New Jersey's Fiscal Year 2019 Budget Brings Significant Changes to the State's Tax Laws
CSG Tax Law Alert
Late in the evening of July 1, 2018, New Jersey Governor Phil Murphy and the New Jersey legislature averted a government shutdown by signing the fiscal year 2019 state budget, which includes significant changes to New Jersey’s business and individual taxes.
Several key provisions within the budget that may affect you and/or your business are summarized below.
Corporation Business Taxes
Corporate Surtax. The new state law imposes a temporary four-year surtax of 2.5% (on top of the current 9% rate) for tax years 2018 and 2019, and 1.5% for tax years 2020 and 2021, on corporate taxpayers with New Jersey allocated income of more than $1 million. For purposes of the surtax, the term “taxpayer” means any entity required to report and pay tax for federal income tax purposes, and includes any business entity subject to the New Jersey Corporation Business Tax (“CBT”). The surtax is expected to raise an additional $425 million in annual revenue.
Unitary Combined Reporting. Effective for tax years beginning on or after January 1, 2019, the new law institutes mandatory unitary combined reporting for groups of companies with common ownership (a more than 50% ownership threshold) that are engaged in a unitary business where one company is subject to tax in New Jersey. The new standard is designed to make it harder for companies to shift profits to lower-tax states and is expected to raise an additional $200 million in annual revenue for the state.
Market-based Sourcing. For CBT apportionment purposes, for tax years beginning on or after January 1, 2019, the new law includes market-based sourcing, pursuant to which a sale of services will be sourced to New Jersey if, or to the extent that, the benefit of the services is received at a location in New Jersey. The law provides for certain default rules if the location of the services received cannot be easily determined. For example, in the case of a customer that is an individual, services will be sourced to the customer’s billing address. In the case of a customer that is not an individual, services will be sourced to where the services were ordered, and if that location cannot be easily determined, then to the location of the customer’s billing address. Together with a few other provisions not discussed in this alert, the new market-based sourcing rule is expected to raise an additional $110 million in annual state revenue.
Dividends Received Deduction. For tax years beginning after December 31, 2016, the dividends received deduction (“DRD”) is reduced, retroactively, from 100% to 95% for 80%-owned subsidiaries. For the purposes of calculating the tax liability owed for the deemed dividends included in the entire net income, the taxpayer shall use either their three year average allocation factor for the taxpayer’s 2015 through 2017 tax years reported on the taxpayer’s tax returns or 3.5%, whichever is lower.
Section 199A Pass-Through Deduction. For tax years beginning after December 31, 2017, the new 20% federal pass-through business income deduction under IRC § 199A – which permits owners of sole proprietorships, S corporations and partnerships to deduct up to 20% of the income earned by the business – will be unavailable for CBT or Gross Income Tax (“GIT”) purposes.
Gross Income Taxes
The Millionaire’s Tax. New Jersey’s top income tax rate will increase from 8.97% to 10.75% for taxpayers earning $5 million and above, effective for tax years beginning on or after January 1, 2018. This provision, referred to as the “Millionaire’s Tax,” is expected to generate an additional $280 million in state revenue for fiscal year 2019.
Property Tax Deduction. New Jersey will allow a state tax deduction of up to $15,000 per year for property taxes paid by a taxpayer beginning in the year 2018. The deduction was previously limited to $10,000. It should be noted that the maximum deduction for property taxes on the federal tax return is $10,000.
Sales Tax Rate. The budget deal did not include a sales tax increase (from the current rate of 6.625%); neither did it pass a tax on shore rentals, which was a significant concern for many. However, effective October 1, 2018, marketplaces like Airbnb and VRBO will be required to collect the state’s 6.625% sales tax and a 5% hotel occupancy tax on short-term house and apartment rentals booked through these sites. In addition, effective immediately, ridesharing services such as Uber and Lyft, are required to impose a 50-cent surcharge and a 25-cent surcharge, respectively, on any shared rides they provide.
Remote Sellers. As one of the most significant changes to the sales tax landscape in New Jersey, the new budget includes remote seller legislation similar to the South Dakota law that was considered in South Dakota v. Wayfair, Inc., No. 17-494 (June 21, 2018). For a more detailed discussion of the Wayfair case, click here. Under the new remote seller law, sellers with (i) gross revenues exceeding $100,000 from taxable sales into New Jersey, or (ii) 200 or more separate transactions will be considered to have “nexus” in New Jersey for sales tax purposes, which will require them to collect sales tax. New Jersey will begin requiring these tax collections as of October 1, 2018. This new law is expected to bring in approximately $188 million in additional annual revenue.
Other Important Provisions
Tax Amnesty. Under the new law, the Director of the Division of Taxation is required to offer a new 90-day tax amnesty program that will run no later than January 15, 2019. Under the program, a qualifying taxpayer with New Jersey state tax liabilities for returns due on or after February 1, 2009, and prior to September 1, 2017, can pay tax and one-half of the interest due as of November 1, 2018. The other half of the interest and penalties will, in most cases, be waived completely. In addition to all other penalties, interest and fees, a penalty of 5% will be imposed on any tax liabilities eligible to be satisfied during this new tax amnesty period that are not so satisfied. The state anticipates generating $200 million in revenue through this program.
Tax on E-Cigarettes. A new sales tax on e-cigarettes will be imposed at the rate of 10 cents per fluid milliliter for the sale of liquid nicotine.
We will continue to update you as new developments emerge with respect to the State’s fiscal year 2019 budget.
For more information regarding this legal alert, please contact your CSG tax attorney or the authors listed below.
Sean M. Aylward | Vice Chair, Corporate & Securities Group | firstname.lastname@example.org | 973.530.2105
Bozena M. Diaz | Counsel | email@example.com | 973.530.2161