[Corrected Copy]
ASSEMBLY BUDGET COMMITTEE
STATEMENT TO
ASSEMBLY, No. 2501
with Assembly committee amendments
STATE OF NEW JERSEY
DATED: JUNE 27, 2002
The Assembly Budget Committee reports favorably Assembly Bill No. 2501 with committee amendments.
Assembly Bill No. 2501, as amended, is designated the Business Tax Reform Act. The Business Tax Reform Act is intended to reform New Jersey’s system of taxation of corporations and other business entities, through revision of the corporation business tax and other changes of law.
The bill updates the law to increase equity among business taxpayers and closes numerous loopholes that allow many profitable companies to reduce their taxable New Jersey income. Second, the bill creates an alternative minimum assessment to measure a company’s economic activity in New Jersey in situations where the traditional "taxable income" measure is not a fair measure. Third, the bill affects the tracking of the income of business organizations, like partnerships, that do not themselves pay taxes but that distribute income to their owners, the eventual taxpayers. The bill also provides several new tax advantages to small business.
"Loophole Closers" and Tax Base Changes.
Revenues from the corporation business tax (CBT), the State's main income-measured business tax, have been declining in the face of apparent economic expansion; there is evidence that large corporations with apparently substantial economic activity in this State and substantial profit have managed to avoid having any of this income become taxable by New Jersey. Some large and apparently expanding corporations have managed to avoid having any taxable income. New Jersey’s experience is part of a national trend, especially in so-called “separate entity” states like New Jersey, where each corporate entity within an affiliated group computes its tax separately, and corporations may structure transactions between affiliates in various states to avoid tax. Effective corporate tax rates in the states fell during and despite the economic expansion of the 1990s.
The "loophole closers" address various ways in which corporations reduce or avoid tax on income, restoring equity between the corporations that can use these methods and those that cannot, or do not. The bill also makes a number of changes to the tax base which increase the taxation equity between corporations that are currently formally different but substantively similar.
Disallowance of deduction of intangibles expenses paid to a related party. The bill limits the ability of a taxpayer to deduct royalties and other intangible expenses and costs and related interest when paid to affiliates. The provision addresses, but does not apply solely to, a tax avoidance device that allows a multicorporate structure to export income from a state where the income is generated as a form of expense (for example, as a royalty payment to an out-of-state affiliate that the paying corporation deducts from its income) and then import the income back (for example as a tax-free dividend or as a loan). The bill continues to allow such deductions in areas that are established as “non-tax avoidance” situations.
The bill gives the Director of the Division of Taxation authority to determine: (1) whether a taxpayer has met its evidentiary burden of establishing by clear and convincing evidence that the add-back of an expense is unreasonable, or (2) that it is appropriate to enter into agreements or compromises with the taxpayer to produce an equitable level of taxation. As the disallowance of the deduction is the general rule, this has the effect of requiring the taxpayer to secure prior approval (through general regulation or case-by-case determination) for the deduction before departing from the general rule.
Another exception provided to the general rule of disallowance is for interest and intangible expenses directly or indirectly paid, accrued or incurred to a related member in a foreign nation with a comprehensive income tax treaty with the United States. The director may require the disclosure of such information as the director deems necessary to determine that the taxpayer’s situation falls within the exception.
The deduction may also be permitted upon a showing that the arrangement involves an unrelated third party.
Disallowance of deduction of interest paid to a related party. The bill also restricts deductibility of inter-affiliate interest expenses. However, the bill again continues to such deductions in areas that are established as “non-tax avoidance” situations.
The first exception is intended to avoid unfairly duplicative taxation, and sets the following criteria for determining whether such a situation exists: (1) the principal purpose of the transaction was not to avoid taxes; (2) the interest was paid at an arm’s length rate pursuant to an arm’s length contract; and (3) the transaction was already subject to tax at levels approximating New Jersey’s corporation business tax as determined by (a) the fact that the related member was subject to tax on income or receipts by another state or national entity, (b) a measure of the tax included the interest received from the related member, and (c) the foreign tax on the interest was within at least three percentage points of the tax rate that would have been applied to the interest income if it were taxable in this State.
