United States: NJ Adopts Combined Reporting, Market Sourcing, And New Amnesty Program

Last Updated: July 10 2018
Article by David J. Gutowski, Kyle O. Sollie and Matthew L. Setzer

At a Glance...

New Jersey Governor Phil Murphy and legislative leaders avoided a government shutdown by reaching a compromise on various tax measures.  The new legislation makes a number of changes to New Jersey's corporation business tax ("CBT"), including requiring taxpayers to file on a unitary-combined basis beginning in 2019 and applying market-based sourcing for services beginning in 2019.  In addition, the legislation provides for a new amnesty program for 2009–2017 tax liabilities.


Over the past several months, New Jersey Governor Phil Murphy and legislative leaders had expressed different views and proposals concerning the State budget.  The Legislature had passed what it saw as a balanced budget, including bills that amended various provisions of the CBT Act.  (See our prior coverage of one of those bills.)  But Governor Murphy decried the bills for not providing a "sustainable" revenue source and threatened to veto them.1 

With a government shutdown looming, Governor Murphy and the legislative leaders met for over six hours on Saturday.  The end result was a budget that includes sweeping changes to the CBT and other significant changes to incorporate recommendations from the Governor.

The CBT amendments

Since taking office, Governor Murphy has called for a "modernization" of the CBT Act to "close loopholes and benefit small businesses."2   Murphy's proposal included combined reporting, market sourcing, and a one-time tax on repatriated earnings.  The compromise that Murphy and the Legislature reached includes Murphy's recommendations on combined reporting and market sourcing, but does not include a one-time tax on repatriated earnings.  

Combined reporting. Beginning with tax years starting on or after January 1, 2019, New Jersey will change from separate-company reporting to mandatory unitary-combined reporting.3 The new legislation addresses some of the shortcomings identified in previous combined-reporting proposals and provides taxpayers with much more substantive guidance.4 Here's a summary of the key provisions:

  • Combined group includes entities with "common ownership" that are engaged in a unitary business.5 
  • Common ownership defined as 50%-or-more of the voting control being directly or indirectly owned by a common owner.6
  • Unitary business defined as a single economic enterprise; the Division of Taxation is empowered to interpret this term to the "broadest extent" permitted under the United States Constitution.7 
  • Net operating losses will be computed on a post-apportioned basis (as opposed to the pre-apportioned method under prior law). 

We will provide more detailed analysis of the combined-reporting provisions in an upcoming alert.

Market sourcing for sales of services. Under prior law, receipts from the sale of services were sourced based on location of performance.  But for tax years beginning on or after January 1, 2019,8 market sourcing will apply to such receipts.  Services will be sourced to New Jersey "if the benefit of the service is received at a location in" New Jersey.  If the benefit of the service is received both in and outside of the state, the portion includable in the sales-fraction numerator will be determined based on the percentage of the value of the service received in New Jersey to the total value of the service.9 

There is a default rule that the benefit of a service received by an individual is received at a customer's billing address.  For other customers, the first-level default rule is the location from which the services were ordered; if that cannot be determined, the second default rule is billing address.10 The new legislation, however, does not specifically define "billing address" or "customer."11 Presumably, the Division will promulgate regulations to provide clarification.

Surtax. Taxpayers with allocated net income above $1 million will be subject to a surtax that will be in effect for four years.  The surtax will be 2.5% for the 2018 and 2019 tax years; the surtax drops to 1.5% for the 2020 and 2021 tax years.  Thus, for taxpayers covered by the surcharge the total CBT tax rate for 2018–2019 will be 11.5% and for 2020–2021 will be 10.5%. 

Reduction of dividends received deduction. The dividends received deduction for dividends from 80%-or-more-owned subsidiaries is reduced from 100% to 95% for periods beginning after December 31, 2016.12 Accordingly, 5% of any undistributed foreign earnings that were deemed to be repatriated pursuant to the Tax Cuts and Jobs Act under I.R.C. § 965 will be included in the CBT tax base.  

New Jersey has very taxpayer-friendly case law on the scope of the unitary business principle.  So taxpayers should consider taking the position that any deemed dividends are nonunitary and excludable from their CBT tax base entirely.

Treaty exception for addback of related-party interest and royalties. Under prior law, there was a broad exception to the addback of related-party interest and royalties if the affiliate was located in a foreign country with a tax treaty with the United States.13 The new legislation significantly limits this so-called "treaty exemption" by requiring the affiliate to pay tax on the income stream at an effective tax rate within three percentage points of the taxpayer's New Jersey effective tax rate.14 

Taxation of worldwide income. The New Jersey Tax Court, in Infosys Limited of India Inc. v. Director, Division of Taxation,15 ruled that a foreign corporation was not subject to CBT on its income unless that income was included on Line 29 of the corporation's federal Form 1120–F.  In other words, a foreign corporation was not subject to New Jersey tax on foreign-source income or income immune from federal income tax based on a treaty.  

