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At the end of June, New Jersey Governor Phil Murphy signed various tax bills as part of the annual budget process, including the imposition of a 2.5% corporate transit fee, the phase-out of the sales and use tax exemption for zero emission vehicles and the repeal of the annual sales and use tax holiday. In addition, certain sales and use tax and business credit bills are with the governor for his consideration.

2.5% Corporate Transit Fee

On June 28, 2024, Governor Phil Murphy signed into law SB 3513/AB 4704 which imposes a 2.5% surtax, referred to as the Corporate Transit Fee (the "Fee"), on certain Corporation Business Tax (CBT) payers that have allocated New Jersey taxable net income in excess of $10 million for privilege periods beginning on and after January 1, 2024 through December 31, 2028 (e.g., five privilege periods).

All revenues from the Fee for fiscal years 2024 and 2025 will be deposited in the General Fund and, beginning in fiscal year 2026, will be appropriated annually for the operating expenses of the New Jersey Transit Corporation.

Fee details

The Fee is effective for privilege periods beginning on and after January 1, 2024 through December 31, 2028. Similar to the surtax that New Jersey imposed from privilege periods beginning on or after January 1, 2018, through December 31, 2023, the Fee functions as a 2.5% rate of tax in addition to the 9% CBT rate imposed on each taxpayer that has allocated New Jersey taxable net income in excess of $10 million.

• Given that the Fee is added to the 9% CBT tax rate to impose a total tax of 11.5% on the entire allocated taxable net income of affected taxpayers, the Fee is not limited to the allocated taxable net income in excess of $10 million but is imposed on the entire taxable net income base.
• For combined groups, the Fee is applied to the entire group's allocated taxable net income.
• For purposes of calculating the $10 million threshold, a combined group is treated as one taxpayer.
• Taxable net income, which is used to calculate the $10 million threshold, is defined in N.J.R.S. Section 54:10A-4(w), which provides for the subtraction of prior net operating loss (PNOL) conversion carryforwards and net operating loss (NOL) carryforwards.
• PNOL conversion carryover means a NOL incurred in a privilege period ending prior to July 31, 2019, and converted from a pre-allocation NOL to a post-allocation NOL.
• No credits will be allowed against the Fee liability except for credits for installment payments, estimated payments made with a request for an extension of time for filing a return, or overpayments from prior privilege periods.
• The Fee does not apply to either New Jersey S corporations as defined in N.J.R.S. Section 54:10A-4(p), which do not elect to be treated as a C corporation, or public utilities as defined in N.J.R.S. Section 54:10A-4(q).

Unlike prior CBT legislation with retroactive effect, the Fee legislation does not provide for underpayment penalty or interest abatement.

Sales and use tax law changes

On the same day, Governor Murphy signed into law SB 3514/AB 4702, which includes the following revenue-raising provisions:

• The sales tax exemption for electric vehicle sales is phased out, with all sales beginning on October 1, 2024, subject to sales tax of 3.3125% and all sales beginning on July 1, 2025, subject to the full sales tax rate of 6.625%
• The annual 10-day back-to-school sales and use tax holiday that historically began in August and ran through the first Monday of September is repealed. The holiday applied to retail sale of computers, school computer supplies, school supplies, school instructional materials, sports and recreational equipment

Changes that passed both houses of the legislature, but that are currently awaiting the governor's signature include:

• SB 721/AB 2812: Effective October 1, 2024, would exempt sales of (1) investment metal bullion (e.g., gold, silver, platinum and palladium) and (2) investment coins made of any metal valued of at least $1,000, from sales and use tax.
• SB 3303/AB 4046: Effective April 1, 2024, would provide an amended accommodation to certain grant and credit recipients with a 60% full-time employee in-office presence requirement to provide that the requirement would be met if the business recipient has a 40% in-office presence and makes a payment equal to 20% of the tax credit it receives for the tax period to the municipal affordable housing trust fund in the municipality in which the qualified business facility is located. SB 3303/AB 4046 also would provide the Economic Development Authority with the discretion to extend the life of issued credit/grant tax certificates.
• SB 3275/AB 4448: Effective immediately, would revise various provisions of the film and digital media content production tax credit program.

Implications

Taxpayers should be mindful of the need to adjust their estimated payment obligations, as the recently enacted Fee cannot be offset by any tax credits, with the exception of prior payments. Further, given the lack of penalty and interest abatement, Taxpayers that may be underpaid due to the retroactive nature of the legislation should consider requesting abatement from the New Jersey Division of Taxation (the Division). The Division has provided certain relief under its discretionary authority in instances.

Businesses should consider the impact of the elimination of the electric vehicle sales and use tax exemption, as this may also impact leases and rentals within the state.

The Division regularly supplements CBT law changes with additional guidance which, along with emerging statutory changes, will be closely monitored and discussed in an upcoming EY Tax Alert.