New Jersey Gov. Phil Murphy recently signed into law a retroactive bill, A4694, that has established New Jersey’s own Convenience of the Employer (COE) provision. Retroactive and effective for tax years beginning on or after Jan. 1, 2023, the bill seeks to level the playing field for New Jersey residents and combat states like New York, whose COE rule has long been enforced on New Jersey resident taxpayers.
What is a COE rule?
When looking at how states implement a COE rule, many look to New York, which has had a longstanding history of fiercely enforcing its own COE provision, especially on residents of other states in the tri-state area. This is especially true for residents of the tri-state area who work for New York-based companies.
New York’s rule generally provides that non-residents of the state are taxed on income that New York considers “derived from sources” within New York, which includes income earned from businesses, trades, professions, or an occupation that is carried out in the state. There are a variety of factors that New York will look to when determining whether the COE rule has been triggered. The most pivotal of these are:
- Where the employee is assigned to work from
- Their availability to work within the state of New York at that assigned office location
- The business purposes for the employee working outside of the state of New York
When the COE rule is triggered, New York non-resident taxpayers who are assigned to work from a New York location are subject to tax relating to work performed outside of the state of New York. This means that for residents of New Jersey who are assigned to a New York office location, even when they work remotely from their homes, they are still subject to New York income tax on their wage amounts earned.
New Jersey’s relief
Prior to the Bill, New Jersey had attempted to provide relief for New Jersey resident taxpayers who worked from their resident state for a non-New Jersey company when COE applies. New Jersey provides a credit for residents against taxes paid to other states, which allows New Jersey resident taxpayers to essentially recoup the non-New Jersey income tax they are subject to under COE on their New Jersey personal income tax returns. (See N.J.S.A. 54A:4-1(a)) for details.)
New Jersey’s new COE rule and resident incentives
Under the new COE rule established by the Bill, a reciprocal COE rule would be enforced on nonresidents of New Jersey who work remotely outside of the state, for their own convenience, essentially mirroring New York’s rule. This would impose New Jersey income tax on New Jersey nonresidents when the COE rule is triggered, even when those nonresidents work from a location outside of the state of New Jersey. It is important to note that this new rule will only apply to employees who are residents of another state that imposes a similar COE rule. States that impose a COE rule but have a reciprocal agreement with New Jersey would be excluded. This would include Pennsylvania, because although the Commonwealth has its own COE rule, they hold a reciprocity agreement with New Jersey, and thus Pennsylvania’s COE rule would never trigger.
Under this new rule, nonresidents who earn employee compensation from a New Jersey employer for personal services, even when those personal services are performed outside of the state, and whose state of residence imposes an income or wage tax that would likewise impose a similar COE-type provision, are themselves subject to income tax in the State of New Jersey for all wages earned.
The Bill also creates new credits for resident taxpayers. New Jersey resident taxpayers are now permitted a refundable credit when they obtain a final judgment in their favor from another state’s tax court or tribunal. These judgments must have resulted in the resident taxpayer being refunded income-based taxes paid to that taxing jurisdiction for services rendered while the resident taxpayer was in New Jersey. This credit would be equal to 50% of the amount of taxes owed to New Jersey as a result of the readjustments for tax years 2020 through 2023 on the New Jersey resident taxpayer’s New Jersey income tax return. The creation of this provision serves as an incentive for New Jersey resident taxpayers to file lawsuits and appeals in other states in an attempt to obtain refunds of taxes paid to those states.
Additionally, the Bill creates an incentive for employers to relocate to New Jersey. A $2,000 credit will be issued for qualified individual taxpayers who seek to be reassigned from an out-of-state location to a New Jersey location, with $10 million per tax year available for such credits.
Further, a grant is available to businesses that assign resident employees to New Jersey locations, and that have 25 or more full-time employees and their principal place of businesses is located outside of New Jersey. For those eligible, these grants seek to incentivize businesses to open, maintain, and assign New Jersey resident employees to a New Jersey location. The grants, which will be administered through the New Jersey Economic Development Authority (EDA), will equal $35 million per year, and will not exceed $500,000 per business.
What does CohnReznick think?
This new legislation provides various forms of relief to New Jersey resident taxpayers who have long been subject to other states’ COE provisions. Additionally, the Bill creates New Jersey’s own COE rule, which will help level the playing field against states like New York that have long benefited from implementation of their own COE rule against New Jersey resident taxpayers. Consult with your tax advisor to confirm how these new changes might impact your New Jersey taxes.
Subject matter expertise
JD, Principal, Practice Leader, State and Local Tax (SALT) Services
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