NJCPA Legislative Update
Below are highlights of key legislation the NJCPA is tracking. If you have any questions, contact Jeff Kaszerman, NJCPA Government Relations Director, at 973-226-4494 x210, or email@example.com.
Appeal bond caps SUPPORT A1055/S2052
The NJCPA and the NJ Civil Justice Institute support this legislation which limits the amount of appeal bond in civil actions to $50 million. When a defendant loses a case at trial and the plaintiff receives a monetary award, state law typically allows the plaintiff to collect that money as soon as the trial court proceedings are completed. In many cases, however, the defendant will appeal to a higher court seeking reversal of the trial court’s determination. Under current law in New Jersey, the defendant must post a bond for the full amount of the award while the appeal is pending.
With awards now reaching hundreds of millions of dollars, it is often financially ruinous for a defendant to post such a large bond and this de facto inability to appeal is used by plaintiff attorneys as a club against defendants. Defendants are forced to settle cases even though they are confident an unfair award would be lowered or dismissed at the appellate level. This legislation will help ensure that the appellate level remains open to defendants who are hit with large damages at the trial level.
The CPA profession’s concern about the impact of having to post huge appeal bonds is not just theoretical. In the last few years there have been many multi-million judgments against CPA firms. For example, this occurred in 2007 in Florida in the case of Banco Espirito v. BDO International, where the CPA firm BDO was held liable for $522 million. If Florida had not enacted legislation similar to S480/A2473 in the previous year, BDO would probably not have been able to post a bond of $522 million and would probably have gone out of business. That would have put the 2,700 people who work at BDO out of work. Instead, BDO was able to appeal and the case was eventually dismissed.
Reducing NJ’s Estate/Inheritance Taxes SUPPORT
This bill phases out the estate tax over five years, first by replacing the current $675,000 threshold with a $1,000,000 exclusion beginning January 1, 2017. The bill increases the exclusion amount to $2,500,000 for 2018, $3,500,000 for 2019, and $5,000,000 for 2020. For 2021 and thereafter, the bill provides that there will be no tax imposed. The bill was passed by the Senate Budget Committee in February 2016.
New Jersey has the most onerous death taxes in the country, which are forcing growing numbers of new Jerseyans to leave for other states where there are either no death taxes or the burden is much lighter. New Jersey is only one of two states that has both an estate and inheritance tax and, unlike most states, NJ never hiked its $675,000 exclusion to match the federal exclusion of $5.1 million. Most recently New York reduced its estate tax by enacting legislation that will phase in an estate tax exemption to match the federal exemption, tempting even more New Jerseyans to flee the state.
A January 2014 Regent Atlantic study “Exodus on the Parkway: Are taxes Driving Wealthy Residents out of New Jersey” noted that in just one year alone, from 2009 to 2010, New Jersey lost over $1 billion in taxable adjustable gross income because it suffered a net loss of 11,167 tax filers who left for FL, PA, NC, MD and VA.
Increases retirement income exclusion fivefold SUPPORT S998/A3339
This bill increases the personal income tax’s pension and retirement income exclusion fivefold over three years. It passed the Senate Budget Committee in February 2016.
Generally under current law, taxpayers with $100,000 or less of annual income, who are at least 62 years old, may claim a pension and retirement income exclusion of up to $20,000 for joint filers, $15,000 for individuals, and $10,000 for married but filing separately.
This bill increases the personal income tax’s pension and retirement income exclusion to $100,000 for joint filers, $75,000 for individuals, and $50,000 for married but filing separately. The bill phases in the five-fold exclusion increase over three years as follows:
| Joint ||
| Individual ||
| Separate ||
The bill is scheduled to apply to taxable years beginning on or after the January 1, first following the date of enactment.
Amending NJ Constitution to Require Payments to Pension Plan OPPOSE ACR109, SCR2
The Senate President and Assembly Speaker introduced identical resolutions proposing a constitutional amendment to require quarterly pension payments by the State, thus removing public workers pension payments from the annual budget appropriations process. They claim that the quarterly payments called for in the resolution, which are calculated on an assumed three percent growth in tax revenue, would cost the state about $3 billion in 2018 and another $600 million a year until the state is contributing the full amount recommended by actuaries in 2022.
The Governor and Republican lawmakers are opposed to the resolution and called it an inappropriate use of the state’s constitution. They also state that the amendment would require severe spending cuts or tax hikes if the state economy does not hit the three percent growth target.
Particularly troubling to opponents is that the constitutional amendment process in NJ allows the resolutions to go directly to the public as ballot questions if the Legislature passes the resolutions in two consecutive legislative sessions. (It was already approved in the previous legislative session.) The resolutions do not need approval from the Governor. That means that despite the Governor’s opposition, the public could be voting on the proposals as soon as November 2016.
In addition to stiff resistance from Republican lawmakers, business groups in NJ, including the NJCPA, are also opposed to the resolution. They too argue that amending the constitution is an inappropriate method for dealing with what should be an annual legislative appropriation process. They believe that the state needs the flexibility to deal with economic emergencies and that if the state economy doesn’t perform at the three percent growth rate called for in the resolution, funding for the pension payments will have to come from tax hikes and cuts to critical areas of state spending such as education and municipal assistance.