The second exception is permitted when the taxpayer establishes that the disallowance of the deduction is unreasonable. As with the similar provision for intangible costs, the disallowance is unreasonable if it would violate the policy goals of the disallowance. For example, the bill permits a taxpayer to keep the deduction if the interest paid is ultimately paid to a third-party unrelated lender, as evidenced by a guarantee provided by the taxpayer to the outside lender. If a taxpayer can demonstrate that, despite the absence of a guarantee, interest is being paid on a loan that was simply “pushed down” from a third party lender, then it would be unreasonable to disallow the interest deduction. As the deduction is retained by exception to a general rule that disallows the deduction, the effect is to require the taxpayer to secure prior approval from the director (through general regulation or case-by-case determination) before departing from the general rule of nondeductibility.
The third exception permits the deduction if the taxpayer establishes, by a preponderance of the evidence as determined by the director, that the interest payment involves a related entity in a foreign nation with a comprehensive income tax treaty with the United States, so long as the taxpayer fully discloses the transaction on its return as prescribed by the director.
A fourth exception, noted above, is intended to cover the situation where debt is “pushed down” from a corporate parent to a subsidiary but involves a regular, market-rate loan from an outside lender. This exception permits the deduction if the transaction involves an independent lender, and the taxpayer taking the deduction guarantees the debt on which the interest is required.
Throwout Rule. Under the apportionment formula that is used for determining the portion of a corporation’s total taxable income that is taxable by New Jersey, the sales fraction is the most heavily weighted factor. The more goods that are shipped out of New Jersey, the lower this factor is. Some of those sales are made in states where the corporation is not subject to tax because the corporation has no operations in those states. These sales are typically referred to as “nowhere sales” because they result in income being assigned so that it is taxed nowhere. The bill closes this loophole by “throwing out” the “nowhere sales” from the denominator of the sales fraction, which causes more of the income of the corporation to be assigned to states where the corporation actually has operations.
The bill limits tax liability related to the throwout rule for affiliated groups to prevent exceptionally large impacts on tax burden. If the calculation of tax liability after the exclusion of certain receipts from the denominator is more than $5 million higher than the tax liability for the group calculated without the exclusion of the receipts, then the additional liability for the group is limited to $5 million, and may be spread proportionately among them. The director is given authority to assign a single corporation within the group to act as key corporation for any adjustment as the director may prescribe.
Extending the reach of the CBT to Constitutional limits. The bill extends the reach of the New Jersey CBT to a corporation that derives any income from New Jersey sources. Under current law, the CBT is imposed upon a corporation "doing business," employing or owning capital property, or maintaining an office in the State. By extending the reach of the CBT to the income of all corporations that derive income from New Jersey, New Jersey extends the reach of the CBT to the full extent permitted under the United States Constitution and federal statute.
Nonoperational income fully taxed. The bill requires that 100 percent assignment of “nonoperational income” (income that is unrelated to the usual operations of the business, usually headquarters-managed investment income) be assigned to the headquarters state to the extent permitted under the Constitution and statutes of the United States. This income usually may only be taxed by the headquarters state, but current law treats it like income from operations and apportions it by formula, which allows a significant part of the nonoperational income of New Jersey headquartered companies to escape taxation. The bill recognizes that income wholly generated by activities in New Jersey should be subject to New Jersey tax.
Disallow deduction for income taxes paid to foreign nations. Like laws enacted in several other states, the bill disallows a deduction for taxes paid to foreign nations. This disallowance parallels that adopted in 1992 for income taxes paid to other states.
Clarification of research and development expense deduction. The bill disallows the deduction of certain research and development expenses that are used to claim the New Jersey research and development credit but are not used to claim a federal research and development credit. (Without this disallowance a taxpayer would sometimes be able to claim both a New Jersey deduction and a New Jersey credit based on the same expenses.)
Investment company income. Investment companies enjoy a preferred tax status under the CBT. New Jersey defines an investment company as a business engaged in managing its own portfolio. The CBT currently defines the taxable income of such companies as 25 percent of their entire net income. The bill raises the proportion of net entire net income subject to tax to 40 percent.
Savings Institutions. In view of federal law changes that modernize the powers and treatment of savings banks, building and loan associations and savings and loan associations, the bill subjects these institutions to the CBT imposed on competing depository and credit institutions.
