New Jersey Enacts Corporate Transit Fee

On June 28, New Jersey enacted a corporate transit fee, a 2.5% tax on some corporation business tax (CBT) payers that have New Jersey allocated taxable net income in excess of $10 million.[1] The fee is effective for privilege periods beginning on and after January 1, 2024, through December 31, 2028.

All revenue collected from the corporate transit fee will be deposited into the general fund. Beginning in state fiscal year 2026, the revenue will be appropriated annually to support New Jersey Transit’s operating expenses and pay for matching funds required to receive federal funding for eligible New Jersey Transit capital projects.

The Former CBT Surtax

For tax years beginning on or after January 1, 2018, through December 31, 2023, New Jersey assessed a 2.5% surtax on “each taxpayer, except a public utility, that has allocated taxable income in excess of $1 million.”[2]

The former CBT surtax defined the term “taxpayer” to include any business entity subject to tax as provided in the Corporation Business Tax Act.[3] It defined allocated taxable net income as “allocated entire net income for privilege periods ending before July 31, 2019, or taxable net income as defined in [the Corporation Business Tax Act] for privilege periods ending on and after July 31, 2019.”

Regarding applicable payments and credits against the former CBT surtax, no credits were allowed against the surtax liability computed under the relevant statutory section 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 Transit Fee

As noted above, the new legislation has retroactive applicability to tax years beginning on or after January 1, 2024.

Unlike the former CBT surtax, the transit fee has an explicit exclusion for S corporations. It defines the term “taxpayer” as “any business entity or combined group that is subject to tax, as provided in the Corporation Business Tax [Act], except not including any S corporation or public utility.”

The allocated taxable income floor to be subject to the transit fee is higher than that under the former CBT surtax: The fee applies to taxpayers with allocated taxable income in excess of $10 million in New Jersey. However, it applies to all income, not just that over $10 million.

The transit fee defines the term “allocated taxable net income” as taxable net income, which is the entire net income allocated to New Jersey, less applicable New Jersey net operating losses.

Like the former CBT surtax, the transit fee is applied in addition to the New Jersey CBT rate of 9%.

No credits are allowed against the corporate transit fee liability computed 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.

Applicability of the Transit Fee to CBT Combined Groups

A transit fee taxpayer is defined to include a combined group, which is generally a group of companies that have common ownership and are engaged in a unitary business. Combined groups are to be treated as a single taxpayer.[4]

The New Jersey Division of Taxation has provided additional guidance on the transit fee’s applicability to combined groups.[5] Despite the exclusion of those groups from the definition of taxpayer, the allocated net taxable income of public utilities and S corporations in a combined group is included when determining if that group is subject to the transit fee.

Insights

• Given the June 28, 2024, enaction date, taxpayers should evaluate the impact on their effective tax rates for ASC 740 purposes.
• Taxpayers that were subject to the former CBT surtax cannot assume they will be subject to the transit fee, given both the allocated taxable income floor of $10 million and the transit fee’s definition of taxpayer.
• Despite the exclusions for public utilities and S corporations, combined groups that have such members must be cautious because the allocated income of those entities is taken into consideration when determining transit fee applicability.
• The statute excludes only public utilities and S corporations from the definition of taxpayer, so the transit fee may apply to entities such as real estate investment trusts, regulated investment companies, and investment companies.

 

Written by Ilya A. Lipin and John Damin. Copyright © 2024 BDO USA, P.C. All rights reserved. www.bdo.com

 

 

[1] 2024 N.J.A. 4704.

[2] N.J. Rev. Stat. §54:10A-5.41(a)(1).

[3] Id. at §54:10A-5.41(b)(1).

[4] 2024 N.J.A. 4704(a); N.J. Rev. Stat. §54:10A-4(z).

[5] New Jersey Division of Taxation, “Corporate Transit Fee” (July 3, 2024).