On July 1, 2018, New Jersey Gov. Phil Murphy signed Assembly Bill 4202, enacting significant changes to the state’s corporation business tax and mandating a tax amnesty program. Separate pending legislation is expected to affect sales tax collection responsibilities for remote sellers in response to the U.S. Supreme Court (Supreme Court) decision in South Dakota v. Wayfair, Inc.
Corporation Business Tax
Historically New Jersey has required that corporate taxpayers file returns on a separate company basis apart from other companies in their unitary group. A group of companies will now be required to file a single combined return if they have common ownership in excess of 50 percent engaged in a “unitary business.” The state will construe the term unitary business to the broadest extent permissible by the U.S. Constitution. The default filing method used for the combined group is a water’s-edge combination, using a Joyce approach regarding the calculation of the apportionment factor. However, a combined group may elect to be taxed on a worldwide or affiliated group basis. These changes will apply to tax periods beginning on or after January 1, 2019.
Effective for tax periods beginning on or after January 1, 2018, a surtax will be levied on a temporary basis through December 31, 2021. The rate for tax years beginning on or after January 1, 2018, through December 31, 2019, is 2.5 percent, switching to 1.5 percent for the two years through December 31, 2021. The surtax applies to taxpayers—except public utilities—with New Jersey allocated net income in excess of $1 million.
Market Sourcing for Services
For the sales factor, New Jersey will abandon its current location-of-performance method for sourcing sales of services. Effective for tax periods beginning on or after January 1, 2019, receipts from the sales of services will be sourced to where the benefit of the service is received. For example, if the benefit of a service is received at a New Jersey location, the receipt is sourced to New Jersey. If the benefit of a service is received at locations inside and outside of New Jersey, the receipt is sourced to New Jersey based on the percentage of total value of the benefit received at the New Jersey location or using a reasonable approximation to determine the total value of the benefit of the service received in all locations, including New Jersey.
Net Operating Loss (NOL)
The state will use a post-apportioned NOL for tax years beginning on or after July 1, 2018. Losses incurred on a pre-apportioned basis prior to this date will be converted and carried forward to offset future taxable income of the taxpayer that incurred the loss.
Dividends Received Deduction (DRD)
The DRD for dividends received from foreign subsidiaries is reduced to 95 percent for periods beginning after December 31, 2016. Consequently, 5 percent of any deemed dividends under the Tax Cuts and Jobs Act will be subject to tax. Taxpayers will use the lower of their three-year average allocation factor for the 2015 through 2017 tax years or 3.5 percent to calculate the tax liability on the deemed dividends included in entire net income.
Deferred Tax Deduction
Beginning on or after January 1 of the fifth year after the law becomes effective, combined group taxpayers are entitled to a deduction from combined group entire net income equal to one-tenth of the amount necessary to offset the increase in net deferred tax liability or decrease in net deferred tax asset. The deduction is applicable for 10 years and only is available to publicly traded companies.
Qualified Business Income Deduction & Interest Expense
New Jersey decouples from the new business income deduction under Internal Revenue Code (IRC) Section 199A. Effective for tax years beginning on or after January 1, 2018, related-party interest paid to a foreign related member won’t be required to be added back if income received by the foreign entity will be taxed at a rate equal to or greater than 3 percent of the tax rate applied by the state. In addition, for tax periods beginning after December 31, 2017, the interest deduction limitation under IRC §163(j) will apply pro rata on interest to both related and unrelated parties, regardless of whether the related parties are subject to the state’s addback rules.
The New Jersey Division of Taxation will conduct a tax amnesty program for taxes due on and after February 1, 2009, but prior to September 1, 2017. The program will run for 90 days and end on or before January 15, 2019. The program will abate 50 percent of the associated interest and all late payment, filing and delinquency penalties. An additional 5 percent nonabatable penalty will be imposed on any amounts not resolved during the amnesty period.
Sales Tax Nexus
The New Jersey Legislature also has drafted a law to enact similar nexus standards as decided in the recent landmark Supreme Court decision in South Dakota v. Wayfair, Inc. New Jersey Assembly Bill 4261 will require remote sellers to collect and remit sales taxes if they have either 200 or more separate annual sales or $100,000 or more in annual gross receipts from New Jersey. If passed, the law would take effect on October 1, 2018.
To learn more about how these changes may affect your organization, contact Jim, Jeff or your trusted BKD advisor.