New Jersey enacts corporate transit fee surtax

On June 28, 2024, New Jersey Gov. Phil Murphy signed legislation, A.B. 4704, which enacts a 2.5% surtax, termed the “Corporate Transit Fee,” on certain Corporation Business Tax (CBT) taxpayers that have New Jersey allocated taxable net income over $10 million.¹ The new surtax is in addition to the CBT and applies to privilege periods beginning on or after Jan. 1, 2024, through Dec. 31, 2028.

Corporate Transit Fee 

The Corporate Transit Fee of 2.5% is levied on businesses with annual taxable net income allocated to New Jersey greater than $10 million for the 2024–2028 privilege periods.² Accordingly, these businesses will be subject to an 11.5% tax as opposed to the standard CBT rate of 9%. The new 11.5% rate (the highest in the country) will be imposed on the entire amount of taxable net income, not only the excess over $10 million. The legislation defines “allocated taxable net income” to mean the same as the term “taxable net income” as defined in the CBT Act for purposes of calculating a taxpayer’s CBT liability.³ The Corporate Transit Fee is imposed in addition to the taxpayer’s regular CBT liability, except that the surtax is not imposed on S corporations or public utilities. No credits are allowed against the new surtax, 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.⁴

The New Jersey Division of Taxation has issued guidance explaining that for purposes of the Corporate Transit Fee, a combined group filing the CBT-100U (unitary return) is considered to be one taxpayer and the fee is imposed at the group level.⁵ The income attributable to a combined group member that is a public utility or S corporation is not excluded when determining whether the group is subject to the Corporate Transit Fee or in calculating the fee.⁶ If the combined group’s taxable net income is greater than $10 million, the combined group is liable for the Corporate Transit Fee. Therefore, separate companies that are S corporations or public utilities are not subject to the fee. If these entities are members of a combined group, however, their income is included in the $10 million calculation.

The Division’s guidance clarifies that no penalties and interest will be imposed on an underpayment that results from the Corporate Transit Fee during the first year of enactment.⁷ If the penalties and interest resulting from an underpayment are charged to the taxpayer, the Division will waive the penalties and interest due to the law change.

Commentary

There has been some controversy and uncertainty concerning whether New Jersey would extend its existing CBT surtax beyond 2023, or alternatively enact a new surtax. A brief review of the history of New Jersey’s CBT surtax is warranted. Before 2018, the highest CBT rate in New Jersey was 9%. In 2018, New Jersey enacted legislation that levied a temporary 2.5% surtax on businesses, not including partnerships and S corporations, with New Jersey allocated taxable net income over $1 million.⁸ The surtax was set to expire at the end of 2021, but in late 2020 it was extended through the end of 2023 because of COVID-19 pandemic shortfall concerns.⁹ The surtax technically expired with the closing of the 2023 tax year, but in February 2024, Gov. Murphy proposed his FY25 budget including the Corporate Transit Fee of 2.5% on businesses with greater than $10 million in taxable net income.¹⁰ This came after Gov. Murphy declined to extend the prior similar surtax that expired at the close of 2023 on companies with New Jersey allocated taxable net income over $1 million.

The new Corporate Transit Fee applies to businesses with over $10 million of allocated New Jersey net taxable income as opposed to the prior iteration which applied to businesses over the $1 million threshold. Therefore, taxpayers with New Jersey allocated taxable net income over $1 million but not over $10 million are no longer subject to the surtax. According to state estimates, the Corporate Transit Fee is projected to generate over $1 billion of additional tax revenue for the 2025 fiscal year, over $800 million for the 2026–2028 fiscal years, and over $500 million for the 2029 fiscal year.¹¹ The additional revenue is intended to support the state transit system’s operating expenses and to pay for the state’s matching funds required to receive federal funding for new transit projects. The state estimates that over 600 corporate taxpayers will be subject to the Corporate Transit Fee.¹²

Taxpayers should consider that the Corporate Transit Fee is a second quarter event for ASC 740 purposes and is retroactively effective for privilege periods beginning on or after Jan. 1, 2024. Because the only exceptions to the Corporate Transit Fee are reserved for public utilities and S corporations, other types of entities such as real estate investment trusts (REITs), regulated investment companies (RICs), and investment companies (ICs) may be subject to the surtax, either independently or by reason of being in a New Jersey combined group subject to the surtax. Taxpayers that have New Jersey allocated taxable net income near the $10 million threshold should evaluate potential planning opportunities such as changing the composition of the combined unitary group, sales factor sourcing, consideration of accounting methods, and allowable purchases of net operating losses.

1 Ch. 20 (A.B. 4704), Laws 2024; Corporate Transit Fee, New Jersey Division of Taxation, July 3, 2024.
2 A.B. 4704, § 1.b.
3 A.B. 4704, § 1.a. “Taxable net income” generally is defined as entire net income allocated to New Jersey as modified by subtracting any prior net operating loss (NOL) conversion carryforward, and any NOL. N.J. REV. STAT. § 54:10A-4(w).
4 A.B. 4704, § 1.b.
5 Corporate Transit Fee, New Jersey Division of Taxation, July 3, 2024.
6 Certain S corporations and public utilities may be included in a combined group. For a list of entities that should be included or excluded, see Technical Bulletin TB-86(R), New Jersey Division of Taxation, revised Nov. 1, 2023.
7 Corporate Transit Fee, New Jersey Division of Taxation, July 3, 2024.
8 N.J. REV. STAT. § 54:10A-5.41, as enacted by Ch. 48 (A.B. 4202), as amended by Ch. 131 (A.B. 4495), Laws 2018.
9 Id., as amended by Ch. 95 (A.B. 4721), Laws 2020.
10 Press Release, Governor Murphy Presents Fiscal Year 2025 State Budget: “Making New Jersey the Best Place to Raise a Family,” Office of New Jersey Governor, Feb. 27, 2024.
11 Fiscal Note for A.B. 4704, New Jersey Legislative Budget and Finance Office, July 3, 2024. Note that the projection for the 2025 fiscal year was adjusted upward to include a one-time catch-up payment equal to the first two quarters of estimated payments in the 2024 tax year, given the retroactivity of the legislation to Jan. 1, 2024. The catch-up payments are estimated at $242 million.
12 Id.