jersey determines its share of income using the single sales factor, which is based on the taxpayer’s sales market in the state.
Emigholz, who has worked on the bill with Treasury, the Murphy administration, and sponsors since last summer, explained why this point is factually incorrect.
“Under New Jersey law, only operational income is subject to the market-based sourcing within single sales factor,” he said. “A taxpayer’s other non-sales income such as interest, dividends, rental, royalties, or capital gains is assigned to the jurisdiction where the activity actually occurs.
“GILTI is treated as a dividend under the new CBT legislation. So, it does indeed matter where the corporation is located, not just where the sale takes place. Particularly, for taxpayers headquartered in New Jersey, when that GILTI income is often assigned to New Jersey.”
Emigholz continued: “Higher tax rates also incent parties to a transaction to have delivery of the products and services take place in lower tax jurisdictions. Sales does not just mean consumer sales at a retail store, but it is often sales to intermediaries that eventually sells to consumers.
“So, corporations could sell their product to a warehouse or distribution facility just outside of New Jersey that will deliver it to New Jersey retailers to avoid the higher tax rate. A film studio could film their movies or television shows anywhere and the location of that filming impacts where the tax is paid. Every non-consumer sale can be shifted because of a higher tax without a corporation giving up on the New Jersey market for the final sale of their product.” NET OPERATING LOSSES
The bill would also make the tax code more taxpayer friendly in the way it treats net operating losses (NOLs) by allowing the sharing of NOLs by combined businesses.
“Current law does not allow the pooling of NOLs between combined businesses resulting in the inability to fully utilize them, and the current ordering of them also limits their full use,” Emigholz said.“This bill allows the sharing of NOLs between combined businesses so that they are not locked away or captured, and changing the order would end them being partially absorbed by the dividends received deduction.