Deduction for dividends received from another corporation. Current law excludes 100 percent of dividends received from companies in which the taxpayer has an ownership interest of 80 percent or more; and excludes 50 percent of all other dividends received. The bill disallows the deduction for dividends received from a corporation in which the taxpayer has less than a 50 percent ownership interest.
Locating the receipts from financial services. The bill provides that for the purpose of determining the sales fraction for allocating New Jersey receipts of broker/dealers and asset management firms, the sales occur where the customers receive the services, as opposed to where the services are performed as under current rules. This assures that New Jersey collects a fair share of tax from transactions that have as their practical effect a use of New Jersey economic opportunities and as a side effect removes a barrier to these financial service providers locating in New Jersey.
Codification of Net Operating Loss Rule. The bill codifies the New Jersey regulations governing the use of net operating losses (NOLs) with the goal of foreclosing further challenges to them. The regulations were adopted in 1986 (see N.J.A.C.18:7-5.13), and the New Jersey Supreme Court found them to be validly retroactive to all tax years ending after June 30, 1984, coinciding with the effective date of the 1985 law, P.L.1985, c.143, that first permitted the carry-forward of NOLs. The Supreme Court in that case upheld the validity of the regulations in the face of a challenge that they exceeded the Legislature’s intent.
Alternative Minimum Assessment.
The bill implements an alternative minimum assessment (AMA) that will accurately measure a company's economic presence in New Jersey and assure that companies that enjoy the advantages of the New Jersey economy will be required to satisfy a levy beyond the $200 minimum now in the law. S corporations, professional corporations, investment companies, pass-through entities, and corporations operating as cooperative under federal requirements will be exempt from the AMA.
The AMA also assures a fair measure of support of State services from firms that exploit the State’s marketplace, but are exempt from a tax like the CBT pursuant to federal Pub. L. 86-272, 73 Stat. 555, 15 U.S.C. s 381 et seq. This reform will effectively capture the value of the activities in New Jersey of out-of-state companies that currently pay no corporate income taxes in New Jersey.
Companies will assess their AMA liability with a formula that uses either allocated gross receipts or allocated gross profits as a determining factor. The bill defines gross profits to mean gross receipts minus the cost of goods sold, and the bill adopts the federal definition of cost of goods. By permitting companies to use their gross profits to calculate their AMA, the bill protects high volume, low margin industries such as retailers, food stores, car dealers and others that are so vital to the state’s economy from bearing a disproportionate burden. The bill gives the Director of the Division of Taxation the authority to expand or adjust the definition of “cost of goods sold” if justified to achieve a more equitable result among the various types of businesses subject to the alternative calculation.
Corporations subject to the CBT will be required to compute the AMA and pay the greater of the CBT or the AMA. Businesses with gross profits of less than $1 million are not subject to the AMA. Businesses with gross profits of between $1 million and $10 million are subject to AMA at a rate of .0025 times the amount of gross profits over $1 million multiplied by 1.11111 (which has the effect of phasing out the $1 million exclusion between $1 million and $10 million). For businesses with more than $10 million in gross profits, the AMA is based on a rising rate multiplied by total gross profits, ranging from .0035 times profits between $10 million and $15 million to .008 times gross profits above $37.5 million.
A similarly graduated rate is applied to gross receipts. For gross receipts of $2 million or less, there is no assessment. For gross receipts between $2 million and $20 million, the rate is .00125 times (with a similar phase-out of the exclusion). Between $20 million and $30 million, the calculation is .00175 times total gross receipts, rising to a high of .004 times gross receipts for gross receipts of more than $75 million.
The bill places a cap of $20 million on the AMA for affiliated groups of five or more taxpayers.
A provision of the bill restricts the opportunities for a taxpayer to break its AMA-subject entities into smaller units so as to take advantage of the lower range of the graduated scale on the AMA by limiting the exclusion for all members of an affiliated or controlled group to $5 million of gross profits ($10 million of gross receipts), or five times the exclusion amount for the members of the group.
The bill sunsets the AMA for privilege periods beginning after June 30, 2006, except for taxpayers exempt from the CBT pursuant to federal Public Law 86-272. To avoid any claim of discriminatory treatment by such businesses, based on a claim that CBT payers might be subject to lower liabilities than out-of-state businesses covered by Pub L. 86-272, the amendment provides such out-of-state businesses with the option of consenting to the jurisdiction of the State to impose the CBT.
