• new_linkedIn
  • new_google_plus
  • new_rss
img1

New Jersey Adopts Single Sales Factor and Changes to Gross Income Tax Act

| More
May 2011

Summary

New Jersey Governor Chris Christie has signed into law legislation phasing in a single-sales factor apportionment formula over a three-year period beginning with privilege periods on or after January 1, 2012. Legislation was also passed which changes the apportionment formula for airlines and modifies the Gross Income Tax Act by allowing the netting of certain gains and losses and extending the carryforward provisions for business-related losses.

Details

Corporate Business Tax Provisions (Senate Bill 2753)

Single Sales Factor

The New Jersey Corporation Business Tax apportionment formula, which currently uses a three-factor formula (with double-weighted sales), has been modified to a single sales factor, with a phase-in over a three-year period.

Effective January 1, 2012, the phase-in will be as follows:

For Privilege Period Ending

Sales Factor

Property Factor

Payroll Factor

Before January 1, 2012

50%

25%

25%

After December 31, 2011, but before January 1, 2013

70%

15%

15%

After December 31, 2012, but before January 1, 2014

90%

5%

5%

After December 31, 2014

100%

0%

0%

See Senate Bill 2753, enacted April 28, 2011 (amending N.J.S.A. 54:10A-6). Similar provisions were proposed in the previous two fiscal years, but ultimately failed to pass. See Assembly Bill 1676 (2010) and Assembly Bill 4028 (2009). New Jersey’s change in apportionment-factor methodology puts the state in line with the changes already made by a number of other states, and makes the state more attractive for corporations looking to relocate business operations.

Airlines

The bill also modifies the apportionment formula for commercial airlines from a “departures” based methodology to a “revenue miles” methodology.

Gross Income Tax Provisions (Senate Bill 2754)

The New Jersey Gross Income Tax is imposed on various “categories” of gross income. Historically, a net loss in one category of gross income may not be applied against gross income in another category of gross income. Senate Bill 2754, enacted April 28, 2011, allows the netting of gains and losses from four categories of income, and allows the carryforward of business-related losses for up to 20 years. The four categories are (1) net profits from business; (2) net gains or net income derived from or in the form of rents, royalties, patents, and copyrights; (3) distributive share of partnership income; and (4) net pro rata share of S corporation income.

The tax benefits that would result from the cross-netting of income and losses from the above categories of business income will be phased in over a five-year period, for taxable years beginning after December 31, 2011. The cross-netting tax savings will be fully implemented in 2016. Once fully implemented, the maximum benefit permitted under the new legislation will be 50 percent of the amount the taxpayer would save if New Jersey allowed unlimited netting among the four categories of income.

Senate Bill S2754 has certain limitations. Specifically, taxpayers that elect to net income against losses from the previously referenced income categories are prevented from applying those losses to income or losses that are not related to the taxpayer’s own business (e.g., salaries and wages, disposition of property, interest or dividends).

Senate Bill S2754 also permits taxpayers to carry forward net losses from business-related categories of income for a period of 20 taxable years. As a result of the above changes, business owners that are subject to Gross Income Tax in New Jersey (i.e., individuals and pass-through entities) will be entitled to similar tax benefits as taxpayers subject to the Corporation Business Tax (e.g., cross-netting and carryforward of net operating losses).

Conclusion

After the enactment of this legislation, New Jersey is the latest of a growing number of states that have adopted a singlesales factor apportionment methodology in an effort to attract new businesses to the state and retain existing businesses. Note that the above changes were enacted after New Jersey’s repeal of the so-called “throwout” rule and the “regular place of business” requirement for apportioning income outside the state; both of these previous changes were effective for privilege periods beginning after June 30, 2010.

Material Discussed in this Alert is meant to provide general information and should not be acted on without obtaining professional advice tailored to your firm's individual needs. The information is for general guidance only and is not a substitute for professional advice.

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Related Team Member(s)
shannancuddy90x120
Shannan Gilmartin Cuddy
Tax Partner
(978) 557-5338
Email Me