Newly instituted combined reporting requirements for corporations and new taxes on C-corporations and individuals earnings more than $5 million are matters in New Jersey’s fiscal 2019 budget that beg close heed, tax attorneys caution.
Combined reporting, which looks at a company’s overall profits instead of just its New Jersey-based entities, represents a fundamental shift in the way the state taxes corporations. Historically, if a corporation was owned by another entity, New Jersey taxed each separately.
That meant each corporate unit determined whether it was subject its own New Jersey tax liability. The new tax will result in all business units operating in the state being taxed as one business.
“There’s a lot of ambiguity in the law. What are the limits [of a unitary business]? How many companies, and which companies?” asked Jaime Reichardt, chair of the state and local tax practice at Sills Cummis & Gross. “It’s a very fact-sensitive inquiry. It’s also a constitutional inquiry that’s been subject of case law from the United States Supreme Court going back decades. This may lead to further controversies, uncertainty and litigation.”
Tom Bracken, president of New Jersey Chamber of Commerce, said combined reporting is “a major issue for many of our large customers” and makes the state ”much more uncompetitive.”
The new law isn’t expected to present significant compliance issues.
“Most of the companies that are required to file a unitary combined returned have to file similar returns in other states like California and New York,” said David Shipley, partner in McCarter & English’s tax and employee benefits arm. “It’s not going to be something new or different for these corporations because they’re filing these returns in other states.”
Meantime, the corporate business tax — which applies to corporations with $1 million or more in income from New Jersey operations — has been raised to 11.5 percent from 9 percent for 2018 and 2019, and to 10.5 percent for 2020 and 2021.
“It’s bad policy,” said Michele Siekerka, president and CEO of the New Jersey Business & Industry Association. “It will affect over 2,000 businesses that generate over $2 billion net income. Our companies are not reacting very favorably, saying ‘Now’s the time to look to my accountant to consider to leave the state,’ [or] ‘I’m not going to leave the state, but I won’t grow in the state.’”
The new rates are primarily going to affect large Fortune 500 and Fortune 100 companies as well as smaller businesses that are regional in nature, according to Shipley.
“What’s interesting is this affects in-state and out-of-state corporations equally because your income that’s subject to tax is apportioned based on the percentage of sales in New Jersey,” Shipley said. “If you have a New Jersey-based company that makes $50 million and has 10 percent of their earnings here, and if you have an out-of-state company with the same sales and income, they’re going to be taxed the same. You’re not worse off than if you’re located out of state.”
“That being said, I think the rate increase along with the shift to unitary combined reported, and the reduction in the dividends received deduction collectively send a message to corporations that New Jersey isn’t a tax friendly state,” he added.
As for the tax on the state’s wealthiest residents, it affects individuals with annual incomes of $5 million. Gov. Phil Murphy estimates that some 1,700 New Jerseyans will have to pay the new 10.75 percent tax, dubbed a “millionaires’ tax” as first proposed by the governor but more of a multimillionaires’ tax as enacted.
“Pennsylvania’s highest tax rate is 3.07 percent,” Shipley said. “In that area, it puts New Jersey at a competitive disadvantage, as it’s significant how much money someone going from New Jersey to Pennsylvania would save [on taxes] if they make $5 million.”
How this will affect the state, he said, depends on how many of its most affluent residents move as a result of the tax.