In July of 2006, the New Jersey legislature passed 14 new bills as part of the New Jersey 2007 Fiscal Year Appropriations Act. The media focused on New Jersey’s budget deadlock and the showdown between the Assembly Democrats and Governor Jon Corzine over what was slated as a proposed hike in the sales tax from 6 percent to 7 percent. Nearly a week after the government shutdown of nonessential services, New Jersey lawmakers settled on a budget compromise. The resulting tax legislation encompassed more than a 1 percent sales tax increase on previously taxable transactions. The Appropriations Act widened the sales tax base, applied the sales tax to previously exempt services, affected sales in Urban Enterprise Zones and contained a number of corporate tax provisions. This article identifies many of the significant changes, but it does not cover all provisions of the Appropriations Act.
Effective July 15, 2006, the New Jersey sales and use tax increased from 6 percent to 7 percent. Less widely publicized was the widening of the sales and use tax base to a number of services. Business owners of these service companies are now required to register with the state, and collect and pay a sales and use tax. As of October 1, 2006, the following services were subject to a 7 percent sales tax: storage space, tanning services, massage services, tattooing, investigation and security services, information services, limousine services, membership fees and parking. The sales tax applies to a new category of "digital property." The state is now taxing electronically delivered items (e.g., sales via the Internet or mobile telephones) the same way as it taxes the sale of compact discs and DVDs.
In addition to widening the tax base, the Appropriations Act taxes certain previously exempt services, while preserving other exemptions. Partially exempt and nonexempt services include the sale of magazines, laundering services, landscaping services, prewritten computer software delivered electronically, installation of flooring, and delivery charges for taxable goods and services. It is recommended that over the next few months attorneys and/or accountants that have clients that fall into this category of partially exempt services assist them in identifying taxable services and develop new accounting methods to deal with these changes.
The State of New Jersey implemented transition rules that apply to taxable sales that began before July 15, 2006, and completed on or after July 15, 2006. Customers may apply to the Division for a refund of the 1 percent increase under certain circumstances.
Changes to the New Jersey Corporation Business Tax and Minimum Tax have also been enacted. For a three-year period (beginning after July 1, 2006, but before July 1, 2009), businesses will be assessed and must pay a 4 percent surtax in addition to the annual corporation franchise tax. The tax will be applied to the amount of tax liability remaining after applying credits against liability, other than credits for installment payments, estimated payments made with a request for extension to file a return, or overpayments from a prior privilege period. For example, if a New Jersey corporation has a tax liability of $90,000 as a result of a 9 percent business corporation franchise tax as reported on page 1, line 18 of the Form CBT 100, a surtax of 4 percent is due in the amount of $3,600. As a practical matter this increases the maximum corporate business tax rate to 9.36 percent.
The Minimum Tax has been increased depending upon the taxpayer’s gross receipts (as defined by the Alternate Minimum Assessment “AMA”) as illustrated by the accompanying chart.
The minimum corporate tax for affiliated or controlled groups remains the same $2,000 for each member of a group that has a total payroll of $5 million or more for an applicable tax period.
It is not all bad news. New Jersey businesses were assured some continuing tax relief. The AMA sunsets for tax periods beginning after June 30, 2006. The Corporation Business Tax Net Operating Loss carry-forward deduction was limited to 50 percent of a taxpayer's pre-apportionment income for the 2004 and 2005 tax years. The Appropriations Act restores the full 100 percent deduction of the Net Operating Loss carry-forwards.
The widening of the sales and use tax base of taxable services and the modifications to the Corporate Business Tax are likely to affect many New Jersey businesses. Such taxpayers should consult their tax advisors to plan accordingly and avoid the pitfalls of noncompliance.
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