July 17, 2018
New Jersey enacts and proposes myriad sales and use tax and other excise tax changes
In recent weeks, the New Jersey legislature approved, and Governor Phil Murphy (D) has signed, a flurry of bills making substantial changes to all of the state's major taxes, including its sales and use, excise taxes, corporate business tax (corporate income) (CBT) and gross income tax (personal income) (GIT) while also authorizing a tax amnesty program. This Alert focuses on the significant changes to the state's sales and use and other excise taxes. These law changes include imposing such taxes on certain transient accommodations and ride-sharing services. In addition to the enacted legislation, bills approved by the legislature, but awaiting the Governor's signature, would adopt economic nexus and marketplace provider provisions for sales and use tax purposes and impose a bag tax.
For a discussion of the CBT changes, see Tax Alert 2018–1342.
For a discussion of the GIT changes, see Tax Alert 2018–1410.
For a discussion of the New Jersey tax amnesty program, see Tax Alert 2018–1390.
The following is a summary of the sales and use and other excise tax law changes.
Prearranged rides fee (enacted)
On July 1, 2018, Governor Phil Murphy signed Assembly Bill 4061 (A4061) into law. A4061 imposes transportation-related fees for customers ordering rides that begin and end in the state through "Transportation Network Companies." A Transportation Network Company is defined as a corporation, partnership, sole proprietorship, or other entity that is registered as a business in New Jersey or operates in the state and uses a digital network to connect a transportation network company rider to a transportation network company driver to provide a prearranged ride, such as the Uber and Lyft services. Entities arranging non-emergency medical transportation in which Medicare or Medicaid funding is involved are excluded from the definition of Transportation Network Company.
Highlights of A4061 include the following:
— Imposition of the fee will commence October 1, 2018.
— A "shared ride" is a prearranged ride in which the rider requested, before the ride commenced, to share the prearranged ride with one of more riders, and the rider is charged a fare that is partially based on the rider's request to share all or part of the prearranged ride with one or more riders, regardless of whether the rider actually shares all or part of the ride with one or more riders.
— The fee for a single rider will be $0.50 for every ride originating and terminating within the state.
— The fee for a shared ride will be $0.25 for each rider.
— Rides beginning and ending in counties with fewer than 200,000 residents are exempt.
The state has estimated that the new prearranged rides fee will result in annual increased state revenues in the range of $7.2 million to $16 million. The fee must be imposed and collected by the Transportation Network Company and must be separately stated on the electronic receipt provided to the rider. The Transportation Network Company must remit and report the fees collected on a monthly basis in a manner prescribed by the Director of the Division of Taxation in the Department of the Treasury. The fee is similar to those imposed in other countries, states and local subdivisions around the world as governments adapt to the changes in the transportation industry wrought by new ride-sharing technology.
Transient accommodations tax (enacted)
On July 1, 2018, Governor Phil Murphy signed Assembly Bill 1753 (A1753) into law. A1753 imposes a total combined hotel fee of 5%, plus New Jersey sales and use tax, and any other local hotel or similar taxes, on the rent for every occupancy of a transient accommodation in the state. The provisions of A1753 become operative on October 1, 2018.
Highlights of A1753 include the following:
— Transient accommodations are defined as a room, group of rooms, or other living or other sleeping space for the lodging of occupants, including residences or buildings used as residences.
— Transient accommodations do not include: hotel or hotel rooms, a room or group of rooms used as a place of assembly, a dormitory or similar residential facility of a school, hospital, nursing home, campsite, cabin, etc.
— Furnished and unfurnished private residential property will not be considered to be transient accommodations where no maid service, room service, linen changing service, or other common hotel services are made available by the lessor and where the keys to the residential property, whether physical key, access to a keyless locking mechanism, or other means of physical ingress to the property, are provided to the lessee at the location of an offsite real estate broker licensed by the New Jersey Real Estate Commission, or the lease of real property is for a term of at least 90 days.
— A Transient Space Marketplace is defined as an online marketplace in which a person may offer transient accommodations or hotel rooms to individuals (e.g., home sharing). The marketplace allows transient accommodations or hotel rooms to be advertised or listed in exchange for consideration or provides a means for a customer to arrange for the occupancy of the transient accommodation or hotel room in exchange for consideration.
Although the overall impact has not yet been estimated, the new law is expected to raise a significant amount of revenue for the state. For example, the law will make taxable short-term rentals through online sharing services in popular locations like the Jersey shore and the New York metro area. New Jersey's taxation of these rentals mirrors the efforts of other states to tax short-term rentals of real property that were made possible by emerging technology.