Furthermore, if a company’s AMA exceeds its CBT in one year, the bill allows the difference between the AMA and the CBT as a credit (that carries forward without limit) to reduce the company’s CBT liability in a future year. The bill limits the credit applied in any one year to an amount that does not reduce the CBT liability to less than 50 percent of the CBT otherwise due or less than the minimum franchise tax for the privilege period, which puts the AMA credit in line with the operation of other tax credits under the corporation business tax.
Pass-through Entities.
Pass-through entity return processing fee. The bill institutes a $150 per-owner processing fee on the owners of pass-through entities, having more than two owners. "Pass-through"entities, such as partnerships, limited liability partnerships, and limited liability companies, are not subject to tax themselves, but "pass through" their income to their owners (partners of partnerships or members of limited liability companies) who are subject in their separate capacities. Pass-through entities that have New Jersey source income or New Jersey resident owners must annually file a New Jersey K-1 form with the State in which they report their income and must list their owners.
For pass-through entities that have income from New Jersey sources and more than two members, the bill establishes an annual $150 per owner filing fee, capped at $250,000 per entity annually. The bill establishes a similar filing fee of $150 per licensed professional for professional corporations with more than two licensed professionals, also capped at $250,000 per corporation annually. The bill treats these fees as payments under the State Uniform Tax Procedure Law for purposes of penalties, interest and other administrative functions.
Pass-through entity payment on behalf of owners.
The Division of Taxation estimates that half of K-1s filed in New Jersey list out-of-State residents who are involved in New Jersey pass-through entities with New Jersey source income. Enforcement is difficult in such cases. The bill addresses this problem by providing a mechanism for securing revenue prior to distribution in an amount that would be equivalent to withholding. Pass-through entities other than those listed on a national exchange must make a payment on the share of the income of each nonresident (corporate, partnership, individual, trust or estate) owner at a 9% rate for corporate owners and a 6.37% rate for individual owners. The payment is credited to separate accounts for each owner, and may be credited against their respective tax liabilities.
Revenue Measures.
Two year NOL suspension. The bill suspends the application of net operating loss (NOL) deductions for tax years 2002 and 2003. The usual seven year carryforward (14 years for certain high-technology corporations) is extended for two years. This suspension does not apply to the NOLs purchase through the high-technology incentive program.
Subchapter S corporation phase-out freeze. Subchapter S corporation tax rates are currently in the third year of a four year "phase-out" or reduction to no tax imposed. This bill resets the tax rate on S corporations to the 2001 tax year levels through tax year 2005, and then resumes the phase-out thereafter.
Acceleration of fourth quarter payments for substantial taxpayers. The bill, in effect, accelerates the fourth quarter estimated tax payment (due for most taxpayers in September) into the second quarter (for most taxpayers due in June) for taxpayers with gross receipts of $50 million or more. The accelerated schedule would remain in effect for these taxpayers for privilege periods beginning in 2002 and thereafter.
Decoupling from federal "bonus" depreciation. The bill disallows the deduction of the 30% "bonus" depreciation that was allowed for certain property for federal tax purposes under the federal “Job Creation and Worker Assistance Act of 2002,” Pub L. 107-147. The bill returns the New Jersey depreciation rules to New Jersey law as it stood before the enactment of the federal law, and gives the Director of the Division of Taxation authority to formulate rules and regulations to carry out the decoupling from federal law, including the necessary basis adjustments.
Increased minimum tax. The bill increases the minimum tax from $210 annually to $500 annually for tax year 2002 and thereafter, except for corporations that are members of affiliated or controlled groups with total payrolls of $5 million or more, whose minimum tax will be $2,000.
Small business provisions.
CBT tax rate reduction for small business. The bill reduces the statutory rate from 7.5 percent to 6.5 percent for businesses with less than $50,000 of net taxable income, which is more than a 13 percent rate cut. That would result in a tax decrease for approximately 20,000 small businesses, according to estimates by the Division of Taxation. Enhanced New Jobs Investment Tax Credit. The bill encourages job creation by doubling the value of the new jobs factor under the New Jobs Investment Tax Credit, and increasing the eligibility caps allowing the qualification of midsized businesses for the credit.