Opponents of the measure call for renegotiating the state’s pension and health care obligations with the unions along the lines of the recommendations contained in the February 2015 report issued by the bipartisan NJ Pension and Health Benefit Study Commission.
Professional Malpractice Reform SUPPORT A1254
The NJCPA supports this bill, which requires that civil actions alleging professional malpractice be brought within two years, as is the case with civil actions generally. Currently, the statute of limitations in these professional malpractice cases is six years. The bill sponsor is Assembly Speaker Prieto.
Creation of Task Force to Study Regulating Tax Preparers, OPPOSE SJR61
This legislation would establish a Task Force to make recommendations concerning the regulation of tax preparers. The Task Force would be required to issue a report that “determines the appropriate scope of a program for regulating commercial tax return preparers; addresses the appropriate qualifications, including, but not limited to, minimum educational qualifications and continuing education requirements for commercial tax return preparers; and considers any other matters the task force determines to be necessary or appropriate.”
Although it might seem like a straight forward issue, the subject of regulating tax preparers on a state level is actually quite complicated and has a number of pitfalls. For example, the IRS recently launched a federal voluntary program to regulate tax preparers and the potential for marketplace confusion is immense. Will taxpayers know the differences between classes of preparers? Furthermore, the American Institute of CPAs recently is on record in opposition to state regulation of tax preparers.
While the NJCPA is opposed to this bill, it does support various regulatory options outlined by the AICPA that would enhance ethical behavior and competency requirements for non CPA tax preparers. The NJCPA also supported previous legislation enacted into law that gave the NJ Division of Banking and Insurance the power to protect consumers from certain unethical practices conducted by some unscrupulous tax preparers.
Mandatory firm rotation for external governmental auditors OPPOSE
In August 2008 the NJ comptroller released a report criticizing firms that do external government audits for local government units in NJ. Amongst his recommendations was mandating audit firm rotation for local government bodies every 10 years. Since then, there have been several other legislative and regulatory proposals to mandate audit firm rotation. The NJCPA successfully opposed all these initiatives.
Although the NJCPA generally supported most of the reforms called for in the Comptroller’s report, we are strongly opposed to mandatory audit firm rotation. Our opposition to this as well as recommendations for real reforms that will strengthen the audit process for government units can be found in our 2010 white paper NJCPA RECOMMENDATIONS FOR REFORMING THE EXTERNAL AUDIT PROCESS FOR LOCAL GOVERNMENT ENTITIES IN NJ. Further recommendations are to be found in our 2014 correspondence with Assemblywoman Nancy Munoz in which we put forth comprehensive recommendations. In 2013 Assemblywoman Munoz had introduced legislation requiring mandatory firm rotation, but she withdrew it at our request. She is now considering introducing legislation that may include our recommendations, which focus on mandating audit committees and financial/budgeting education for elected local government board members.
While mandatory rotation is appealing on the face of it, in reality it puts a governmental entity at a greater risk of fraud going undetected, can easily lead to lower audit quality and is very costly. Requiring mandatory rotation leaves the new audit firm with significant startup costs and a steep learning curve, the cost of which will be passed on to taxpayers. It also leaves the door open to more fraud and waste, as the new auditors are less likely to spot suspicious transactions due to the knowledge gap they must overcome in the beginning years of taking on a new client. The NJCPA strongly believes that mandatory rotation is counterproductive and will harm efforts to reform the governmental audit process in NJ.
It is also worth noting that audit firm rotation was specifically NOT included in the Sarbanes-Oxley federal accounting reform legislation and a 2003 United States Government Accountability Office report on the issue stated that the “GAO believes that mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence and improve audit quality considering the additional financial costs and the loss of institutional knowledge of the public company’s previous auditor of record…”
Changing due date of NJ transfer inheritance tax payment SUPPORT A2931
This bill realigns the NJ transfer inheritance tax payment due date to coincide with the payment due dates for the State and federal estate taxes. The purpose of this bill is to simplify New Jersey’s inheritance tax filing procedures. It was introduced at the request of the NJCPA State Tax Interest Group.
Mandating Paid Sick Leave OPPOSE A2354
The NJCPA joined a coalition of business groups fighting state and municipal efforts to require employers to provide paid sick leave to employees. The Keep NJ Competitive coalition is comprised of 35 business groups, including the NJ Business & Industry Association (NJBIA) and the NJ State Chamber of Commerce. The coalition opposes state legislation that would require all employers with ten or more employees to provide nine paid sick days per year and employers with fewer than ten to provide five days. Currently, only 3 states require paid sick time.
In addition to fighting A1446, the coalition has been contending with numerous municipalities that have passed local paid sick leave ordinances. Nine cities have already passed such ordinances.
Many employers who already offer paid sick leave incorrectly believe that A1446 would not affect them. In fact, it would because of the requirements listed below:
- Employees could carry-over unused leave from one year to the next — 40 hours for small companies (less than 10 employees), and 72 hours for larger companies (10 employees and above). The only alternative would be employers paying the time out each year.
