Bill Text: NJ S64 | 2018-2019 | Regular Session | Introduced


Bill Title: Increases earned income tax credit; provides credit for child or dependent care expenses; taxes "investment management services." *

Spectrum: Moderate Partisan Bill (Democrat 4-1)

Status: (Introduced - Dead) 2018-06-21 - Substituted by A3088 (ACS) [S64 Detail]

Download: New_Jersey-2018-S64-Introduced.html

SENATE, No. 64

STATE OF NEW JERSEY

218th LEGISLATURE

 

PRE-FILED FOR INTRODUCTION IN THE 2018 SESSION

 


 

Sponsored by:

Senator  TROY SINGLETON

District 7 (Burlington)

 

 

 

 

SYNOPSIS

     Imposes corporate business tax and gross income tax on income attributable to certain investment management services that a corporate or individual partner provides on behalf of a partnership.

 

CURRENT VERSION OF TEXT

     Introduced Pending Technical Review by Legislative Counsel.

  


An Act concerning the taxation of certain investment management services provided to a partnership, amending N.J.S.54A:5-8 and P.L.1945, c.162, and supplementing Title 54A of the New Jersey Statutes and P.L.1945, c.162 (C.54:10A-1 et seq.).

 

     Be It Enacted by the Senate and General Assembly of the State of New Jersey:

 

1.      N.J.S.54A:5-8 is amended to read as follows:

     54A:5-8.     a. Income from sources within this State for a nonresident individual, estate or trust means the income from the categories of gross income enumerated and classified under chapter 5 of this act to the extent that it is earned, received or acquired from sources within this State:

     (1)   By reason of ownership or disposition of any interest in real or tangible personal property in this State; or

     (2)   In connection with a trade, profession, occupation carried on in this State or for the rendition of personal services performed in this State; or

     (3)   As a distributive share of the income of an unincorporated business, profession, enterprise, undertaking or other activity as the result of work done, services rendered or other business activities conducted in this State except as allocated to another state pursuant to regulations promulgated by the director under this act; or

     (4)   From intangible personal property employed in a trade, profession, occupation or business carried on in this State; or

     (5)   As a result of any lottery or wagering transaction in this State other than that excluded from taxation pursuant to N.J.S.54A:6-11; or

     (6)   As S corporation income allocated to this State of a New Jersey S corporation.

     b.    Income from sources within this State for a nonresident individual shall not include income from pensions and annuities as set forth in subsection j. of N.J.S.54A:5-1.

     c.     For purposes of paragraphs (2) through (4) of subsection a. of this section, a nonresident taxpayer shall not be deemed to be carrying on a trade, profession, occupation, business, enterprise, undertaking or other activity in this State, or to be rendering personal services in this State, solely as a result of the purchase, holding and sale of intangible personal property by the trade, profession, occupation, business, enterprise or undertaking, to the extent that (1) the activities related to the intangible personal property are for the account of the trade, profession, occupation, business, enterprise, or undertaking and (2) the trade, profession, occupation, business, enterprise, or undertaking does not hold the intangible personal property for sale to customers.  For the purposes of this subsection: "intangible personal property" includes, but is not limited to, "commodities", as defined in paragraph (2) of subsection (e), and "securities," as defined in paragraph (2) of subsection (c), of section 475 of the federal Internal Revenue Code of 1986, 26 U.S.C. s.475; and "purchase, holding and sale of intangible personal property" includes activities incidental thereto giving rise to income, including commitment fees, breakup fees, income from securities lending, and any other incidental activities as prescribed or authorized by the director.

     Provided however, that the provisions of this subsection c. shall not apply to income from investment management services provided to a partnership, S corporation, or other entity.

     As used in this subsection:

     "Investment management services" means providing a substantial quantity of any of the following services to a partnership, S corporation, or other entity as a partner thereto:

     (1)   advising as to the advisability of investing in, purchasing or selling a specified asset;

     (2)   managing, acquiring, or disposing of a specified asset;

     (3)   arranging financing with respect to acquiring specified assets; or

     (4)   any activity in support of any of the services described in (1) through (3).

     "Specified asset" means certain securities, real estate held for rental or investment, interests in partnerships, commodities, or options or derivatives contracts, except if at least 80% of the average fair market value of the specified assets of the partnership, S corporation, or other entity during the taxable year consists of real estate.

     The director shall adopt such regulations as the director deems necessary to accomplish the purposes of this section.

(cf: P.L.1998, c.106, s.14)

 

     2.    (New section) a. Notwithstanding the provisions of the "New Jersey Gross Income Tax Act" N.J.S.54A:1-1 et seq. to the contrary, in addition to the tax imposed on the income of a non-resident taxpayer pursuant to N.J.S.54A:5-8, there shall be imposed an additional surtax of 19% on income from investment management services received during the taxpayer's taxable year.

     b.    Notwithstanding the provisions of the "New Jersey Gross Income Tax Act" N.J.S.54A:1-1 et seq. to the contrary, in addition to the tax imposed on the income of a resident taxpayer from the categories of gross income enumerated and classified in N.J.S.54A:5-1 et seq., there shall be imposed an additional surtax of 19% on income received during the taxpayer's taxable year from investment management services provided to a partnership, S corporation, or other entity.

