Many Tax Changes Enacted with the 2018/19 New Jersey Budget
There were numerous tax changes affecting both individuals and businesses under the New Jersey state legislature budget agreement signed into law by Governor Murphy last July.
Gross Income Tax (GIT)
The Governor had sought to increase the top GIT rate from 8.97 percent to 10.75 percent on taxable income above $1 million, the so-called “millionaire’s tax.” A compromise was reached, whereby a new 10.75-percent rate is imposed on taxable income in excess of $5 million, effective for 2018 and subsequent years. Per the Governor’s office, this measure will impact only approximately 1,760 residents. No penalty will be imposed for insufficient payment of estimated tax that may otherwise be due on salaries and wages received before Sept. 1, 2018, resulting from this retroactive tax rate hike.
Whereas the federal Tax Cuts and Jobs Act (TCJA) limits the SALT deduction to $10,000 for 2018 and future years, the New Jersey property tax deduction for taxes paid on a principal residence has increased from $10,000 to $15,000 for years after 2017. The earned income tax credit was increased slightly, and a new child care credit mirroring the federal child care credit was enacted, although the credit is fully phased out if New Jersey taxable income exceeds $60,000.
Corporation Business Tax (CBT)
By far the greatest number of changes took place in this area. Space limitations preclude all CBT changes from being addressed here, but a temporary 2.5-percent surtax will be imposed on taxpayers (except public utilities) with allocated net income exceeding $1 million for tax years beginning Jan. 1, 2018, through Dec. 31, 2019, which is then reduced to 1.5 percent for tax years beginning Jan. 1, 2020 through Dec. 31, 2021.
Mandatory combined reporting is effective for combined groups for periods beginning on or after Jan. 1, 2019, on a unitary basis under rules that, to a large degree, were not formulated when the July 2018 budget agreement was adopted. In fact, on July 20, 2018, the New Jersey Division of Taxation sought quotes from qualified service providers to assist it with drafting regulations and creating CBT forms and related materials to implement the new combined reporting regime in New Jersey.
The term “combined group” refers to a group of companies having common ownership and which are engaged in a unitary business, where at least one company is subject to CBT. For this purpose, “common ownership” exists where more than 50 percent of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners, either corporate or non-corporate, whether the owner or owners are members of the combined group. The term “unitary business” refers to a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership that are sufficiently interdependent, integrated and interrelated through their activities.
For tax years beginning after 2018, sales of services will no longer be sourced based on where the services are performed. If the benefit of the service is received at a location in New Jersey, the receipts will be sourced to New Jersey. If the benefit of the service is received at locations both within and outside New Jersey, the portion of the sale that is allocated to New Jersey is to be based on the percentage of the total value of the benefit of the service received at a location in New Jersey or a reasonable approximation to the total value of the benefit of the service received in all locations. For customers other than individuals, the service is deemed received at the location from which the services were ordered if the state in which the services were assigned cannot be determined. In instances where the state in which the services were assigned cannot be determined, for an individual, the service is deemed received at the customer’s billing address.
No penalties or interest will accrue for underpayment of tax for the provisions applying retroactively to tax years beginning on or after Jan. 1, 2017, that create an additional tax liability. However, the additional payments must be made either as part of the second estimated payment after the enactment, or as part of the first estimated payment due after Jan. 1, 2019 for tax years beginning on or after Jan. 1, 2018.
In late June, the U.S. Supreme Court decision handed down in Wayfair permits states to enact remote seller sales tax provisions. New Jersey enacted legislation effective Nov. 1, 2018, establishing a bright-line standard for sales tax nexus of $100,000 in taxable sales or 200 or more transactions. The law also imposes sales tax collection and reporting requirements on a “marketplace facilitator,” which is defined as any person or business that provides a forum to a retailer to advertise, promote and list the retailer’s products, and that also collects receipts from the customer and remits payment to the retailer.
The Governor had sought to restore the sales tax rate to 7 percent. However, it remains at 6.625 percent. Effective Oct. 1, 2018, marketplaces such as Airbnb and VRBO are now required to collect New Jersey sales tax.
This article appeared in the January/February 2019 issue of New Jersey CPA magazine. Read the full issue.