Tax Alert: Significant New Jersey Tax and Incentive Changes Enacted
12/30/2008
In response to the recent economic woes, the State of New Jersey has made significant tax and incentive changes in an effort to provide relief by attracting businesses back to New Jersey and promoting job growth. These changes are summarized below.
Extension of Net Operating Loss Carryforward Period
To help corporate taxpayers recover their losses, on November 24, 2008, Governor Jon Corzine signed into law Senate Bill 2130. This bill extends the net operating loss (NOL) carryforward deduction from seven periods to 20 for losses generated during periods ending after June 30, 2009 (tax year 2009 for calendar taxpayers). Although the State still prohibits taxpayers from carrying back a NOL to prior years, New Jersey is now competitive with the 20-year carryforward period allowed by its neighboring states of New York, Connecticut, Pennsylvania, and Delaware.
Also, the New Jersey Economic Development Authority continues its program of allowing certain high-tech and biotech corporations to sell unused New Jersey NOL deductions and research and development credits for cash.
Repeal of “Regular-Place-of-Business” and Throwout Provisions
On December 19, 2008, Governor Corzine signed into law Assembly Bill 2722. This bill repealed the “regular-place-of-business” and throwout provisions and is a key victory for corporate taxpayers seeking income tax relief and for attracting companies back to New Jersey. Because of these two provisions, corporate taxpayers have historically viewed New Jersey, from a state income tax perspective, as a costly state within which to transact business for reasons explained below. Consequently, many corporate taxpayers have elected to move or locate their offices to neighboring states with less costly tax structures. The repeal of both provisions is effective for periods beginning on or after July 1, 2010 (tax year 2011 for calendar taxpayers).
Generally, a state income tax is determined by taxing a portion of a corporation’s profit that has been assigned to the given state by way of an apportionment formula. A typical apportionment formula is based on the corporation’s percentage of in-state sales, payroll, and property versus its everywhere sales, payroll, and property. Many states have altered this formula to give greater weight to the sales factor or eliminate the payroll and property factors altogether. Such alterations act to favor those companies with in-state facilities. New Jersey has previously altered its apportionment formula so that the sales factor is 50 percent of the entire apportionment formula. Governor Corzine is currently pushing to eliminate the payroll and property factors of the apportionment formula in an effort to help those corporations with in-state facilities and to further attract companies back to the State.
The “Regular-Place-of-Business” Provision
The “regular-place-of-business” provision required corporate taxpayers to pay New Jersey income tax on its entire profit, regardless of where earned, if the taxpayer lacked a regular place of business (i.e., a bona fide office) outside of New Jersey. Thus, such a corporation could not determine its New Jersey income tax by use of an apportionment formula, as discussed above. Although the State did allow taxpayers who fell within this provision credits for taxes paid to other states, such relief was seldom equivalent to the ability of apportioning profit or was cost prohibitive. This is evident by the State’s projected impact of this repeal to be $60 million of reduced annual business tax collections.
The Throwout Provision
New Jersey adopted its throwout provision as part of its 2002 Business Tax Reform Act, which made significant corporate tax changes. The throwout provision deals with how a corporation computes its sales factor of the apportionment formula generalized above. Typically, a taxpayer’s sales factor is the ratio of its in-state sales to its everywhere sales. In determining the denominator of its sales factor, the throwout provision requires a company to exclude its sales to customers who are located in states that do not tax the corporation’s profit. Such a provision is rarely used as it effectively taxes profits that have little to no connection with the state imposing the throwout provision. This is evident by the State’s projected impact of this repeal to be $89 million of reduced annual business tax collections. (Note, this provision is much different than the throwback provision employed by several states, such as California.)
Also be aware that there are pending court cases in which taxpayers (viz., Pfizer) are challenging the State’s ability to impose its throwout provision. In anticipation of the court striking down the throwout provision, many corporate taxpayers affected by this provision are filing protective refund claims. Although the State will likely deny the refund claim, taxpayers can appeal their claims to the Conference and Appeals Branch pending the final outcome of the issue in court.
New Economic Incentives Enacted—InvestNJ Business Grant Program
On December 9, 2008, Governor Corzine signed into law Assembly Bill 3294, titled InvestNJ Business Grant Program. This bill establishes a two-year incentive program within the New Jersey Economic Development Authority (EDA) that will provide $120 million in grants to help stimulate in-state job creation and capital improvements.
In sum, the InvestNJ Business Grant Program provides the following two incentives for all businesses, whether a corporation, partnership, limited liability company, or a sole proprietorship:
- A cash grant of $3,000 for each new in-state job created and retained for one year, not to exceed $500,000 per business. In order to qualify, the job position must include health benefits under a group health plan.
- A cash grant equal to seven percent of qualifying “capital investment” that exceeds $5,000, not to exceed $1 million per business. Qualifying “capital investment” includes real property improvements (new construction and renovation), certain types of furniture and fixtures, machinery, and equipment. It also includes environmental remediation costs related to the cleanup of a company’s facility site if it has not already obtained financial assistance from another government agency.
The qualifying jobs and capital improvements must be made prior to January 1, 2011. To obtain these grants, a business must complete and file an application, yet to be designed, with the EDA. For both grants, in order to qualify, a business must have continuously operated within the State for at least two years immediately prior to applying for the grant and employ at least five full-time employees. Regulations with specific details are forthcoming.
Of the $120 million authorized, $50 million is authorized for job creation grants and $70 million for capital improvement grants.
Expansion of Urban Enterprise Zone Upfront Sales Tax Exemption
For those business located within a New Jersey Urban Enterprise Zone (UEZ) the upfront sales tax exemption was expanded by Governor Corzine on December 17, 2008.
Effective February 1, 2009, the prior-year gross receipts threshold increases from $3 million to $10 million for purposes of the “point-of-purchase” exemption whereby purchases of most goods and services can be purchased free of sales tax. Taxpayers above the $10 million threshold continue to pay sales tax on purchases and have to subsequently file refund claims for the sales tax paid.
To find out how these changes impact you, contact your J.H. Cohn service professional at 877-704-3500.
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