Breaking down the CBT: A look at some of its (many) technical details

Despite coming to an agreement on the corporate business tax hike late Saturday, state legislative leaders and Gov. Phil Murphy were still negotiating technical details of the bill for most of the day Sunday.

The Legislature finally introduced and passed the final version of the bill after 7 p.m. Sunday, setting the stage for significant reporting changes for companies with more than $1 million in revenues in the state.

In his conditional veto letter to the General Assembly dated July 1, Murphy reiterated his concern about increasing the corporate business tax, even if temporarily.

But, he also provided specific details on how the companies would determine if their income was eligible to be taxed by the CBT.

“I am recommending changes to support New Jersey-based companies by including market-based sourcing, aligning our state tax law with the federal research and development credit (and) ensuring equitable recapture of income made available through addressing treaty exclusions to prevent abusive profit-shifting activities,” Murphy wrote.

“My revisions also modernize New Jersey’s tax code by introducing combined reporting to New Jersey so that we may join the 26 other states, the District of Columbia and New York City that have already done so.”

In the final version of the bill, the language included a number of different corporate structures, entities and industries that would need clarifications or exemptions.

They include:

  • Excluding public utilities;
  • Specifically addressing captive insurance;
  • Defining dividends (so that they don’t include gaming winnings, amounts rolled over from IRAs and gains from an estate or trust);
  • Defining how the tax applies to mergers and acquisitions;
  • Exempting international banks and state-based banks;
  • Defining how much of a company’s income in the state should be taxed, retroactively, looking at a three-year average from 2015.

The language regarding banks was one of the changes that became a point of contention in the negotiations over the weekend.

Companies will be exempt if they have “less than 90 percent of its average gross assets in New Jersey, at cost, invested in stocks, bonds, debentures, mortgages, notes, patents, patent rights or other securities or consisting of cash on deposit during the period covered by its report; or is a banking corporation, a savings institution, or a financial business corporation as defined in the Corporation Business Tax Act,” the bill said.

There was some other interesting language.

Deloitte multistate tax professional Norman Lobins calculated the impact of the CBT bill on a company making $100 million.

With the state only able to tax 5 percent of a company’s dividends, which was supposed to be in lieu of taxing repatriated offshore assets, it is still able to increase the tax payment of a company.

A $100 million company with $40 million in dividend income can only be taxed on $2 million. If that same company’s total sales in New Jersey total $1 million, its dividend income is $70,000. In this scenario, the company’s New Jersey percentage is 1 percent, while, under the new law, it would be 1.05 percent, which gives the state a boost in revenue collection, Lobins said.

Lobins also noted that in the final version of the bill, despite all the contention over the combined reporting clauses, there was a provision that walked back the impact of it, as well as shifted the burden of the process away from the state Division of Taxation.

“The director may, at the director’s sole discretion: (a) make any deficiency assessment against either the managerial member or a taxable member of the combined group; (b) refund or credit any overpayment to either the managerial member or a taxable member of the combined group; (c) require any payment to be made by electronic funds transfer; and (d) require the combined unitary tax return to be electronically filed,” according to the bill.

On Sunday morning, it appeared that an old bill sponsored by Sen. Paul Sarlo (D-Wood-Ridge) would be used and amended to supplement the combined reporting requirement. But, by the end of the day, the Legislature passed the corporate tax bill and included the combined reporting language in there.

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