Press Room: Tax Release
New Jersey Enacts Legislation to Overhaul Corporation Business Tax
New Jersey Governor Phil Murphy signed a new state budget into law on July 1, 2018. The final budget makes sweeping changes to New Jersey’s Corporation Business Tax (CBT) regime and is generally effective January 1, 2019, but also includes provisions with retroactive effective dates to January 1, 2017 and 2018. The legislation mandates combined reporting and market-based sourcing, revises the state’s net operating loss (NOL) carryforward rules, imposes a temporary surtax that results in one of the highest corporate tax rates (11.5%) among states, and makes other significant changes to the CBT. Additionally, the legislation includes new provisions for a tax amnesty program, a surcharge for pre-arranged rides, and tax levies on remote sellers. The historic legislation is considered the most significant overhaul of the CBT since it was initially enacted in 1945. Below is a discussion of some of the changes included in the final budget legislation.
Highlighted Changes to Corporation Business Tax
- Combined Filing - Effective January 1, 2019, New Jersey will adopt mandatory unitary combined reporting. A New Jersey taxpayer or group of taxpayers will be required to file a water’s edge combined return, although a worldwide filing election will also be available. A worldwide group election is generally binding for six years. A combined group includes entities with common ownership engaged in a unitary business. Common ownership is defined as more than 50% of the voting control being directly or indirectly owned by a common owner. A unitary business is defined as a single economic enterprise; however, the New Jersey Division of Taxation (Division) is interpreting this term to the broadest extent.
- Market-Based Sourcing - New Jersey will also adopt market-based sourcing for sales of services. Effective January 1, 2019, receipts for services will be sourced to New Jersey if the benefit of the service is received at a location in New Jersey. If the benefit of the service is received both in and outside of New Jersey, the portion includable in the sales-fraction numerator will be determined based on the percentage of the value of the service received in New Jersey to the total value of the service. The new legislation provides default rules based on either the location from where services are ordered or customer billing address; however they did not provide specific definitions. The Division will need to enact regulations for clarification.
- NOL Carryforward Rules - The new legislation provides amendments to the computation and utilizations of NOLs. NOLs will now be calculated on a post-apportioned basis beginning on or after January 1, 2019 and no longer requires the utilization of NOL carryforwards prior to the application of the dividends received deduction (DRD). The new legislation also allows for survival of NOL carryforwards resulting from mergers among combined group members.
- Temporary Surtax - Effective January 1, 2018, taxpayers with allocated net income above $1 million will be assessed a surtax. The surtax will be 2.5%, (effective 11.5% rate) for the periods beginning on or after January 1, 2018 through December 31, 2019, and decrease to 1.5% (effective 10.5% rate) for the periods beginning on or after January 1, 2020 through December 31, 2021.
- Dividends Received Deduction and Transition Tax - Effective retroactively to January 1, 2017, the new budget legislation reduces the dividends received deduction (DRD) amount. For taxpayers receiving dividends from 80%-or-greater owned subsidiaries, the deduction is reduced from 100% to 95%. Under the new transition tax inclusion under Sec. 965 (mandatory deemed repatriation), taxpayers will now be required to deduct 95% of the pre-apportioned amount calculated under Sec. 965 and pay New Jersey CBT tax on 5% of such amounts.
- Limitations on Treaty Exemption - Effective January 1, 2018, the new legislation adds limitations on the treaty exemption affecting interest expense and intangible-related add-back amounts. Previously, foreign corporations were not subject to New Jersey tax on foreign-source income or income excluded from federal income tax due to a treaty. This type of income may now be taxable under the new legislation as the definition of entire net income is required to be calculated without regard to any exemption or credit. Additionally, prior law provided an exception to the add back of interest and royalties paid to affiliates located in a foreign country that had a tax treaty with the United States. Under the new rules, the affiliate is now required to pay tax on the income stream at an effective rate within three percentage points of the taxpayer’s New Jersey effective tax rate.
- Decoupling from Federal Provisions - Effective January 1, 2018, New Jersey decouples from certain provisions of the federal tax reform legislation enacted under the Tax Cuts and Jobs Act (TCJA), including the qualified business income deduction under new Sec. 199A, and will utilize a pro-rata application with respect to new business interest expense limitation under Sec. 163(j).
Other Tax Provisions
- Tax Amnesty - The new budget agreement also includes a state tax amnesty program for unpaid taxes due on and after February 1, 2009 but before September 1, 2017. The amnesty program provides taxpayers with 50% interest and penalty relief. The relief is applicable to late payment penalties, late filing fees, costs of collection, delinquency penalties or recovery fees. Eligible taxpayers who fail to pay the overdue taxes during the amnesty period will be subject to a 5% penalty in addition to all existing penalties, interests and collections costs. The Director of Taxation will establish the tax amnesty program not to exceed 90 days and end no later than January 15, 2019.
- Surcharge for Pre-arranged Rides - Effective October 1, 2018, transportation network companies such as Uber and Lyft are required to collect a 50-cent surcharge for any ride that originates and terminates in New Jersey. This surcharge must be listed separately on all invoices.
- Remote Sellers – In addition to the budget signed into law, the New Jersey legislature has approved the first post-Wayfair remote seller law. If signed into law by the governor, New Jersey’s legislature will become the first to have passed a law following the Supreme Court’s decision in South Dakota v. Wayfair. The New Jersey law mirrors the provisions under South Dakota’s statute and has significant implications for online businesses.
This historic legislation provides for an overhaul of the CBT and has implications for all taxpayers conducting business in New Jersey. Business taxpayers must closely analyze the sweeping provisions and determine the impacts with respect to their New Jersey CBT liability. We will keep you apprised of relevant developments as the new budget legislation is reviewed and further guidance is provided.