Governor McGreevey Approves Decoupling, NOL Changes

Governor James E. McGreevey signed, as part of his fiscal year 2005 budget package, a bill that decouples New Jersey corporation business tax (CBT) and gross (personal) income taxes from the increased IRC Sec. 168(k) 50% bonus depreciation and $100,000 IRC Sec. 179 expensing deduction enacted by the federal Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).

The new legislation affects IRC Section 179 expense deductions and depreciation permitted on the NJ CBT-100 and Schedule E. For property placed in service on and after January 1, 2004 , the law decouples the $100,000 federal ceiling from the amount permitted to be deducted as an expense for New Jersey corporation business tax purposes under IRC section 179. Returns for periods ending after December 31, 2003 are affected, if property has been placed in service on or after January 1, 2004 but during the privilege period. Since the amount of the deduction under prior law was $25,000, that is the limit of the IRC section 179 deductions for New Jersey purposes. The Act also makes clear that property placed in service after September 10, 2001 will not receive the bonus depreciation treatment.

The tax legislation summarized below was enacted as part of the State of New Jersey ’s 2005 Budget.

Business Retention Credits

Effective July 1, 2004 , businesses that have operated in New Jersey for at least 10 years and that undertake a project to retain jobs in New Jersey are eligible for corporation business (income) tax credits. The tax credits allowed may not exceed 80% of the projected state tax revenues from the retained full-time jobs.

Eligible businesses include those that agree to relocate and maintain a minimum of 250 retained full-time jobs from a location within New Jersey to a new location within the state. For businesses that relocate a minimum of 500 full-time employees, the credit equals "total allowable relocation costs," defined as $1,500 times the number of retained full-time jobs, and will be issued immediately upon entry of the project agreement between the taxpayer and the state. A bonus credit of 50% of the amount of original tax credits will be awarded to any business that relocates more than 2,000 full-time employees. The total value of tax credits issued may not exceed $20 million in any fiscal year.

Eligible taxpayers must apply for the credits. No credits will be issued in any year until the state treasurer has certified that the amount of retained state tax revenue received equals or exceeds the amount of tax credits.

The law also requires that a tax credit certificate transfer program be established under which taxpayers may surrender unused credits to other businesses with corporation business (income) and insurance premiums tax liabilities.

Tax Benefit Certificate Transfer Program Cap

The annual cap on the tax benefit certificate transfer program for new or expanding emerging technology and biotechnology companies increases from $40 million to $60 million for the 2005 fiscal year and for each fiscal year thereafter.

Sales Tax Exemptions

Eligible businesses with 1,000 or more full-time employees in New Jersey that are relocating 500 or more full-time employees into a new business location may qualify for a New Jersey sales tax exemption certificate for the purchase of machinery, equipment, furniture and furnishings, fixtures and building materials other than tools and supplies for the new business location.

Finally, a New Jersey sales and use tax exemption is available for final sales of electricity and natural gas to a qualified business in an urban enterprise zone that employs at least 500 people, at least 50% of whom are directly employed in a manufacturing process.

Property Tax Relief Benefits Increased

The new FAIR (Fair And Immediate Relief) program, provides increased property tax relief benefits to New Jersey homeowners and tenants. Beginning with the rebates paid in 2004 for applications filed for tax year 2003, the rebate amounts are as follows:

Increased Gross Income Tax on High-Income Taxpayers

The new legislation establishes an additional bracket of 8.97% in the graduated gross income tax table for taxpayers with taxable income above $500,000.  The new legislation is effective retroactively to January 1, 2004 .

Because of the increase in tax rates, new withholding rates are required. The legislation requires that all employers withhold at the rate of 12 percent from salaries, wages and other remuneration paid in excess of $500,000 during the remainder of 2004. This new rate takes effect immediately and must be instituted by all employers no later than September 1, 2004 . On January 1, 2005 , the top withholding rate is reduced to an annual rate of 9.9 percent.

Outdoor Advertising Fee Changes

The new legislation provides for a gradual reduction in the rate of the fee imposed on outdoor advertising signs and also provides that entities treated as exempt organizations for sales and use tax purposes shall be exempt from the outdoor advertising fee as well. It also subjects outdoor advertising signs to real property tax.

New Tire Fee

Effective August 1, 2004 , the new legislation imposes a fee of $1.50 on the sale of new motor vehicle tires, including tires sold as a component part of a new motor vehicle either sold or leased in New Jersey .

Electronic Filing Threshold

Effective immediately, the new legislation lowers the threshold for mandatory use of electronic transfer as the means of filing state taxes for taxpayers whose prior year liability was $10,000 or more.

Cosmetic Medical Procedures Tax

Beginning after September 1, 2004, the new legislation imposes a new 6% gross receipts tax on the purchase of certain cosmetic medical procedures, which are medical procedures performed in order to improve a person’s appearance, but without significantly serving to prevent or treat illness or disease or to promote proper functioning of the body. “Cosmetic medical procedures” do not include reconstructive surgery or dentistry to correct or minimize abnormal structures caused by birth defects, developmental abnormalities, trauma, infection, tumors or disease. The tax will be collected from the patient by the cosmetic medical service provider, who will be required to remit the tax quarterly.

Estimated Tax on Income from Sale of Real Property by Nonresidents

Effective August 1, 2004 , the new legislation requires nonresidents who derive income from the sale of real property in this State to pay estimated gross income tax. The Act provides that a county recording officer at the time the deed is filed must be presented with evidence of filing or payment of estimated tax with respect to the gain realized from the sale.

Bank Account Information

Effective immediately, the new legislation requires financial institutions, in response to a request by the Director of the Division of Taxation, to transmit electronically a report regarding the accounts of tax debtors.

Contractor Registration Changes

Effective after September 1, 2004 , the new legislation extends to local government agencies the requirement that public entities may enter into public contracts with providers of goods and services only if they have presented documentation showing that they are registered with this State for tax purposes. The Act also provides that these providers of goods and services and their affiliates must remit sales or use tax on tangible personal property delivered to a retail buyer in this State.

License Suspension of Tax-Noncompliant Businesses

Effective  immediately, the new legislation provides a mechanism whereby the Division of Taxation will receive information regarding the identity of entities (including individuals) that are holders of licenses to engage in a particular profession, trade or business in this State, and will then examine their tax records to identify any areas of non-compliance and will give them an opportunity to contest their indebtedness or delinquency or to come in compliance. The Act authorizes the Director to demand the summary suspension of a professional, occupational or business license of an entity that already has an unsatisfied judgment for tax indebtedness, or who fails to remedy any tax indebtedness after receiving the notice provided for under this Act.

Realty Transfer Fees

For realty transfers taking place on or after August 1, 2004, the new legislation imposes an additional “general purpose fee” at a graduated rate, on grantors of realty where the value of the deed is more than $350,000, and makes other changes in fees and clarifications in the provisions governing realty transfer fees.

Cigarette Tax Increase

Effective July 1, 2004 , the new legislation increases the cigarette tax to $.1025 per cigarette, increasing the tax on a pack by $.35.