Administrative Provisions.
To assist in the limiting tax avoidance, and to capture transactions not expressly addressed, the bill provides additional enforcement tools to the Director of the Division of Taxation.
Disclosure of inter-affiliate transactions. The bill addresses the problem of taxpayers failing to present sufficient data to allow the Division of Taxation to gain an understanding of the true earnings picture of any member or all members of an affiliated group or control group. The bill allows the director to require the disclosure of inter-affiliate transactions, including transactions with related businesses that are not themselves CBT taxpayers, including management fees, rents and charges for other services.. Disclosure is required only upon request of the director, and the taxpayer has 90 days to comply. Noncompliance is treated as a failure to file a complete return, subject to the normal penalties under the State Uniform Tax Procedure Law.
Mandatory consolidated filing. The bill requires taxpayers to determine their taxes after eliminating all inter-affiliate payments in excess of fair compensation. The bill also provides that if a taxpayer cannot demonstrate by clear and convincing evidence that it has accurately reported its true earnings in such a manner, the director may compel consolidated filing.
NOL suspension hold-harmless. The bill forbids the imposition of any penalty for the underpayment of an estimated payment that is due to the two year suspension of the application of NOL carryforwards.
Fourth Quarter 2002 25% estimated payment. For the fourth quarter estimated payment for the 2002 tax year, and only that payment, the bill suspends the usual forgiveness provisions that apply to estimated tax payments and requires the fourth quarter payment to be 25% of the total liability for 2002, calculated under the provisions of the bill. The amendment is intended to allow taxpayers a quarter to adjust to the new rules and calculate likely 2002 final tax liability under the new rules, while fulfilling the State’s need for revenue data under the new rules to use in estimating revenues for the following fiscal year. The first quarter payment for 2003 based on total 2002 liability will be due at the usual time, as will the full “catch-up” amount due under the new rules for 2002 in the fourth month following the close of the privilege period.
Air Carriers.
Air carrier AMA credit. The bill allows an air carrier that contributes more than 25% of the total amortization for capital improvement projects at Newark International Airport paid through rates and charges to take a credit of 50% of its amortization payment for the privilege period against its calculation of AMA, so long as the credit does not reduce the AMA to less than the CBT statutory minimum. An air carrier that takes this credit for a privilege period is not allowed the AMA credit against the CBT for AMA paid in that privilege period.
Air carrier consolidated return election. The bill allows an air carrier to file a consolidated return with its affiliated group.
Corporation Business Tax Study Commission.
The bill creates a nine-member, bipartisan Corporation Business Tax Study Commission, to study the reforms adopted under the bill and: (1) evaluate whether the tax burden is equitably borne among business taxpayers or favors large multinational businesses over smaller businesses operating wholly within New Jersey; (2) examine whether tax burdens are distributed fairly among the corporate business tax and other forms of business and personal taxes within the state; (3) study whether profitable corporations can avoid paying their fair share of New Jersey tax by using minimization or avoidance strategies; (4) examine whether New Jersey and its corporate business taxpayers would be better served by combined unitary reporting and suggest a form for that reporting to take, and (5) determine whether the reforms adopted by the bill yield stable, recurring revenues sufficient to achieve long-term structural balance for State finances.
The commission will have access to as much data as possible within the confidentiality restrictions of R.S. 54:50-9, and the ability to draw upon existing State resources for assistance in undertaking its work, in addition to the ability to appoint an executive director. The commission must make its report by December 30, 2003. If the report is not produced by June 30, 2004, then the director shall suspend the AMA for privilege periods commencing after December 31, 2004. If the commission recommends the termination of the AMA
the AMA shall not be imposed for privilege periods beginning after December 31, 2004.
Corporation Business Tax Excess Revenue Fund.
The bill creates a restricted reserve fund known as the Corporation Business Tax Excess Revenue Fund, into which amounts in excess of the annual target for corporation business tax revenues will be deposited. The target will be set at $1,823,000,000 in FY 2003. The targets for following fiscal years would be calculated based on the target for the prior fiscal year multiplied by the weighted average of the rate of growth of collections from the gross income tax and the sales and use tax. The rate of growth will be calculated for each by comparing the anticipated revenue from each source certified by the Governor upon approval of the annual appropriation act for the current year against the amount of money actually deposited from collections of each in the immediately preceding fiscal year, the deposits to be determined from the annual financial report of the State for the immediately preceding fiscal year.
