It has long been a trap for the unwary, or a helpful tip for those in the know, that multistate income from business that is reported on a New Jersey Gross Income Tax (“GIT”) return is apportioned differently from the way that such income is apportioned if the income was instead subject to the New Jersey Corporation Business Tax (“CBT”). That disparate treatment of businesses for New Jersey’s GIT, its version of an individual income tax, changes this year. GIT filers with large multistate businesses that have evolved over the years should consider whether their business conduct and tax perspective should evolve as well.
For many years, business activity apportionment was aligned (or somewhat aligned) whether the business was subject to the CBT or the GIT. Many years ago, the CBT apportionment formula (New Jersey calls it “allocation”) was an equally weighted three-factor formula of property, payroll, and sales ratios. The CBT has since moved, legislatively, to a hyper-weighted sales factor and then to a single sales factor. However, the GIT did not keep pace.
The Change: For tax years beginning on and after January 1, 2023, a taxpayer who is subject to the GIT and conducts a multistate trade or business, regardless of the form of the business, or who is a partner in a partnership or shareholder in an S-Corporation that conducts a multistate business, part of which is conducted in New Jersey, must apportion income using the CBT apportionment rules. In tying GIT apportionment to the CBT apportionment methodology, the legislation specifically identifies CBT statutes N.J.S.A. 54:10A-6 through N.J.S.A. 54:10A‑10. Several are highlighted for ease of reference:
- the sales factor (i.e., single sales factor), N.J.S.A. 54:10A-6;
- allocation of non-operational income, N.J.S.A. 54:10A-6.1;
- broker, dealer, or asset manager sourcing, N.J.S.A. 54:10A-6.2;
- airline industry sourcing, N.J.S.A. 54:10A-6.3;
- improper reflection of income alternative apportionment, N.J.S.A. 54:10A-8; and
- income distortion adjustments, N.J.S.A. 54:10A-10.
A.B. 5323 section 13; L. 2023, c. 96.
Caveats: The legislation does not merely tie the GIT apportionment to the CBT. It states that if business is conducted partly within and partly outside New Jersey “and, as a result thereof or for other reasons that portion of the income from sources within the State cannot readily or accurately be ascertained, the income from the trade, business, partnership, or S corporation shall be sourced in a manner consistent with the provisions of” N.J.S.A. 54:10A-6 through N.J.S.A. 54:10A‑10. A.B. 5323 section 13; L. 2023, c. 96. That quoted phrase “and, as a result … that portion of the income from sources within the State cannot readily or accurately be ascertained” is not defined or explained.
Sourcing of salary, wages, tips, fees, commissions, bonuses, and other remuneration are unchanged by the GIT business income change. A.B. 5323 section 13; L. 2023, c. 96.
The Old Law: Through 2022, the GIT apportionment formula was an equally weighted three-factor formula consisting of property, payroll, and sales ratios. The three-factor formula existed only as a matter of the Division of Taxation’s declaration that the three-factor formula be used. It did so by creating a required schedule for multistate business to use when reporting income on a New Jersey GIT return (the form is Form NJ-NR‑A Business Allocation Schedule). That arbitrary formula existed only by fiat, without a statute or regulation, and is subject to challenge under the right facts.
Penalty: The legislation includes a waiver for estimated tax penalty for 2023 for underpayments due to increased taxes that result from the apportionment changes if the taxpayer catches up the estimated payments by the second next estimated tax payment due after enactment. Calendar-year taxpayers have until the January 2024 estimated tax payment to catch up estimated payment amounts. A.B. 5323 section 7; L. 2023, c. 96.