     As used in this subsection:

     "Investment management services" means providing a substantial quantity of any of the following services to a partnership, S corporation, or other entity as a partner thereto:

     (1)   advising as to the advisability of investing in, purchasing or selling any specified asset;

     (2)   managing, acquiring, or disposing of a specified asset;

     (3)   arranging financing with respect to acquiring a specified asset; or

     (4)   any activity in support of any of the services described in (1) through (3) herein.

     "Specified asset' means certain securities, real estate held for rental or investment, interests in partnerships, commodities, or options or derivatives contracts, except if at least 80% of the average fair market value of the specified asset of the partnership, S corporation or other entity during the taxable year consists of real estate.

 

     3.    Section 6 of P.L.1945, c.162 (C.54:10A-6) is amended to read as follows:

     6.    The portion of a taxpayer's entire net worth to be used as a measure of the tax imposed by subsection (a) of section 5 of P.L.1945, c.162 (C.54:10A-5), and the portion of its entire net income to be used as a measure of the tax imposed by subsection (c) of section 5 of P.L.1945, c.162 (C.54:10A-5), shall be determined by multiplying such entire net worth and entire net income, respectively, by an allocation factor which is the property fraction, plus twice the sales fraction plus the payroll fraction and the denominator of which is four, and which, for privilege periods beginning on or after January 1, 2012, is the sum of the portions of the property fraction, the sales fraction, and the payroll fraction determined in accordance with the following schedule:

     for privilege periods beginning on or after January 1, 2012 but before January 1, 2013, 15% of the property fraction plus 70% of the sales fraction plus 15% of the payroll fraction,

     for privilege periods beginning on or after January 1, 2013 but before January 1, 2014, 5% of the property fraction plus 90% of the sales fraction plus 5% of the payroll fraction, and

     for privilege periods beginning on or after January 1, 2014, 100% of the sales fraction,

except as the director may determine pursuant to section 8 of P.L.1945, c.162 (C.54:10A-8), that is:

     (A)  The property fraction is the average value of the taxpayer's real and tangible personal property within the State during the period covered by its report divided by the average value of all the taxpayer's real and tangible personal property wherever situated during such period; provided, however, that for the purpose of determining average value, the provisions with respect to depreciation as set forth in subparagraph (F) of paragraph (2) of subsection (k) of section 4 of P.L.1945, c.162 (C.54:10A-4) shall be taken into account for arriving at such value.

     (B)  The sales fraction is the receipts of the taxpayer, computed on the cash or accrual basis according to the method of accounting used in the computation of its net income for federal tax purposes, arising during such period from

     (1)   sales of its tangible personal property located within this State at the time of the receipt of or appropriation to the orders where shipments are made to points within this State,

     (2)   sales of tangible personal property located without the State at the time of the receipt of or appropriation to the orders where shipment is made to points within the State,

     (3)   (Deleted by amendment.)

     (4)   services performed within the State which shall be deemed to include, but shall not be limited to, investment management services performed by the taxpayer as a partner provided to a partnership, S corporation, or other entity.

     As used in this subsection:

     "Investment management services" means providing a substantial quantity of any of the following services to a partnership, S corporation, or other entity as a partner thereto:

     (1)   advising as to the advisability of investing in, purchasing or selling a specified asset;

     (2)   managing, acquiring, or disposing of a specified asset;

     (3)   arranging financing with respect to acquiring a specified assets; or

     (4)   any activity in support of any of the services described in (1) through (3).

     "Specified asset" means certain securities, real estate held for rental or investment, interests in partnerships, commodities, or options or derivatives contracts, except if at least 80% of the average fair market value of the specified assets of the partnership, S corporation, or other entity during the taxable year consists of real estate,

     (5)   rentals from property situated, and royalties from the use of patents or copyrights, within the State,

     (6)   all other business receipts (excluding dividends excluded from entire net income by paragraph (1) of subsection (k) of section 4 of P.L.1945, c.162 (C.54:10A-4)) earned within the State,

     divided by the total amount of the taxpayer's receipts, similarly computed, arising during such period from all sales of its tangible personal property, services, rentals, royalties and all other business receipts, whether within or without the State.

     (C)  The payroll fraction is the total wages, salaries and other personal service compensation, similarly computed, during such period of officers and employees within the State divided by the total wages, salaries and other personal service compensation, similarly computed, during such period of all the taxpayer's officers and employees within and without the State.

