In a last-minute deal to avert a government shutdown, New Jersey Governor Phil Murphy and the New Jersey Legislature cobbled together a budget with numerous amendments to New Jersey’s tax law. Below is a summary of some of the most important changes from New Jersey’s 2018 budget deal that was signed into law on July 1, 2018.

Corporation Business Tax

• Surtax. A temporary surtax is imposed on taxpayers earning New Jersey allocated income in excess of $1 million at a rate of 2.5% for tax years beginning on or after January 1, 2018, through December 31, 2019, and at 1.5% for tax years beginning on or after January 1, 2020, through December 31, 2021.
• Market Sourcing. For periods beginning on or after January 1, 2019, receipts from the sale of services are sourced to the location where the benefit of the service is received. In the event the location where the benefit of the service is received cannot be determined, certain default rules apply. Specifically, if the customer is an individual, the benefit of the service is deemed to be received at the location of the customer’s billing address. If the customer is not an individual, the default rule is the location from which the service is ordered, or if that location cannot be determined, the location of the customer’s billing address.
• Combined Reporting. Effective for periods beginning on or after January 1, 2019, New Jersey will require mandatory unitary combined reporting. A combined group is a group of companies with common ownership (with a more than 50% ownership threshold) and that are engaged in a unitary business. The law specifies that “unitary business” shall be construed to the broadest extent permitted under the US Constitution.
• Prior Net Operating Loss Conversion Carryover. The law creates a “prior net operating loss conversion carryover” computed using the business allocation factor from the “base year,” which is the last privilege period prior to the July 1, 2018 effective date of the law. The prior net operating loss conversion carryover may only offset the income of the combined group member that created the loss and cannot be shared with other members of the combined group.
• Dividends Received Deduction (DRD). The DRD is reduced, retroactively, for tax years beginning after December 31, 2016, from 100% to 95% for 80% owned subsidiaries. The DRD also includes dividends that are “deemed paid,” such as undistributed foreign earnings that were deemed repatriated under the Tax Cuts and Jobs Act. Under mandatory unitary combined reporting, beginning January 1, 2019, dividends between members of a combined group are eliminated in the calculation of the group’s entire net income.
• Special Allocation Factor for Deemed Dividends. The 5% of deemed dividends from 80% owned subsidiaries that is not excluded from entire net income for the tax year beginning on or after January 1, 2017, and before January 1, 2018, is apportioned using a three-year average allocation factor for the taxpayer’s 2015 through 2017 tax years or 3.5%, whichever is lower.
• IRC § 199A. New Jersey explicitly decoupled from the new IRC § 199A qualified business income deduction.
• IRC § 163(j). For tax periods beginning after December 31, 2017, the interest deduction limitation under IRC § 163(j) will apply on a pro-rata basis to interest paid to both related and unrelated parties, regardless of whether the related parties are subject to add-back requirements.

Sales and Use Tax

• Remote Sellers. New Jersey also passed legislation similar to the South Dakota law that was considered in South Dakota v. Wayfair, Inc., No. 17-494 (06/21/18). Under the new remote seller law, nexus is established for sellers that have gross revenue exceeding $100,000 from taxable sales into New Jersey or 200 or more separate transactions. In addition, a “marketplace facilitator” must collect sales tax and report sales to the state.

Other Taxes and General Provisions

• Tax Amnesty. New Jersey will offer a 90-day tax amnesty period that will run no later than January 15, 2019. Under the amnesty program, a taxpayer with tax liabilities for returns due on or after February 1, 2009, can pay tax and one-half of the interest due as of November 1, 2018; most penalties and one-half of the interest due will be waived.
• “Multi-millionaire’s” Tax. For individuals, New Jersey sets the new top income tax bracket at 10.75% for income exceeding $5 million.

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