On July 1, 2018, New Jersey Governor Phil Murphy and the state’s legislature reached a budget agreement that avoided a looming partial government shutdown. While the budget created a number of isolated tax increases, from an increased tax rate for individuals with income over $5 million to a potential $.05 plastic bag tax, a major reform was made to the state’s corporate business tax (CBT) regime. Historically, New Jersey has long been a state hanging on to separate entity reporting and the sourcing of service receipts based on the service performance location. However, new legislation, A4202, passed as part of the budget agreement eliminates both of these rules.
Effective for tax years after 2018, New Jersey will have mandatory unitary combined reporting for corporate business taxpayers. A “combined group” includes all companies that have common ownership and are engaged in a unitary business, and is generally limited to domestic entities and any foreign entities if 20% of their property and payroll is based in the U.S. The transition to combined reporting will require prior net operation losses (NOLs) to be converted from a pre-apportionment loss to a post-apportionment. A converted prior NOL can only be used by the entity which generated it.
Also effective for tax years after 2018, the New Jersey sales factor will be determined by applying a market-based sourcing rule for sales of services. New Jersey’s market-based sourcing will require corporate taxpayers to source service revenue to New Jersey if the benefit of the service is received at a location in the state. For services that are received both within New Jersey and outside New Jersey, the portion of the sale that is sourced to New Jersey is based on the portion of the value of the benefit of the service received in the state. The rules allow reasonable approximation in determining the location that the benefit of a service is received, as well fallback provisions for when the state of assignment cannot be determined. For example, for customers that are businesses, if the state or states of assignment cannot be determined, the service is deemed to be received at the location from where the customer ordered the services.
Other tax-related legislation enacted as part of New Jersey’s budget agreement include:
- Temporary Two-Year CBT Surtax – For periods ending on or after January 1, 2018, corporations with New Jersey apportioned net income between $1 million and $25 million will be subject to a surtax rate of 2.5%. Corporations that have New Jersey apportioned net income over $25 million will pay a 4% surtax.
- Reduced Dividend-Received-Deduction (DRD) – For the tax period beginning after December 31, 2016, legislation reduces the dividend exclusion for taxpayers receiving dividends from an 80% or greater owned subsidiary from 100% to 95%. It appears that the DRD will apply to deemed repatriated dividends under IRC § 965, as the legislation applies to dividends paid or “deemed paid.”
- Remote Seller Sales Tax Collection – Sales tax nexus legislation consistent with the U.S. Supreme Court’s decision in Wayfair. Remote seller collection obligation will begin on October 1, 2018.
- Decoupling from Section 199A Deduction – An addition to the individual gross income tax rules was enacted specifically stating that New Jersey does not allow a pass-through business income deduction pursuant to IRC section 199A.
If you have any questions about New Jersey’s tax law changes, please contact Michael Colavito or one of our tax advisors at 301.231.6200.