With the goal of stimulating economic activity in areas under distress, New Jersey created the Urban Enterprise Zone program to provide businesses in Urban Enterprise Zones (UEZs) with several forms of tax relief incentives that have been in place for many years. In terms of sales and use tax, the qualified business can use the UZ-5 exemption certificate to make tax-free purchases or to provide UZ-4 contractor’s with an exempt-purchase certificate to have the contractor make tax free purchases on its behalf. However, New Jersey has newly set a $100,000 annual limitation for each category, effective Jan. 1, 2022.
UZ-5 exemption certificate is used to make tax-free purchase of tangible personal property and services, except for motor vehicles, telecommunications, and utilities. Once over the $100,000 of annual qualified taxable purchases, the UEZ business must stop using the certificate and start to pay sales tax for the remainder of the calendar year.
For UZ-4 contractor’s, an exempt-purchase certificate is given by the UEZ business to its contractor for making tax-free purchases of construction materials, supplies and services when used exclusively to improve, alter or repair a UEZ business location, according to a notice issued by the State of New Jersey Department of the Treasury Tax Division. Once contractors of the qualified business have made $100,000 in annual purchases, the business must stop using the certificate and advise the contractors, and their subcontractors, to also stop using it for the remainder of the calendar year. It’s also important to note that the $100,000 limitation does not apply when the contractor purchases construction materials, supplies, and services for erecting new structures or for a project with a total cost that equals or exceeds 50% of the market value of the structure before improvement.
What Does CohnReznick Think?
The taxpayer should monitor and keep detailed records for the annual exempt purchase under the two categories mentioned above. This is because the business will be liable for the tax plus interest, and penalty when the certificates were issued beyond the annual exempt purchase limitation.
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