     In the case of a banking corporation which maintains a regular place of business outside this State other than a statutory office, and which elects to take the exclusion from net worth provided in subsection (d) of section 4 of P.L.1945, c.162 (C.54:10A-4) or the deduction from entire net income provided in paragraph (4) of subsection (k) of section 4 of P.L.1945, c.162 (C.54:10A-4), the allocation factor shall be computed and applied in accordance with section 6 of P.L.1945, c.162 (C.54:10A-6); provided, however, that the numerators and the denominators of the fractions described in (A), (B) or (C) above shall include all amounts attributable, directly or indirectly, to the production of the eligible net income of an international banking facility as defined in paragraph (4) of subsection (k) of section 4 of P.L.1945, c.162 (C.54:10A-4), whether or not such amounts are otherwise attributable to this State.

(cf: P.L.2011, c.59, s.1)

 

     4.    (New section) Notwithstanding the provisions of the "Corporation Business Tax Act (1945)," P.L.1945, c.162 (C.54:10A-1 et seq.) to the contrary, in addition to the tax imposed on the entire net income of a taxpayer pursuant to subject to the provisions of section 6 of P.L.1945, c.162 (C.54:10A-6), there shall be imposed an additional surtax of 19% imposed on income received from investment management services during the taxpayer's accounting or privilege period.

 

     5.    This act shall take effect immediately but shall remain inoperative until enactment into law by the states of Connecticut, New York and Massachusetts of legislation having an identical effect with this act, as shall be determined by the Director of the Division of Taxation in the Department of the Treasury, but if the states of Connecticut, New York, and Massachusetts shall have already enacted such legislation, as shall be determined by the director, this act shall take effect immediately; and shall apply to taxable years and accounting or privilege periods beginning after its effective date.  Provided further, however, that sections 2 and 4 of this act shall expire if the director determines that the United States Congress has passed and the President of the United States has signed legislation having an identical effect with this act applicable to such income earned in all of the states and territories.

 

STATEMENT

 

     This bill taxes income attributable to certain "investment management services" that an individual partner or corporate partner provides on behalf of a partnership.  The intent of the bill is to ensure that a possible "carried interest loophole"' is not used under New Jersey tax law.

     "Carried interest" is the term commonly used to describe an investment manager's share in the net profits of an investment fund in excess of any amount contributed by the manager to such fund.  When an investment manager organizes a fund and provides management services to it, the manager usually receives a share of the fund's future net profits (a "carried interest"), along with a fixed management fee.  The investors who provide most of the capital for the fund share the rest of the fund's future profits.  Under current federal law, each investor's share of the fund's net profits, including the investment manager's share, generally is taxed at the lower rate for capital gains (rather than at ordinary income tax rates).  Simply stated, the carried interest loophole has the effect of treating hedge fund and private equity fees as capital gains, rather than ordinary income.

     Hedge fund and private equity funds are usually structured as partnerships. The fund manager is the general partner of the funds, the investors are limited partners.  Investors often supply the majority of the capital, and the fund manager is supposed to supply investment expertise.  Investment managers charge certain fees for the services they provide.  In both hedge funds and private equity funds, the standard fee structure is "2 and 20" - meaning two percent of the fund assets per year are taken as the management fee, which covers operating costs, while 20% of all gains over a certain benchmark rate are taken by the fund manager as the performance fee.  To many, this 20% fee appears to be compensation for services.  If the federal income tax treated the performance fee as compensation for services, it would be taxed as ordinary income, where the highest marginal tax rate is currently 39.6%.  Instead, many fund managers treat this fee as an investment profit.  But profits on investments held longer than one year receive preferential treatment in the federal income tax code, with the highest marginal rate on long-term capital gains set at 20%.  Thus, at the federal level this income is taxed at a 20% rate and not a 39.6% marginal rate, escaping a marginal tax rate of about 19.6%.

     In order to ensure that the carried interest loophole does not penetrate New Jersey's taxes on income from such services, the bill defines this source of income as investment management services income so that income that might be claimed by fund managers to be nontaxable income from intangibles, is clearly identified as taxable income for both corporate and nonresident and resident individual partners.

     The bill has a unique effective date mechanism so that the proposed changes would take effect only upon the enactment into law of other states' legislation having an identical effect in the states of Connecticut, New York, and Massachusetts.  This is intended to complete a multi-state level effort to close the loophole so that fund managers could not avoid the tax by simply moving to a nearby state.

     In addition, the bill also implements a 19% surtax as a "carried interest fairness fee"' under the gross income tax and the corporation business tax.  This surtax aims to "repatriate" the federal income tax lost at the federal level back to the states.  However this 19% "carried interest fairness fee" will only remain in effect until such time as the Director of the Division of Taxation determines that the United States Congress has passed and the President of the United States has signed legislation having an identical effect with this act applicable to such income earned in all of the states and territories.  Thus, this state level effort will end if the loophole is closed at the federal level nationwide.

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