Liquid nicotine tax (enacted)
On July 1, 2018, Assembly Bill 4132 (A4132) was enacted to expand the Tobacco Products Wholesale Sales and Use Tax Act to include liquid nicotine. Liquid nicotine will be taxed at the rate of $0.10 per milliliter. The tax base is the number of milliliters of liquid nicotine sold by a distributor or wholesaler to retail dealers or consumers. A complementary use tax is also imposed. The A4132 further requires retail dealers, wholesalers, and distributors of tobacco products to file returns disclosing their inventories of liquid nicotine. The law takes effect September 29, 2018.
The new tax on liquid nicotine is expected to raise a moderate amount of revenue for the state. Given the growing popularity of liquid nicotine for use in "e-cigs" (electronic cigarettes), "e-hookahs" (electronic hookahs), and other vaporizers and similar products, it is expected that the liquid nicotine tax will be a growing source of revenue that may partially displace traditional tobacco tax revenues.
Remote seller tax collection (proposed)
On July 1, 2018, both houses of the New Jersey Legislature approved Assembly Bill 4261 (A4261), which, if enacted, will impose a sales tax collection requirement on remote sellers with no physical presence in New Jersey. The collection requirement would apply to remote sellers with: (1) over $100,000 in sales of tangible personal property, services or specified digital products in New Jersey; or (2) 200 or more separate transactions in the state in any one calendar year, as long as there is at least one sale of tangible personal property in that year. The bill would also provide for a one-year trailing requirement to collect tax if one of the two thresholds was met in the prior year. A4261 further provides that marketplace facilitators, which are entities providing a forum through which third parties can sell products (e.g., the internet), must collect sales tax through the forum on all retail sales destined for New Jersey locations. The marketplace facilitator is not required to collect the tax if the third-party seller is registered to collect New Jersey sales and use tax. If enacted, the provisions of A4261 will become effective on October 1, 2018.
A4261 was introduced and approved by the legislature soon after the U.S. Supreme Court issued its historic decision in South Dakota v. Wayfair, Inc., et al., 1 (Wayfair), in which it struck down the decades-old precedent restricting states from requiring remote sellers with no physical presence in a state to collect that state's sales or use tax. The Wayfair case has significant ramifications for remote sellers, which will likely be required to collect sales tax in many states in which they have no physical presence but make sales. Both out-of-state and foreign sellers may be affected. New Jersey has followed South Dakota's lead by adopting the same $100,000 in sales and 200 transactions thresholds and applying the new provisions prospectively only.
Bag tax (proposed)
On June 21, 2018, both houses of the New Jersey Legislature approved Assembly Bill 3267 (A3267), which, if enacted, will impose a 5 cent bag tax on carryout bags provided to retail customers. The bill is currently awaiting the signature of Governor Phil Murphy, who is expected to sign it. Once the Governor receives the bill, he will have 45 days to act on the measure or it will become law without his signature, unless the session is adjourned, in which case he has seven days.
Effective October 1, 2018, retail customers would pay the 5 cent bag tax on every single-use carryout bag the retailer provides. The following would be exempt from the bag tax:
— Customers in the federal Supplemental Nutritional Assistance Program
— Cloth and machine washable fabric bags with handles, non-woven polypropylene bags with handles, and reusable plastic bags with handles that are at least 2.25 mils thick (exempt as reusable bags)
— Bags without handles that separate items and prevent damage or contamination of the items
The operators of drug stores, supermarkets, and retail stores with over 2,000 square feet of retail space would be required to collect the bag tax, as would all drug, supermarket and retail stores that are part of a chain with 10 or more locations in New Jersey. The operators would be allowed to keep 1 cent out of every 5 cents collected. Notably, the law would supersede and preempt all local bag taxes or fees except those passed before the date the bill is enacted. Specific instructions for filing returns and remitting the tax will be issued by the Director of the Division of Taxation if A3267 is enacted, under the New Jersey Administrative Procedure Act.
If enacted, the new law will result in an additional tax for retail customers in New Jersey and further compliance burdens for the drug stores, supermarkets, and retail stores operating in the state that have to collect, report and remit the new bag tax. The bag tax is likely to only raise a small amount of revenue for the state. Despite the small amount of the bag tax, its proponents believe it will incentivize many New Jersey retail customers to utilize reusable bags or other items in order to avoid the tax. Further, the local preemption aspect of the bill is important, because it would prevent the future development of a myriad local bag taxes across New Jersey's 21 counties and hundreds of municipalities, simplifying the compliance burden for customers and retail operators alike.
1 South Dakota v. Wayfair, Inc. et al., U.S. S.Ct. Slip Op. #17-494 (available on the Internet here (last accessed July 12, 2018)).