New Jersey Passes Corporate Tax Overhaul, Remote Work Bills

New Jersey’s Legislature crammed major work into the final hours of its fiscal year Friday, approving a corporate business tax overhaul, a budget for fiscal year 2024, and new tax rules addressing in-state workers subject to New York state’s income tax.

With little drama the Assembly and the Senate unanimously approved A5323, the first comprehensive adjustment to the New Jersey corporate business tax since 2018, when the state adopted mandatory combined reporting. The measure heads to the desk of Gov. Phil Murphy (D), whose administration helped craft the bill together with lawmakers, business interests, and the state Treasury Department.

The overhaul measure modifies portions of the corporate income tax code addressing the way earnings are apportioned to the state. The bill also slashes the state’s authority to tax the earnings of foreign subsidiaries of multinational corporations, and expands the state’s income tax to out-of-state businesses that make more than 200 transactions into New Jersey or derive more than $100,000 in sales there.

The bill contains both tax cuts for businesses and revenue raisers for the state but was characterized as “essentially neutral in the long run” in a fiscal note from the Office of Legislative Services.

Corporate Surcharge

New Jersey’s tax climate for both large and small businesses will be further streamlined under an agreement outside of A5323 to abide by an earlier commitment to sunset the state’s controversial corporate business surcharge at the end of 2023.

The state bumped its corporate rate to 11.5% from 9% under a temporary 2.5% surcharge in 2018, lifting the state out of a budget hole. The surcharge was extended in 2021, but earlier this year, Murphy and lawmakers agreed the surcharge would expire at the end of the year.

“The passage of the corporate tax reform bill plus the inclusion of the sunset of the corporate surtax in the state budget will make New Jersey much more competitive for jobs and economic growth,” said Christopher Emigholz, chief government affairs officer for the New Jersey Business & Industry Association. “NJBIA has enjoyed working with the Murphy Administration and the State Legislature to make both possible.”

But the overhaul was controversial with progressive tax groups such as New Jersey Policy Perspective, which objected to a provision abandoning the state’s approach to global intangible low-taxed income. GILTI is a category of foreign income recognized under the 2017 federal tax law to discourage multinationals from shifting income from patents and trademarks to controlled foreign corporations based in lower-tax countries. New Jersey currently piggybacks on the federal tax on GILTI but allows for a 50% exclusion.

The overhaul bill expands the exclusion to 95%, putting the state at parity with the tax treatment of GILTI by several neighbors, including Connecticut, Massachusetts, and New York.

“The legislation is nothing less than an open invitation for wealthy multinational corporations to shift profits they earn in New Jersey to subsidiaries in foreign tax havens,” Peter Chen, senior policy analyst at New Jersey Policy Perspective, said in a statement.

Lawmakers also approved a $54.3 billion budget for the coming fiscal year, which begins July 1. The enacting legislation, A5669, includes a major new tax benefit targeting senior citizens struggling with the burden of high property taxes.

The budget deal includes the so-called “StayNJ” program, which grants New Jersey older than 65 and earning less than $500,000 per year tax credits valued at half their property tax bill—subject to a $6,500 cap. A separate feature boosts New Jersey’s “Anchor” property-tax relief program by $250 for thousands of senior homeowners and renters.

Remote Work

Lawmakers also passed a bill aimed at an issue that is a sore point for Murphy and lawmakers: the taxes state residents must pay to New York, where many of their employers are based. The measure would allow remote workers subject to New York’s income tax to claim a credit against their state tax liability and would establish incentives for workers to relocate to New Jersey.

The measure, A4694, introduces a “convenience of the employer test” for residents of states with similar tests—New York’s test is well known. Under the bill, if an employee who lives in New York does work there for a New Jersey company that isn’t required to be performed in New York, that employee would be subject to New Jersey taxation.

The convenience of the employer rule—which exists in Connecticut, Delaware, Nebraska, New York, and Pennsylvania—determines that wages earned by a nonresident employee are attributed to the location of their assigned office, regardless of whether the work was conducted at a home office in a different state. In some cases, there are exceptions for employees working from home due to a specific requirement imposed by the employer rather than for their convenience. New Jersey has a personal income tax reciprocity agreement with Pennsylvania, and so it doesn’t have the same issue there that it has with New York.

The bill won unanimous support in the Senate on Friday and passed the Assembly on May 25. Murphy is expected to sign the proposal.

The bill also introduces a nonrefundable gross income tax credit for workers who transfer from an out-of-state location to an in-state area. The credit would be equal to half the amount of taxes owed as a result of the readjustment of New Jersey’s credit for taxes paid to another state.

Additionally, the measure establishes a pilot program, managed by the Economic Development Authority, to provide grants to businesses, enabling them to relocate their New Jersey resident employees assigned to outside locations to New Jersey areas. Qualified companies must have 25 or more full-time employees and be primarily located in another state. The bill sets a $35 million cap on the total grants awarded in any fiscal year.

“This is a strike to states that unfairly have taxed New Jersey,” Assemblyman P. Christopher Tully (D) said.