A new bill1 introduced in New Jersey’s state Assembly is hoping to attract consumers to small businesses located in the state by cutting in half the New Jersey sales tax rate they would have to charge on their retail sales of tangible personal property.
Ordinarily, we would not write an article on proposals because obviously they might not pass. That is exactly what I hope happens to this bill. As I read the language of the bill, I cannot help but think of the additional complexity that would be added to an already complicated area.
Current Sales Tax Framework
Currently, New Jersey imposes a 6.625% sales tax rate on retail sales of tangible personal property and certain enumerated services. There aren’t any local sales taxes in New Jersey, so that rate applies across all jurisdictions in the state. If enacted, this bill would allow qualified small businesses to only charge a sales tax rate of 3.3% on its retail sales of tangible personal property excluding certain items such as motor vehicles, among other things.
Qualification Criteria for Small Businesses
To be a qualified small business enterprise per this bill, the retailer must meet these criteria:
- The business must have its principal place of business in New Jersey;
- The business must be independently owned and operated; and
- The business must employ the equivalent of fewer than 50 full-time employees
Salem County Precedent
I was surprised to learn that New Jersey has a similar scenario playing out in the state already. Apparently, Salem County-located businesses are already allowed to charge half of the general New Jersey sales tax rate on their retail sales of tangible personal property.2 No services are allowed for the reduced rate, as well as various other types of property (e.g., motor vehicles, cigarettes, etc.). The difference between Salem County and this proposal is that all businesses qualify for the Salem County reduced rate, regardless of employment size.
The Salem County provisions highlight one of the problems I see with this proposed bill. The proposed changes would apply to qualifying small businesses only, which means that the exact same good sold by a business with 51 employees will have to charge the full 6.625% New Jersey sales tax rate compared to the qualifying small business enterprise only having to charge 3.3%. It would seem to me that the state should be careful of picking on one segment of their tax base in favor of another. Anyone care to guess how long its going to take for the larger retailers in the state to lobby the legislature to shut this bill down? Not feeling the love from their own state, what if a “large” business decided to simply pick up and move their principal place of business from southwest New Jersey over into Delaware, a state that has no sales tax? All other things being equal – especially the cost of the item – If it only adds a few minutes to my drive, I’ll make that trip 10 out of 10 times.
Implications for Mail-Order and Internet Sales
Will this proposed law include mail-order or internet sales of otherwise qualifying tangible personal property? The Salem County provisions specifically exclude mail order or internet sales from being afforded the reduced rate. The way this bill reads, it says that the place of business of the small business enterprise must not be primarily engaged in making catalogue or mail order / internet sales. What does that mean? Does it mean that at least 51% of its sales need to be made and fulfilled with in-stock inventory? Or will it ultimately follow the Salem County guidance?
Employee Residency and Remote Work
Additionally, this bill doesn’t specify where the employees have to reside. In today’s environment, remote workers are abundant in all sizes and types of businesses. Technological advancements make it so much easier to work from home in Idaho for your home office in Ohio. Admittedly, if this bill were to continue forward, there are a lot of details that must be determined, and this is clearly one of them. But what if the Division of Taxation and/or the legislature did require that the employees reside in New Jersey? These businesses would potentially want to pass on REALLY GOOD out-of-state candidates so that they can continue to only charge the reduced sales tax rate, only to have those same candidates get hired by the “large” business enterprise in New Jersey.
Challenges in Tax Calculation Setup
How would these retailers manage their tax calculation engine setup? More often than not, the HR side of the business is not communicating its hiring (and firing) changes to the side of the business that handles the sales taxes. So a qualifying small business enterprise might be correctly charging the reduced 3.3% rate of tax, only to find out several months later that they hired some folks that put them over the 50 FTE threshold and thus not eligible for the reduced rate. What then? Are they liable for the unbilled sales tax during that period? Is there a grace period to correct the system, in either direction?
The old saying “the devil’s in the details” is no truer than with this proposed bill. I suspect it won’t go far, but stranger things have happened. New Jersey already offers a reduced sales tax rate to businesses in Salem County, but this proposal brings far more challenges to overcome.