WHIPPANY, N.J. – Tax reform. In the state of New Jersey, these two words are enough to strike fear in virtually everyone, from homeowners plagued by some of the highest property taxes in the nation to business leaders alike. While many of the former – mostly in the northern counties – are feeling the pinch of the $10,000 property-tax cap just weeks before the federal filing deadline, the latter are considering their next steps in addressing the impact of new, far-reaching tax legislation taking effect in 2019.
While legislators and industry analysts are introducing cause/effect and chicken-or-the-egg theories regarding New Jersey’s enduring tax-revenue slump, the Garden State is joining ranks with a good number of its fellow states by transitioning to two very impactful corporate tax-generating initiatives: mandatory combined reporting for business taxpayers and implementation of market-based sourcing.
The Complexities of Combined Reporting
In its January bulletin, the New Jersey Division of Taxation indicated the state is transitioning to mandatory combined reporting for taxpayers with year-ends on or after July 31, 2019. Given the state’s definition of “common ownership” and “engaged in a unitary business where at least one company is subject to tax under this chapter” language, a good number of entities that once filed a separate return now find themselves re-classified into the combined group category.
Such entities include: U.S. corporations and foreign, banking, financial and professional corporations; casinos; domestic and foreign limited liability companies (excluding those classified as partnerships or disregarded entities); federal S corporations and qualified subchapter S subsidiaries (that have not made the state’s S-corporation elections); and NJ S corporations and NJ qualified subchapter S subsidiaries (which have elected to be included).
While New Jersey is simply following a trend of the last several years established by approximately half of all U.S. states, the combined reporting mandate is not without its own complexities and headaches. These run the full gamut of corporate tax compliance and planning to profit mitigation. Other related issues requiring consideration are a minimum tax of each combined-group member if it has nexus in the Garden State as well as the treatment of tax attributes (such as Net Operating Losses) of the members.
Interstate and Global Commerce and Market-Based Sourcing
Another major consequence of New Jersey’s tax-reform legislation is the implementation of market-based sourcing. Simply put, this shift away from cost-of-performance sourcing – where taxes are based on the location in which a corporation performs its income-producing activity – places a new burden on corporate taxpayers engaged in multi-state sales of services. Under New Jersey’s market-based sourcing guidelines, corporations – regardless of where they are based – must now assign tax apportionment to sales received in or delivered to New Jersey.
The primary motivation for switching to market-based sourcing is to give New Jersey equal footing in corporate taxation of interstate and global sales destined for the Garden State. As a result, New Jersey can now lay claim to a piece of the tax-revenue pie for businesses headquartered in low- or no-tax states.
Although the concept of market-based sourcing seems fairly straightforward, and is a windfall from the state’s perspective, corporations are left in a quandary. And, many are turning to their professional tax advisors to sift through the potential pitfalls. Among these are how to apply the various rules for different states, avoiding the potential for double taxation and correctly classifying the circumstances/services to which an apportionment should be applied.
Tax reform – and its rippling effect – is a thing of the present on the state and federal, individual and corporate level. In particular, now is not the time for businesses – regardless of their size or industry – to go it alone.