- Employers would be required to keep confidential records of any leave time used by every employee for five years. Information on the health of an employee or their family member would need to be treated as confidential and not disclosed (even to a supervisor) without the employee’s written permission.
- Although employers could ask for documentation on the need for leave, they’d also have to pay for any costs obtaining it.
- An employer could be sued if they disciplined an employee for using paid sick leave, took “adverse action” against them, or gave them an “unfavorable reassignment.”
- It would be illegal for an employer to require an employee to find his replacement, even if the employee knew in advance that they’d be taking leave.
- No PTO substitution: Employers offering general paid time off (PTO) would still have to provide an additional number of “sick” days to comply with the legislation. The legislation prohibits employers from reducing existing benefits which are more favorable to employees.
Revising financial reporting requirements for charitable organizations MONITORING A3668
This bill amends New Jersey’s Charitable Registration and Investigation Act by increasing the thresholds of gross revenue amounts received by charitable organizations that determine their annual financial reporting requirements with the Attorney General’s office. Under the bill, a charitable organization operating or soliciting within the State which receives annual gross revenue in excess of $1,000,000 must file with its annual financial report, a financial statement which has been audited by an independent certified public accountant. Currently, the threshold is $500,000.
Fighting Abusive Patent Trolls SUPPORT H.R. 9/S.1137; A2462/S1563
The NJCPA joined United for Patent Reform, a national coalition of diverse businesses fighting to stop the abusive activities of “patent assertion entities” (PAEs), commonly referred to as “patent trolls.” PAEs are companies that use patents for the express purpose of filing patent infringement lawsuits against individuals or businesses to obtain licensing fees or a legal settlement rather than actually supporting or developing any products.
PAEs typically approach small- to medium-sized businesses alleging patent infringement through letters threatening litigation and demanding payment for licensing fees. Often, these entities create shell companies making it difficult for companies to know who is threatening them. Their targets have included CPA firms and state CPA societies.
The PAEs’ claims are made in bad faith and are based on overly broad patents related to common business practices and technologies. According to a 2013 report prepared by the President’s Council of Economic Advisers, the National Economic Council, and the Office of Science & Technology Policy, suits brought by PAEs have tripled in just the last two years, rising from 29 percent of all infringement suits to 62 percent of all infringement suits. Estimates suggest PAEs may have threatened over 100,000 companies with patent infringement in 2013 alone.
Instead of creating new jobs and investing in new technologies, businesses large and small across many industries—from national realty, construction, and technology businesses to Main Street retail shops, hotels, grocers, convenience stores, and restaurants—continue to be forced to divert scarce resources to fighting frivolous lawsuits and overly broad claims made by patent trolls.
Congress is pursuing a solution to this problem, with two bill pending (S. 1137 and H.R. 9). On a state level, more than 20 states have introduced legislation aimed at combating this abuse, including New Jersey (A310).
Penalizing “Inverted Domestic Corporations” MONITORING A3624/A3681 ACS, A3678, S2361
These bills, which pro business groups strongly oppose, would penalize “inverted domestic corporations.” The bills define an inverted domestic corporation as a business or parent corporation incorporated or previously incorporated in the United States that became incorporated in a foreign country or that became a subsidiary of a corporation that is incorporated in a foreign country, primarily for the purpose of avoiding United States taxes. Under the bills, the companies would be prohibited from getting state contracts and certain development subsidies.
The State Treasurer would have sole authority in determining if a company is an inverted domestic corporation. The determination would be made based on several factors, including: whether the change in corporate organization has substantially reduced the corporation’s federal tax liability; whether the corporation has the majority of its operations in the US; whether the corporation is at least half-owned by US shareholders; and any other factors the Treasurer deems appropriate. Corporations barred from performing federal contracts because it was deemed to be an inverted domestic corporation under federal law are automatically deemed to be an inverted company under these bills.
The legislation poses several concerns to the business community. The vague definition for inverted domestic corporations could be broadly applied and may impact existing state contracts if the State Treasurer determines a company to be an inverter. Additionally, the bill does not specify any means for a company to appeal a determination by the State Treasurer.
Business Court Bill SUPPORT S738, A287
This bill establishes a Business Court as a court of limited jurisdiction very similar to the current Tax Court. The Business Court would have jurisdiction with respect to business and commercial disputes involving contracts; the Uniform Commercial Code; banking; insurance; commodities; securities; corporations; non-profit corporations; partnerships; limited liability entities and associations; business trusts; competition among businesses; business reorganizations; dispositions of businesses; business combinations; shareholder, partner and member disputes; intellectual property matters; the termination of services to a business or an agreement not to compete; employment agreements with an executive officer or manager; and other commercial disputes as provided by the court rules. The Business Court would also hear certain private actions authorized under federal law which may be heard in State court pursuant to which a federal agency regulates certain matters.
This Business Court would help to ensure that there are state judges who have the experience and expertise to handle complicated business cases. The bill is supported by the NJBIA, State Bar Association, and many other pro business groups.