July 17, 2023

New Jersey Enacts Sweeping Tax Law Changes

By Tri Hoang, EA, MST, Principal, Tax & Business Services, Jeremy Katz, J.D., LL.M., MBA, Tax & Business Services & Nicholas Scher, J.D., LL.M, Tax & Business Services

New Jersey Enacts Sweeping Tax Law Changes State & Local Tax

With a stroke of his pen on July 3, 2023, New Jersey Governor Phil Murphy enacted comprehensive changes to the Garden State’s corporate and partnership tax landscape, assenting to Assembly Bill (A.B.) 5323. This bill introduces modifications that will significantly impact nexus relations and income apportionment for taxpayers within New Jersey.

Crucially, this legislation is not an overnight phenomenon – its provisions will unfurl across a series of key dates, presenting nuanced changes set to reshape New Jersey’s fiscal ecosystem. A concise summary of these important effective dates is provided below.

Provisions Effective for Tax Years Ending on or After July 31, 2023

Economic Nexus Threshold

For NJ Corporate Business Tax (“CBT”) purposes, the state has adopted the economic nexus provisions similar to those applicable to the state’s sales and use tax regime. A corporation is subject to the CBT if it derives receipts in excess of $100,000 or has more than 200 separate transactions delivered to New Jersey customers.

New CBT Return Filing Deadline

Establishes the due date of the New Jersey return as the 15th day of the month immediately following the month of the original or extended federal corporate tax return filing due date. For example, the federal corporation tax return (Form 1120) is generally due on the 15th day of the fourth month following the end of the tax year, which for calendar year taxpayers is April 15th of the succeeding year. Under the new rules, the New Jersey CBT return will be due by May 15th.

Sales Factor Sourcing

The “Finnigan” Rule – The “Joyce” rule has been supplanted. All types of combined reporting groups are now required to use the “Finnigan” apportionment method and compute all New Jersey-sourced receipts of combined group members are includable in the receipts factor numerator, regardless of whether the member has nexus with New Jersey.

Treatment of Global Intangible Low-Taxed Income (“GILTI”)

GILTI income will now be treated as a dividend, eligible for the 95 percent dividends received exclusion.

NOL Conformity

New Jersey now conforms to the 80% limitation on utilization of NOLs under IRC Section 172. The new provisions also allow sharing of NOL and prior NOL (PNOL) carryforwards among combined group members, regardless of whether such NOL or PNOL carryforwards were created within a combined filing with the sharing members.

Provisions Effective Retroactively for Tax Years Ending on or After July 31, 2022

Combined Reporting: Worldwide vs. Water’s-Edge Affiliated Group Filing Requirements

A.B. 5323 establishes worldwide filing requirements to include income from all sources for members of an affiliated business group. On the other hand, foreign affiliates includable under either a water’s edge or an affiliated group filing are included only to the extent of ECI, subject to treaty limitations.

Statute of Limitations on NOL Adjustments

Under the new provisions, either the New Jersey Director of Taxation or the taxpayer may adjust NOLs in closed years to determine the correct tax liability in tax years still open under the statute of limitations. The Director can go back up to 10 years to make these adjustments as needed.

Provisions Effective Retroactively for Tax Years Beginning on or After January 1, 2023

New Partnership Sales Factor Sourcing

Partnerships must now use single sales factor sourcing, consistent with the apportionment rules under the CBT applicable to corporations. The Division of Taxation is working on and will soon release updated tax forms and instructions to reflect this change in apportionment methodology. Furthermore, sales of services must now be sourced to New Jersey using market-based sourcing, which sources receipts to the location where the benefit of the service was received. Note that given the retroactive application of this new provision to January 1, 2023, taxpayers will be relieved from the estimated tax penalty and interest relief. No penalties or interest will accrue for an underpayment of tax due for any provision that creates additional tax liability, provided that for tax periods “ending on and after July 31, 2023, the additional estimated payments shall be made no later than the second next estimated payment due following the enactment…or the second estimated payment due after January 1, 2024, whichever due date is later.”

Other Notable Provisions

  • Effective for tax years beginning on or after January 1, 2024, New Jersey will no longer impose the 2.5-percent CBT surtax, which sunsets on December 31, 2023.
  • Effective retroactively for tax years beginning after December 31, 2017, taxpayers must compute the IRC Section 163(j) interest deduction limitation on a federal consolidated basis, including federal consolidated filing affiliates not included in a New Jersey return. However, if a New Jersey combined group includes affiliates not included in the federal consolidated return, the IRC Section 163(j) interest deduction limitation must be computed based on the New Jersey combined.
  • Effective retroactively for tax years beginning on or after January 1, 2022, New Jersey decouples from the IRC Section 174 amortization requirement for research and experimental expenditures by allowing a current-year deduction for expenses incurred during the same privilege period for which a New Jersey research and development credit is claimed.
  • Effective January 1, 2023, for publicly traded companies, the law has been amended to revise how the net deferred tax liability deduction is to be calculated.

New Jersey Establishes a Convenience of the Employer Test

Interestingly, more tax law changes are on the horizon for New Jersey with Assembly Bill 4694, which as of this writing, has passed both houses of the state legislature and is expected to be sent to Governor Murphy for his signature.

New Jersey Assembly Bill 4694 introduces a convenience of the employer test for New Jersey residents. This means that individual taxpayers who are nonresidents of New Jersey earn wages from a New Jersey employer for services performed outside of New Jersey but were not required to do so and whose state of residence imposes a convenience of the employer test (Connecticut, Delaware, Nebraska, New York, and Pennsylvania). Then their employer would need to withhold New Jersey income tax as though the employee worked in New Jersey.

For tax years beginning on or after January 1, 2020, but before January 1, 2024, Bill 4694 would also allow remote workers subject to the convenience of the employer rule in other states to claim a gross income tax credit against their New Jersey state tax liability. To obtain a credit, a New Jersey resident would need to pay any income or wage tax to another jurisdiction, apply for and be denied a refund from that jurisdiction for wages earned while a New Jersey resident, file an appeal and obtain a final judgment from the jurisdiction’s tax court which grants the taxpayer an income tax refund on the grounds that the income was derived from services rendered while the resident taxpayer was within New Jersey. However, the credit would only equal 50% of the taxes owed to New Jersey due to the readjustment of New Jersey’s credit for taxes paid to another state.

If you have any questions about what these changes may mean for you or your business, please reach out to Marcum’s State and Local Tax Team.