2020 Tug-of-War Expected Over Taxes … AGAIN

Additional taxes might soon be proposed in the state, but the business community wants to discuss options to make New Jersey more competitive and commerce-friendly.

By João-Pierre S. Ruth, Contributing Writer On Feb 11, 2020

The annual cycle of state budget battles once again finds New Jersey facing the possibility of tax increases. There are hints of another “millionaires tax” being in the works again, though the potential pushback is gearing up as well. Chrissy Buteas, chief government affairs officer for the New Jersey Business & Industry Association (NJBIA), says she anticipates the governor will call for another tax on incomes greater than $1 million – such a tax already exists in the state for income over $5 million. If this tax increase is introduced and/or enacted, she says it will be yet another way the state makes it a challenge for businesses to operate here. “We are working with the Legislature to find some resolution to these issues that put New Jersey in an outlier status,” Buteas says.

How the state taxes multinational companies that do business here, along with a variety of policy clarifications and adjustments, could put other wrinkles in the tax landscape for 2020. This includes changes taking place at the national level that could reach businesses in New Jersey.

Buteas says NJBIA is eager for a different approach to how multinational businesses are dealt with. “What we’d like to see changed is how the state treats its global, intangible low-taxed income (GILTI),” she says, referring to a section of the tax code concerning companies with operations and income sources both within the state and overseas.

A key issue, Buteas says, is that New Jersey is one of only five states that tax 50% or more of GILTI. Further, this is the only state that is home to 10 or more Fortune 500 company headquarters that also includes more than 5% of GILTI in their tax base. NJBIA proposes the state either decouples from GILTI or exclude 95% of GILTI from the state tax base. That would put New Jersey more in line with regional rivals such as New York, Pennsylvania, Connecticut and Massachusetts, she says.

“We’re an outlier in that we treat it significantly worse than other states,” says Christopher Emigholz, NJBIA’s vice president of government affairs in taxation and economic development, regarding the handling of GILTI. New Jersey’s approach collects as much tax as possible on multinational companies, which Emigholz says makes these businesses that can easily shift their jobs and investments less likely to want to operate, expand and/or remain in the state.

There are other areas, such as the corporate business tax, in which NJBIA would also like to see some progress made, he says. A temporary surtax introduced in fiscal 2019 levied an additional 2.5% on income in excess of $1 million for tax years from January 2018 through December 2019. Emigholz says that surtax was written to drop to 1.5% for tax years through December 2021 and is slated to eventually be retired. There is some question though if Gov. Phil Murphy and the Legislature would allow the surcharge to expire as intended. “We want to make sure that it sunsets,” Buteas says.

There are federal tax policies and procedures due to see changes in 2020 that will also merit attention, says Daniel Mayo, principal with WithumSmith+Brown. For example, he expects final regulations to be issued for investments made into Qualified Opportunity Zones. Created under the federal 2017 Tax Cuts and Jobs Act, Qualified Opportunity Zones comprise more than 8,700 areas representing lower income communities across country. Taxes can be deferred on eligible capital gains made on approved investments into the zones.

Mayo says the intent is to drive economic development in those areas and provide substantial tax benefits to the investors, which can be businesses. The longer an investor remains within a Qualified Opportunity Fund, the capital gains tax diminishes. “If you hold the investment in the opportunity zone for 10 years, all gains [tax] on that investment in the zone is eliminated,” he says. Mayo expects details on the mechanics of the fund to be available soon.

Businesses should also be especially mindful of any delinquent, unanswered federal tax matters that need to be addressed – otherwise there may be a literal knock at the door. Mayo says the Internal Revenue Service has been stepping up its in-person presence when it comes to long-running compliance issues where the taxpayer has ignored attempts to reach the agency. “They are going to have surprise face-to-face visits,” Mayo says. “These are people the IRS has tried to contact many times but they have never responded.”

Changes are coming on the calculation side of reporting taxes, says John Apisa, partner with PKF O’Connor Davies. Commonly-owned companies, in which there are operations engaged in a unitary business for corporate years ending on or after July 2019, would be affected, he says. This means business owners with two or more affiliated companies will have to notify the state and report on a combined basis. Apisa says this may benefit the taxpayer in certain cases. If one company saw losses while the other has income, the two might offset each other. “In the past, you weren’t able to do that,” he says.

Some changes already put into play by the state have affected certain “sharing economy” businesses. Lodging taxes introduced in 2019 for short-term rentals meant Airbnb properties could be taxed similar to hotels, Apisa says. There was some concern that the higher rates would hit New Jersey’s shore rentals, but he says the law was modified to exclude traditional shore rental properties not listed on Airbnb and its ilk. Tax policies seem to be catching up with other sharing economy business models that initially defied traditional classifications. For example, Apisa says the state is moving to make companies such as Uber and Lyft recognize their drivers more as employees than as independent contractors. “That would mean making sure they get paid overtime and are subject to minimum wage rules,” he says.

Overall sentiments about the “business friendliness” of New Jersey’s tax policies have not changed much, Apisa says, especially after the last “millionaires tax.” Still, he believes that approaches adopted by other states may merit a bit of consideration to keep businesses from moving away from New Jersey. “You don’t want taxes to be the only factor, but it is a factor,” he says.

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