In 2023, New Jersey businesses witnessed a flurry of state tax developments. With an evolving regulatory tax environment, many businesses find that keeping up with these changes can be daunting. These regulatory challenges can be further complicated when, at the same time, an organization is going through its own transformation. This may include developing new service offerings, adopting remote workforce strategies or implementing advanced customer service technologies.
As companies contemplate business model changes, it’s imperative that they collaborate with their tax advisors early in the decision-making process to understand how these regulatory changes may impact business planning.
Here are a few of the most significant New Jersey business tax developments:
Shortly after the Tax Cuts and Jobs Act (TCJA) was enacted, New Jersey enacted sweeping reform of the corporation business tax (CBT). This tax reform put in place mandatory unitary combined reporting and adopted market-based sourcing for corporations. On July 3, 2023, Gov. Phil Murphy signed into law A.B. 5323, which yields the most significant business tax changes since the 2019 tax reform.
Although promoted by many as a CBT amendment bill, possibly the most significant change in A.B. 5323 is not a CBT provision, but a gross income tax provision which affects partnerships and sole proprietors. This is the retroactive adoption of a single sales factor (SSF) apportionment formula along with market-based sourcing (MBS). SSF/MBS was effective Jan. 1, 2023, and has resulted in non-corporate businesses using the same apportionment methodology as corporations.
This is monumental change, as New Jersey-centric businesses may be able to substantially reduce their overall state tax due and/or possibly alleviate resident credit limitations for New Jersey-based owners.
As businesses brainstorm new service offerings, an out-of-state partnership could simply have a filing requirement if the benefit of the service is received at a New Jersey location. In parallel, out-of-state businesses won’t be able to dilute their New Jersey apportionment factor as they may have in the past, as the new statute eliminates the use of a payroll and property factor, relying solely on a sales factor.
On July 21, 2023, New Jersey enacted a “convenience of employer” rule (A.B. 4694), which will likely impact payroll tax withholding procedures for many employers. The law is designed to be retaliatory to other states that enact an equivalent rule, as it only applies to employees who are residents of states that also impose a convenience of employer rule.
As such, this means that an employer with an office in the Garden State with remote employees who work from home in a state that also has a comparable rule (e.g., New York) needs to examine if they should start withholding in New Jersey.
The new law is retroactive to Jan. 1, 2023, and applies to nonresidents who have compensation from a “New Jersey employer” unless such services are required to be performed outside of New Jersey for the “necessity of the employer.” As the new law doesn’t define many key terms, published state guidance instructs employers to rely on the convenience rule of the employee’s resident state.
Businesses that are planning to use remote workforce strategies need to evaluate how remote policies can be structured to help minimize potential state tax risks while achieving business objectives.
On Sept. 5, 2023, the Treasury Department released TB-108, formally explaining New Jersey’s position on internet activities as previously adopted by the Multistate Tax Commission (MTC) that would exceed the protections of P.L. 86-272, potentially resulting in income tax.
Based on the published guidance, if a business provides post-sale customer service assistance through an electronic chat, email or application that customers access through the company’s website, then a business would be considered to exceed the protections of P.L. 86-272.
In addition, other internet activities may also be deemed to exceed protections. This includes if a business remotely fixes or updates products by transmitting code via the internet as part of a purchased service subscription or if a business gathers market or product information through the placement of cookies and sells such information to third parties. With respect to these two activities, it appears New Jersey has a higher threshold than the MTC, as both the “remote product upgrades” and the “cookies” also require a service revenue condition.