The new legislation calls this ruling into question by expanding the definition of "entire net income."  Specifically, entire net income is required to be computed without regard to "any exemption or credit allowed in any law of the United States imposing any tax on or measured by the income of corporations."16 Taxpayers may still have a position that treaty protection applies for CBT purposes, however, because it is not clear that a treaty constitutes a "law of the United States."  

Dividends no longer absorb net operating losses. Not all of the provisions in the new legislation are taxpayer-unfriendly.  In particular, under prior law, taxpayers had to apply net operating losses before their dividends-received deduction.  Under the new legislation, a taxpayer applies net operating losses to its (post-apportionment) net income computed after the dividends received deduction.17

Other provisions of the budget agreement

Tax amnesty. The budget agreement also included a state tax amnesty for any unpaid taxes.18 Here's a summary of the key terms of the amnesty:

  • Period to participate: The Division of Taxation will announce a ninety-day period for taxpayers to participate in the amnesty.  The period to enter the amnesty program will end on or before January 15, 2019.
  • Term: For taxes due on and after February 1, 2009, but prior to September 1, 2017.19
  • Interest relief: 50%.
  • Penalty relief: No late payment penalty, late filing penalty, cost of collection, delinquency penalty, or recovery fee.

Transient accommodations. This legislation imposes sales and use tax and the hotel and motel occupancy fee on transient accommodations.20  

Surcharge for prearranged rides. Beginning October 1, 2018, transportation network companies (such as Uber and Lyft) must collect a fifty-cent "surcharge" for any ride that originates and terminates in New Jersey.21 The legislation requires transportation network companies to separately state the surcharge on the invoice that they provide to riders.22 

Remote sellers. The Legislature also passed a bill concerning use tax collection responsibilities for remote sellers.23 Governor Murphy is also expected to sign the remote seller bill into law.  The bill follows from the United States Supreme Court's decision in South Dakota v. Wayfair, Inc.,24 which held that vendors can have nexus in a state for sales and use tax purposes, even if they are not physically present in the state.  The decision has significant implications for online businesses ( see our coverage of the case).

In Wayfair, the Supreme Court impliedly found that South Dakota's nexus standard was sufficient.  That standard applied to sellers that weren't physically present in the state and annually either: (1) made sales to South Dakota purchasers in excess of $100,000; or, made 200 or more separate transactions for delivery to South Dakota.  The bill that the New Jersey Legislature passed includes a nexus standard that mirrors the South Dakota standard.


1 See Twitter, Governor Phil Murphy, Tweet starting with "Legislators have a choice," (June 29, 2018, 6:24 P.M.), available at https://twitter.com/GovMurphy/status/1012824110580293633. 

2 See Budget in Brief, FY 2019, Philpp D. Murphy, p. 9 (March 2018), available at  https://www.state.nj.us/treasury/omb/

3 See P.L. 2018, c.48, secs. 18–24, 33 (enacted July 1, 2018).

4 For our coverage of the prior combined-reporting proposal, see www.reedsmith.com/en/perspectives/2016/06/nj-combined-reporting-updatebill-continues-through

5 See P.L. 2018, c.48, sec. 3 (adding to N.J.S.A. 54:10A–4 new subsections (z) and (aa), defining "combined group" and "common ownership"). 

6 See id

7 See id., sec. 3 (adding to N.J.S.A. 54:10A–4 a new subsections (gg), defining "unitary business.")

8 See id., sec. 7 (amending N.J.S.A. 54:10A–6(B)(4) to redefine the sourcing of sales); see also id., sec. 33 (effective date).

9 See id. 

10 See id., sec. 7 (N.J.S.A. 54:10A–6(B)(4)(iii) as amended).  

11 See Multi-State Tax Commission, Model General Allocation & Apportionment Regulations, § IV.17.(a)(3).

12 See id., sec. 3 (amending N.J.S.A. 54:10A–4(k)(5)).

13 N.J.S.A. 54:10A–4(k)(2)(I).

14 See id., sec. 3 (amending N.J.S.A. 54:10A–4(k)(2)(I)).

15 See Infosys Pmited of India Inc. v. Director, Division of Taxation, 2017 WL 5907704 (Nov. 28, 2017), aff'd on reconsideration, 2018 WL 1385844 (N.J. Tax March 19, 2018).  For our previous coverage of Infosys, see our alerts, here and here.

16 See id., sec. 3 (amending N.J.S.A. 54:10A–4(k)(2)(A) to remove reference to "specific" exemption). 

17 See id., sec. 3 (adding to N.J.S.A. 54:10A–4 subsection (v) which redefines the net operating loss deduction). 

18 See P.L. 2018, c.46 (enacted July 1, 2018).

19 See id., sec. 1.a. (enacted July 1, 2018).

20 See P.L. 2018, c.49 (enacted July 1, 2018).

21 See P.L. 2018, c.47 (enacted July 1, 2018).

22 See id.

23 See A4261.

24 See Spp Op., No. 17–494 (June 21, 2018).

This article is presented for informational purposes only and is not intended to constitute legal advice.

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