New Jersey Tax Changes Signed Into Law by Governor Christie

New Jersey Tax Changes Signed Into Law by Governor Christie
The July 2014 Riker Danzig Tax and Trusts & Estates Update

On June 30, 2014, Governor Chris Christie signed into law a $32.5 billion state budget for the 2014-15 fiscal year.  Governor Christie spared New Jersey taxpayers from several revenue items included in the version of the budget approved by the State Legislature.  Specifically, he line-item vetoed a proposed “millionaire’s tax” – a temporary tax increase (from 8.97% to 10.75%) on income above $1 million – and a proposed 15% surtax on corporations subject to New Jersey’s corporation business tax (CBT), which would have increased the tax rate from 9% to 10.35%.

However, that same day, the governor signed into law a separate bill that makes several significant changes to New Jersey’s tax rules:

Deemed Asset Sales by Out-of-State Companies.  When a company’s stock is sold, and an election under Section 338(h)(10) of the Internal Revenue Code is made with respect to that sale, the company is deemed to have instead sold its assets.  As previously discussed in our New Jersey Tax Alert 2014, New Jersey’s courts have held that the gain arising from such a deemed asset sale is nonoperational income, which is only taxable by the state in which the company’s principal place of business is located.  The new law changes the definition of “operational income” to include income from the sale of property “the acquisition, managem ent or disposition” of which constitutes “an integral part of the taxpayer’s regular trade or business operations” (the statute previously said “and” instead of “or”).  As a result, out-of-state companies with New Jersey assets or operations may now be required to pay New Jersey taxes as a result of 338(h)(10) elections.

Nonresident Partner Taxes.  Partnerships in New Jersey are required to remit tax on amounts of partnership income that are allocable to their nonresident partners.  As previously discussed in our New Jersey Tax Alert 2014, the courts in at least one case have allowed a nonresident partner to claim a refund of the remitted tax on the basis of that partner not having sufficient nexus with New Jersey to be subject to the tax.  Under the new law, a nonresident partner may no longer claim such a refund unless the partner files a New Jersey tax return reporting income that is subject to New Jersey tax.

Losses and Bad Debts.  Under federal tax law, if a taxpayer’s debt is forgiven, but the taxpayer is bankrupt or insolvent, the amount of debt forgiven may not be treated as taxable income, but the taxpayer’s net operating losses and other tax attributes may be reduced by that amount.  Until now, the CBT has not had a companion provision.  Under the new law, however, a taxpayer’s net operating losses for CBT purposes must now be reduced by the amount of forgiven debt that is excluded from federal taxable income on account of bankruptcy or insolvency.

Sales Tax Nexus Through Independent Contractors and Other Representatives.  Following the lead of New York and other states, the new law permits “click-through nexus,” thereby allowing the State to collect sales tax on sales made by certain out-of-state sellers to New Jersey purchasers.  Under this provision, an out-of-state seller that compensates independent contractors or other representatives having a physical presence in New Jersey to directly or indirectly refer potential customers (whether by a link on a website or otherwise) is presumed to have nexus with the State, so long as its aggregate gross receipts from sales to New Jersey customers through all such contractors and representatives exceed $10,000 during the prior four calendar quarters.  Such a seller would therefore be required to collect and remit applicable New Jersey sales tax on sales to New Jersey customers.  A seller may rebut this presumption, however, by proving that such independent contractors or representatives did not engage in any solicitation in New Jersey on behalf of the seller that would satisfy constitutional nexus requirements.