New Jersey Enacts Significant Income Tax Changes and Adopts “Convenience of Employer” Rule

August 30, 2023

By: Jess Johannesen, SALT Senior Manager

At a glance

  • The main takeaway: New Jersey enacted significant income tax reforms and adopted a “convenience of the employer” rule for sourcing wages earned by nonresidents. 
  • Assess the impact: The amendments to income tax, including a new economic nexus standard, and the adoption of a “convenience of the employer” rule could create unexpected tax liabilities and penalties, as well as opportunities to reduce taxes, for companies doing business in the state.   
  • Take the next step: Aprio’s State and Local Tax (SALT) team can help you understand the impact the new tax rules in New Jersey will have on your business, so you remain in compliance and reduce your tax exposure. 

Schedule a free consultation today to learn more!

The full story:

The Governor of New Jersey, Phil Murphy, recently signed into law two bills that bring significant changes to New Jersey’s tax landscape: Senate Bill 3737/Assembly Bill 5323 was signed on July 3, 2023, which made a series of changes to New Jersey’s Corporation Business Tax Act (CBT), and Senate Bill 3128/Assembly Bill 4694 was signed on July 21, 2023, which created a “convenience of the employer” rule similar to New York as well as creating new tax credits for individuals and businesses. In this article, we provide highlights from each of the new bills. 

Senate Bill 3737/Assembly Bill 5323

Key amendments to New Jersey’s CBT are summarized below (unless otherwise noted, changes are effective for tax years ending on or after July 31, 2023):1

  • Effective for tax years beginning on or after January 1, 2022, New Jersey decouples from the IRC §174 requirement to amortize research and experimental expenditures and will allow taxpayers to deduct the full value of such expenditures in the same year that a New Jersey Research and Development Tax Credit is claimed.
  • Effective for tax years beginning on or after January 1, 2023, nonresident individuals subject to New Jersey’s Gross Income Tax will follow the CBT sourcing rules for business receipts (other than the individual’s compensation). If a nonresident individual engages in a trade or business in New Jersey or is a partner in a partnership or a shareholder of an S corporation that conducts business both within and outside of New Jersey, then such income may be sourced to New Jersey using the single sales factor formula instead of the historic three-factor formula.  Additionally, service receipts would be sourced using market-based sourcing rules instead of cost of performance rules.
  • New Jersey adopts a bright-line threshold for economic nexus. A corporation will be subject to the CBT if it derives New Jersey receipts in excess of $100,000 or has 200 or more separate transactions delivered to customers in New Jersey during the corporation’s fiscal or calendar year. New Jersey represents yet another state adopting its sales and use tax economic nexus rule for income/gross receipts tax purposes, similar to Hawaii and Washington.
  • The following are notable changes to New Jersey’s combined reporting provisions:
    • The definition of a “unitary business” is expanded to include business entities under common ownership that are “sufficiently interdependent, integrated, or interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value among the separate parts.” This minor change from “and” to “or” means that additional entities may now be considered unitary and required to be included as a member of the combined group.
    • All combined reporting groups will be required to use the “Finnigan Method” for sourcing receipts instead of the “Joyce Method” as previously used. Under Joyce, only the New Jersey-sourced receipts of the group members that have nexus with New Jersey are included in the numerator of the receipts factor. However, under Finnigan, New Jersey-sourced receipts of all group members, regardless of whether the member has nexus with New Jersey, will be included in the numerator of the receipts factor. As more members may be added to a combined reporting group as a result of the changes to the definition of a “unitary business,” consider how the change to Finnigan may also impact the apportionment formula even though those new members may not have nexus with New Jersey.
  • Global Intangible Low-Taxed Income (GILTI) will be treated as dividend income that is eligible for the dividend exclusion, which can be up to a 95% exclusion depending on ownership.  Additionally, the IRC §250 deductions for GILTI and Foreign Derived Intangible Income (FDII) are no longer allowed and must be added back to income.
  • New Jersey will conform to the federal 80% limitation regarding the utilization of net operating losses (NOLs) under IRC §172. 

Senate Bill 3128/Assembly Bill 4694

Highlights of the legislation adopting the “convenience of the employer” rule and new tax credits are summarized below:

  • During the pandemic, impacts of New York’s longstanding “convenience of the employer” rule were magnified given the abrupt shift towards a remote workforce. Specifically, this meant that individuals working remotely from New Jersey or Connecticut, for example, for an employer whose primary office is in New York, the compensation for those individuals’ was New York-sourced unless the individuals’ home office met a rather narrow definition. Effective for tax years beginning on or after January 1, 2023, New Jersey now joins New York, and a handful of other states, by adopting its own “convenience of the employer” rule. New Jersey’s version of this rule applies if the employee resides in a state that has a “convenience of the employer” test, such as New York or Connecticut. Specifically, if an employee is working from such state for a New Jersey employer, then compensation earned by the employee is New Jersey-sourced unless the employee is working outside of New Jersey due to necessity as opposed to convenience.
  • A $2,000 nonrefundable gross income tax credit for New Jersey residents who ask their employer and receive approval to permanently reassign their work location from outside the state to a work location in New Jersey.
  • The law establishes a pilot program, administered by the New Jersey Economic Development Authority, through which the state provides grants to businesses that assign their New Jersey resident employees (who are assigned to locations outside of New Jersey) to locations inside New Jersey. A business will be eligible for a grant if the business has at least 25 full-time employees and is principally located outside of New Jersey. Total annual grants are capped at $35 million, and the grant awarded to a business would be based on the New Jersey gross income tax withholdings of the reassigned New Jersey resident employees, up to a maximum of $500,000. Applications for approval must be submitted on or before July 1, 2028.

The bottom line

Aprio’s SALT team can help your business understand the impact of these new tax rules in New Jersey so that you remain in compliance and do not incur unexpected tax liabilities and penalties. In addition, we will work with you to ensure that you are maximizing all opportunities for reducing your New Jersey tax exposure. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

1 For information about all of the income tax reforms from this legislation, see New Jersey TB-107, issued July 11, 2023.

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