Balances in the fund will be available for appropriation in FY 2004 and FY 2005 to assist in covering shortfalls in corporation business tax collections from the target amount for the fiscal year. If there is a balance in the fund on December 30, 2005, the Director of the Division of Taxation is required to adjust corporation business tax rates for privilege periods beginning in calendar 2006 downward by an amount sufficient to equal the balance in the fund.
FISCAL IMPACT:
The State Treasurer's most recent published figures indicate that the Executive anticipates $965 million in additional revenue for FY2003 as a result of the enactment of the business tax revisions proposed under this bill. The Office of Legislative Services notes that this revenue is expected to decline in following fiscal years.
COMMITTEE AMENDMENTS:
The amendments to the bill are extensive, involving technical changes, responses to taxpayer comments, and Legislative policy initiatives. They are enumerated by section.
Section 3 amendments:
♦ The bill as introduced repealed the exclusion of dividend income and offered an election to taxpayers to compute their tax based on their federal consolidated return. The amendment restores the dividend exclusion as in current law for subsidiaries owned 50 percent or more, but subjects other dividends received to full taxation. As the consolidated election was linked to the repeal of the dividend exclusion, which is restored, conforming changes delete the reference the filing of a consolidated return, in section 3 and other sections.
♦ Expand the definition of “Corporation” to include any entity classified as a corporation for federal income tax purposes, so as to include single-member Limited Liability Companies that opt to be taxed as a corporation for federal income tax purposes.
♦ Restore the deductibility of dividends paid by REITs.
♦ The bill continues to create a general prohibition against taking an interest deduction for a payment to a related member. However, the amendments create three additional exceptions to the general rule, described in detail above, incorporating the "unreasonable disallowance" standards detailed in reference to the disallowance of the deduction of intangibles expenses.
♦ The amendment to the bonus depreciation rule replaces a more restrictive rule in the bill as introduced.
♦ Clarify technically the provision on research and development tax credits without changing the substance of the provision.
Section 5 amendments:
♦ Add to the definition of “related member,” which applies throughout the bill, to clarify that the “related member” provisions are intended to include not only corporations but entities such as partnerships and limited liability companies that share common ownership interests by or in other members of the group.
Section 6 amendments:
♦ The bill as introduced increased the proportion of investment company net income subject to tax from 25% to 60%, the amendments reduce that to 40%.
♦ Raise the minimum tax.
♦ Cap "throwout" liability for an affiliated group at $5 million and provide for administration of the cap.
♦ Exempt federally qualified cooperatives from the AMA.
Section 7 amendments:
♦ Provide the graduated AMA.
♦ Raise the AMA cap for affiliated groups from $15 million to $20 million per group.
♦ Give the Director of the Division of Taxation authority to expand or adjust the definition of “cost of goods sold” if justified to achieve a more equitable result among the various types of taxpayers subject to the alternative calculation.
♦ Limit the exclusion for all members of an affiliated or controlled group to $5 million of gross profits ($10 million of gross receipts), or five times the exclusion amount for any particular member of the group.
♦ Allow out-of-State businesses covered by Pub. L. 86-272, the option of consenting to the jurisdiction of the State to impose the CBT.
♦ Limit the AMA credit in any one year to 50 percent of the corporation business tax or the CBT minimum.
♦ Disallow air carriers taking a credit against the AMA from using AMA from that year as a credit against CBT.
Section 8 amendments:
♦ Alter the “throwout rule” to clarify that receipts that are subject to a tax on business presence or business activity, such as a tax on gross receipts, in another state will not be excluded from the denominator of the sales fraction in determining the portion of income allocable to New Jersey.
Section 10 amendments:
♦ Clarify that the powers of the Director of the Division of Taxation to require a consolidated return are so important to the essential function of verifying that a tax return fairly represents entire net income, that the director is given authority to force the filing of a consolidated return up to the limits of the U.S. Constitution and federal statutes.
