New Jersey Passes State Budget with Significant Tax Changes and Adoption of a Tax Amnesty Program
On July 1, 2018, New Jersey Governor Phil Murphy signed the state’s fiscal year 2019 budget after long negotiations with the legislature. Key highlights of the tax changes in the new budget are as follows:
Corporate business tax
- Imposition of a temporary corporate income tax surcharge of 2.5% for the 2018 and 2019 tax years and a 1.5% surcharge for tax years 2020 and 2021. These surcharges apply to corporate taxpayers with New Jersey allocated net income exceeding $1 million.
- Adoption of mandatory combined reporting for commonly-owned corporations operating a unitary business. Common ownership exists where more than 50% of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners, whether the owners are corporate or non-corporate. The group may elect to file on a world-wide basis or a United States affiliated group basis. This is effective for tax years beginning after 2018.
- Adoption of market-based sourcing for service revenue. Under this rule, service revenue will be sourced to New Jersey if the benefit of the service is received at a location in New Jersey. If the benefit is received both within and outside New Jersey, a portion of the revenue will be allocated to New Jersey, based only on the percentage of the total value of the benefit received at a New Jersey location but not elsewhere. This is effective for tax years beginning after December 31, 2018.
- Reduced dividend received deduction. New Jersey Entire Net Income will exclude 95% of dividends paid (or deemed paid) for federal income tax purposes to the extent that the taxpayer owns 80% or more of the dividend payor. Federal Internal Revenue Code section 965 defines which dividends are to be considered “deemed dividends” for purposes of this state tax provision. Previously, the state law exclusion amount was 100% for such income from 80% or more owned dividend payors. This is effective for tax years beginning after December 31, 2017.
Gross income tax (Personal Income Tax)
- An increase in the highest marginal personal state income tax rate to 10.75% from the current rate of 8.97% for individual taxpayers with income of $5 million or more. This is effective for 2018. Additionally, income tax withholding by employers from wages, salaries, and other remuneration paid by an employer for services rendered when they exceed $5 million for 2018 should be at a rate of 15.6% beginning immediately, but not later than September 1, 2018. No penalties will be imposed for insufficient payment of estimated tax due on salaries, wages, and other remuneration received before September 1, 2018.
- An increase in the property tax deduction for resident taxpayers from $10,000 to $15,000. This is effective for tax years beginning after December 31, 2017.
- An increase in the earned income tax credit from 35% of the federal tax credit to 37% of the federal tax credit for 2018. For 2019, the amount is 39% and for 2020 and later years the amount is 40%.
- An additional surtax of 17% will apply on income from investment management services received during a tax year. However, this provision will not be operative until similar legislation is approved by the states of Connecticut, Massachusetts, and New York.
Sales and use tax
- Short-term housing rentals such as Airbnb will now be subject to New Jersey sales tax.
- A new surcharge is imposed on ride sharing such as Uber and Lyft.
- A new tax on e-cigarettes and tobacco.
Film tax credit
- A law titled, “Garden State Film and Digital Media Jobs Act”, was enacted and provides tax credits for film, television, and digital media content production in New Jersey. The tax credits are based on certain expenses incurred while filming in New Jersey and apply to both the corporate business tax and gross income tax.
- The Act also provides other incentives for production companies to hire diverse cast and crews in New Jersey.
- Verification of the credits for production companies will be made by the New Jersey Economic Development Authority.
Tax amnesty – Dates not yet established
The legislation requires the New Jersey Division of Taxation to hold a 90-day tax amnesty program. Program dates have yet to be issued. The legislation requires that the amnesty period is not to exceed 90 days and is to end no later than January 15, 2019. Details of the program are:
- Amnesty applies to state tax liabilities for tax returns due on or after February 1, 2009 and prior to September 1, 2017.
- Taxpayers that qualify will pay the tax due and one-half of the interest that is due as of November 1, 2018.
- The late payment penalty, late filing penalty, cost of collection, and recovery fee that would otherwise be due will be waived.
- Failure to participate in the amnesty program will subject taxpayers to a penalty of 5% in addition to all other penalties which may apply. This additional penalty is statutory and cannot be subject to waiver or abatement.
What does CohnReznick think?Business and individual taxpayers should assess the financial impact of New Jersey’s new tax provisions with emphasis on those provisions taking effect in 2018. Corporate taxpayers should evaluate how mandatory combined reporting and a switch to market-based sourcing for revenue from services will affect their New Jersey tax liability with special attention given to the impact on the income tax provision. Individuals should also assess how the new top marginal tax rate may affect them for 2018 and future years. Additionally, all taxpayers should review any potential past tax exposure issues and if applicable, consider the benefits of coming forward under the amnesty program once the program dates are set.
Subject matter expertise
CPA, JD, Managing Partner - Tax
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