On July 2, 2018, the New Jersey Legislature passed—and Governor Phil Murphy signed—his first budget. This budget was designed to move New Jersey in a new direction as envisioned by the new Governor. The budget bill contains tax increases, tax breaks, and a host of other provisions.

Amnesty

In what may be the final amnesty, New Jersey is floating yet another amnesty with the usual carrot-and-stick approach. The carrot is that the amnesty covers all taxes administered by the New Jersey Division of Taxation (also, “the Division”) and due after February 1, 2009 but before September 2, 2017. The amnesty provided for waiving of all penalties and collection fees as well as half of outstanding interest. The toughest provision includes the stipulation that all amnesty taxes must be paid by the January 15, 2019 deadline. The stick is that any taxpayer that does not take advantage of the amnesty and owes taxes after this time (say, as a result of an exam) will be subject to an additional 5% amnesty penalty.

Estate Tax

This item is not new, but worth mentioning. With the stroke of midnight ringing in 2018, the New Jersey estate tax officially phased out and was fully repealed. Then Governor, Chris Christie, promoted this measure as a means of keeping wealthy individuals from leaving New Jersey for more tax-hospitable locations (like Florida) by eliminating the estate tax. Keep in mind that the inheritance tax was not changed by this legislation. Further, as described later on, this effort may have been undercut, in part, by the enactment of the Millionaire’s tax.

Individual Income Tax

Individuals received both tax increases and tax breaks. First, the good news.

To help New Jersey residents cope with the federal limitation on the deduction for state taxes, the budget increases the property tax deduction from $10,000 to $15,000, but there is a catch. The increase only applies to filers with income less than $150,000. The deduction drops to $5,000 for income between $150,000 and $250,000. The deduction is fully phased out for high earners—income greater than $250,000.

The earned income credit is increased from the current 35% of the federal credit to 37% for 2018 and, in steps, to 40% in 2020.

The retirement income exclusion increases in annual steps to $75,000 S and $100,000 MFJ in 2020.

On the flip side, the legislation decouples, specifically, from the IRC. Sec. 199A deduction as well as enacting a new marginal rate of 10.75% for income of $5 million and above.

Corporation Business Tax

Although New Jersey technically does not have economic nexus, you wouldn’t know it from the audits it has conducted in recent years and the industries it has targeted. Out-of-state banks, insurance companies, brokerage firms, and the like have felt the sting.

For corporate filers the news is bleak. The new legislation brings a corporate surcharge of 2.5% for income in excess of $1 million. Therefore, the new rate for 2018 and 2019 is 11.5%. It goes down to 10.5% for 2020 and 2021 before it is phased out (unless the legislature defers the phaseout).

The new legislation brings market-based sourcing for purposes of apportionment of service revenue in New Jersey. Cost of production still applies for service revenue of noncorporate entities.

The dividend received deduction (DRD) was reduced from 100% to 95% for 80% or more owned subsidiaries. This change was made retroactive to 2017 to enable New Jersey to tax 5% of the repatriation required by IRC Sec 965 as part of the federal tax reform act. For both corporate and individual owners of controlled foreign corporations (CFCs), New Jersey does not allow the deduction provided in IRC Sec 965(c). Therefore, the full calculated repatriation amount is taxable to individuals (since they do not qualify for a DRD).

With this legislation, New Jersey has joined the combined/consolidated reporting bandwagon. Unitary corporate groups are now subject to combined reporting. Only one member of the group needs to have New Jersey nexus to require the group to file a combined report. Combined groups include entities owned more than 50% directly or indirectly. To complicate matters, the legislation has its own definition of what a unitary group is, which is an amalgamation of statutes of various neighboring states. Essentially, unitary is defined as commonly owned business that have integrated, interdependent, and interrelated activities. Water’s-edge reporting is the default for combined reporting used by states, but worldwide reporting is elective. The implementation of the provision has been deferred to tax years ending after July 31, 2019 to allow the Division to generate the necessary forms, program their systems (that until now was based on separate reporting), and issue guidance.

New Jersey applies the 30% of income interest limitation included in IRC Sec 163(j) to both related party and unrelated party interest expense. This is in addition to the currently applicable related party interest expense limitation.

Finally, New Jersey is following New York State’s lead and converting the application of national operating losses (NOLs) from a pre-apportionment basis to a post-apportionment basis. One of the differences is that the pool retains its age. What this means is that an 8-year NOL converts and now has a 12-year life.

Sale & Use Taxes

Even as the budget battle was raging between the legislature and the new Governor, a separate bill was introduced as soon as the South Dakota vs. Wayfair decision was announced. A4261 was passed on June 30, 2018 and is effective October 1 2018. The legislation mimics the South Dakota rules for taxing remote sellers. The legislation requires remote sellers to register, collect, and remit sales taxes if they meet either of the two criteria, that is, 200 transactions or revenue of more than $100,000.

Not to fall behind in the race to tax as many remote sales as they can, a separate piece of legislation was signed by Governor Murphy on October 5, 2018. This legislation, A 4496 requires marketplace facilitators to collect and remit sales tax. This legislation is aimed at marketplace facilitators such as Amazon, Etsy, and eBay. What is not clear is if and how this rule is to work with A4261 (discussed above) that applies to remote retailers. Who exactly is collecting and remitting? This needs to be sorted out and the legislation included a 180-day deferral to give the Division time to issue guidance.

Other facets of the internet-based businesses were also tapped, in the new budget, as additional source of sales and use taxes. Rideshares that begin and end in New Jersey are subject to a new state surcharge of $4.50 per ride. This affects Uber, Lyft, Via, and the countless other rideshare providers.

Trying to capitalize on the popularity of Airbnb, the new legislation imposes sales tax to short-term housing rental market facilitators. A similar provision has been effective in Florida for more than 10 years. Florida has used it to expand its base and tax the short-term rentals of snowbirds.

State Tax Deduction Workaround

The budget legislation includes a provision allowing municipalities to create charities to accept contributions that would provide a credit to the contributions that can be used to offset real estate taxes. In true New Jersey style, the legislation shot itself in the foot. The legislation included a provision that restricts the municipality from touting the tax benefits or the possible treatment by the IRS.

As a whole, the budget sticks to the new Governor’s budget philosophy he campaigned on. Tax the rich and corporations to pay for government programs. New Jersey Transit is in serious need of funding as is the need to shore up the seriously underfunded state pension system. And this only scratches the surface. This is the first of what may be future tax increases to pay for the many programs that Governor Phil Murphy campaigned on.