Why the budget battle is still going on

It’s not in the news, but, behind the scenes, companies are still reacting to last summer’s CBT surprise

By Anjalee Khemlani
New Jersey | Mar 1, 2019 at 12:08 pm
From our print edition

The lingering effects of changes to the state’s corporate business tax haven’t dissipated since last summer — they have just been flying under the radar in full force. 

New Jersey business advocates have been worried that more companies could follow the lead of Honeywell, which moved its corporate headquarters to North Carolina last summer.

Experts said the first evidence of any impact from the CBT will be seen in early 2020 — after businesses file their taxes in October and the Treasury reviews them.

But some companies aren’t waiting to find out.

Ken Hydock, a tax expert at SobelCo, said the ramifications of all these changes are still being understood — and how to reduce the impact is top of mind.

“People are going to have to do something fairly quickly because, even though filing is not until next year, they will have a year of transactions to reduce the income allocated (to New Jersey),” Hydock said.

That’s because the changes expanded the base New Jersey can tax in the business world — including some foreign assets, thanks to federal tax reforms. 

The three notable changes to the CBT included:

  • A switch to combined reporting of the company’s entire income, rather than just the income allocated to New Jersey;
  • An increase in the percent taxed on revenue over $1 million; and
  • Taxing 50 percent of intangible assets parked in low-tax countries.

“What people are trying to do is establish themselves to have as little income allocated in New Jersey as possible, and one of the ways to do that is for companies located outside New Jersey to try not to have 50 percent ownership,” Hydock said.

The changes don’t affect all companies alike. Some companies will do well with combined reporting because the balance of loss and gain will result in lower taxes owed.

The combined reporting change and taxing of Global Intangible Low Taxed Income, or GILTI, has created a sense of urgency in how businesses structure their ownership, such as how Honeywell did, according to Hydock. 

“With the allocation change, we’re not sure how much it’s going to affect the income of New Jersey,” Hydock said. “It is once again a change that people have to change their accounting systems for. It takes time to get up to speed.”

But, he said, to avoid a greater tax burden, companies are looking at things like transferring interest or moving warehouses and offices outside of the state.

A tax expert who helped legislators during the budget showdown last year spoke to ROI-NJ about the CBT battle, but requested anonymity because of the sensitive nature of the issue — which could still return to the spotlight this year or next, they said.

They said one major frustration from the business community last summer was having to change their accounting — which is why the state agreed to a phased-out CBT increase, rather than a permanent increase.

“Most companies don’t want to pay more tax either, but sometimes you know you’re going to have to, so that’s kind of a level way of doing it by offsetting some of the negative impacts of a change,” the source said.

“If you increase the rate of tax on a corporation, the year that — and this is the same for combined filing — you make significant changes … even if it’s not effective for one to two years, the year the law goes into effect, the companies have to revalue their balance sheets for SEC purposes.

“If they have to reprice, that’s a huge hit on company’s financial statements … and that could affect stock prices. If it’s temporary, you don’t have to revalue your balance sheet.”

But the issue that could rear its head again in 2020 is the taxing of intangible assets. Even though the Governor’s Office has said it will work with companies that are negatively impacted and that the Treasury has been directed to consider exceptions.

At the time the state adopted the tax, other states were also looking into it — as a state-level version of repatriation taxes coming from the federal level.

“The issue of GILTI could come back up,” the source said. “Massachusetts was one of the states that said they were going to tax it, and Connecticut, and both of them said no.”

Maryland and Pennsylvania also did the same. New York is pending. This now makes New Jersey an outlier, as the New Jersey Business & Industry Association pointed out in October when a fix-up bill was passed.

How did the state, which notoriously has an unfriendly business climate, end up here?

“It’s a very complicated topic, and that was one of the issues raised by the community during that time,” the source said about last year’s budget battle.

“I don’t think the fight is over.”

Anjalee Khemlani | akhemlani@roi-nj.com | AnjKhem