The New Jersey Division of Taxation recently announced that, beginning January 1, 2017, qualified businesses located in five Urban Enterprise Zones (UEZs) will no longer be allowed to collect sales tax at a reduced rate and will have to begin collecting and remitting sales tax at the state's 6.875% uniform sales tax rate. The affected UEZs are: Bridgeton, Camden, Newark, Plainfield and Trenton.

Accordingly, businesses located in these zones are no longer eligible for UEZ incentives or benefits including: (1) collecting sales and use tax at half the sales tax rate, (2) UEZ sales tax exemption certificates, (3) UEZ corporation business tax employees credit/investment tax credit and credit carryforward, and (4) sales and use tax exemption for natural gas and electricity purchased by certain manufacturers.

Businesses located in the affected UEZs must file the December 2016 monthly UEZ return by January 20, 2017. Beginning January 1, 2017, businesses will be required to file a New Jersey Sales and Use tax return (ST-50) on a quarterly basis. Monthly remittance is required if a business collected more than $30,000 in sales tax in 2016 and the amount of sales tax collected for the month is greater than $500.

Additionally, effective January 1, 2017, businesses will no longer be allowed to use the UEZ Exemption Certificate or the Contractor's Exemption Certificate on purchases of tangible personal property and services used or consumed by qualified businesses in any of the five UEZs.

Note: A bill is still pending in the state legislature which, if enacted, would extend the exemptions in the five UEZs for an additional two years. Action on the bill is expected prior to the end of the year. As matters develop with respect to this legislation, we will provide updates.

Implications

Assuming the UEZ program is not extended by subsequent legislation, beginning January 1, 2017, taxpayers that are currently qualified UEZ purchasers in any of the five affected UEZs (i.e., those with active UZ-5 Urban Enterprise Zone Exemption Certificates) can no longer make tax-free purchases in these UEZs and can no longer issue the UZ-5 or UZ-4 (UZ-4 is Contractor's Exemption Certificate) to suppliers/vendors. In addition, qualified UEZ purchasers must pay the full amount of sales tax to suppliers, unless another valid exemption (e.g., resale, exempt use) applies or the item is not taxable by law.

If the vendor does not subject taxable purchases to sales tax, qualified UEZ purchasers will be obligated to pay use tax directly to the State of New Jersey. As such, qualified UEZ purchasers will be required to implement a use tax decision making process to address situations when the vendor does not bill the sales tax. This process should incorporate the ability to identify if the purchase (of property or services) is taxable in New Jersey, and if so, whether an exemption can be applied.

Options for a use tax decision making process include:

— Implementing a sales/use tax engine
— Developing a strategic manual process
— Creating an effective tax rate structure
— Other processes (e.g., implementing a purchase company, leasing company)

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