Section 11 amendments:
♦ Clarify that, for administrative and compliance efficiency, the additional disclosure of inter-group information is required only upon request of the director, and gives the taxpayer 90 days to comply (noncompliance is maintained as a nonfiling situation) and make other technical changes.
Section 12 amendments:
♦ Clarifies that partnerships listed on a U.S. national stock exchange are not subject to payment responsibilities.
Section 13 ( added by amendment)
♦ Accelerates estimated payments for taxpayers with gross receipts of $50 million or more.
Section 14 amendments:
♦ Clarify that for enforcement purposes, the professional corporation fees will be payments under the State Uniform Tax Procedure Law, subject to the usual tax penalties for failure to file and pay and make other technical changes.
Section 22 amendments:
♦ Clarify that for enforcement purposes, the partnership fees will be payments under the State Uniform Tax Procedure Law, subject to the usual tax penalties for failure to file.
♦ Clarify that the partnership fees only apply to partnerships that derive income from New Jersey.
Section 26 amendments:
♦ Broaden application of the situsing rule to further reduce the tax disincentives for companies to locate in this State.
Section 27 amendments:
♦ Technical, to precisely track existing regulations, reflecting the Legislature's intention to state again that the regulations accurately represent existing law.
Section 28 (added by amendment)
♦ Provides that tax year 2002 fourth quarter payment will be a full 25% of the total liability for 2002 under the provisions of this bill.
Section 29 (added by amendment)
♦ Provides air carrier credit.
Section 30 (added by amendment)
♦ Allows air carrier to file a consolidated return.
Section 31 (added by amendment)
♦ Creates Corporation Business Tax Study Commission.
Section 32 (added by amendment)
♦ Establishes the Corporation Business Tax Excess Revenue Fund.
Minority Statement
By Assemblymen Malone, Blee, Kean and O'Toole.
Governor McGreevey is proposing a budget that increases spending by $2.3 billion in FY’03 and needs to identify revenue sources to fund this spending plan. One source is to increase the Corporate Business Tax, which through this bill, increases taxes for New Jersey businesses by at least $1 billion.
The sponsor’s statement would lead one to believe that the changes proposed in this legislation are designed to close tax loopholes and shift tax liability to those corporations that have an ability to pay. This bill does neither. This bill increases the tax burden on “mom & pop” shops and mid-size corporations, and makes changes that will cause New Jersey based multinational corporations to rethink their decisions on where to locate and expand.
For the past ten years the Legislature has worked to make changes in the business community’s perceptions and attitudes toward New Jersey as a place to locate. This has led to an explosion of high-paying jobs that has catapulted New Jersey to the forefront of the country in per capita income. Those ten years of steady, positive changes would be wiped out with this one piece of legislation.
The most egregious provision of the legislation establishes the Alternative Minimum Assessment. This is nothing less than a new tax on business. A survey conducted by the Business and Industry Association of New Jersey of its members showed that most, if not all, small and mid-size companies will see a significant increase in their tax burden. These companies no longer will be able to consider the most routine expenses, such as payroll, a cost of doing business. Thus they will be taxed on their payroll under this legislation. Faced with the question of how they can cover this added cost, employers will find that the only way they can is through a reduction in their workforce.
It has also been the policy of the Legislature to promote health care accessibility, especially through employment. To encourage businesses to provide health benefits to their employees, the Legislature has allowed them to deduct health care costs. Under this legislation, however, deducting health care costs no longer will be allowed. This presents employers with the choice of either paying higher taxes or providing health care benefits. And with this change, the health care benefits of many New Jereseyans will be lost.
Since March 2002 the public has heard the argument that many of the state’s largest corporations do not pay their fair share in business taxes. Such rhetoric may sound compelling, but this bill is not an attempt to establish fairness – it is an attempt to obtain more state revenue regardless of fairness. Should a corporation that has not made a profit in three years be expected to pay taxes at a level equivalent to that of a profitable corporation? Should a business in bankruptcy be required to pay a higher level of taxes? This bill makes a mockery of the fairness argument by squeezing money out of unprofitable businesses to fuel proposed increases in state spending.
The business community has offered changes to the bill that will bring the business community’s share of New Jersey’s tax burden back into line with that of past years, without backsliding on the economic gains the state has made over the past ten years.
Without further changes, we are unable to vote for the bill.