Single Sales Factor, also referred to as Single Sales Fraction, changes the way in which New Jersey apportions a share of a corporation’s in-state income from a three-fraction formula to a single sales factor formula.
Prior to 2012, New Jersey’s corporation business tax employed a three-fraction formula that apportioned a share of a corporation’s income to this State based on a weighted average of the following fractions: (1) a corporation’s property in-State over the corporation’s total property; (2) a corporation’s sales in-State over the corporation’s total sales; and (3) the corporation’s payroll in-State over the corporation’s total payroll. The sales fraction accounted for 50 percent of the apportionment and the property and payroll fractions each accounted for 25 percent of the apportionment.
The three-factor (property, payroll, sales) business tax allocation formula was prevalent in the post-World War II period when companies were primarily immobile, the service sector was small and markets were regional. In today’s global economy with highly mobile businesses, many states have moved to eliminate the anti-investment factors (property and payroll) from their corporation tax laws. Currently, 23 states have either already adopted or are phasing in the single sales factor tax reform for all or some of their industries, including New York, Pennsylvania and Connecticut.
Like other states, New Jersey originally utilized the three-factor formula with each factor weighted equally. In 1994, New Jersey enacted legislation to double weight the sales factor, lowering the impact of the physical factors from 66 percent to 50 percent. Even so, the system still punished companies that called New Jersey home because of the 25 percent in-state property and 25 percent in-state payroll fractions. As such, comparing two companies with the same in-state (New Jersey) sales, if one was located in Pennsylvania and the other in New Jersey, the New Jersey based firm would pay more in taxes.
—Change in the Law—
A single sales factor formula replaces the three-factor formula. The change is phased in over three years. For tax year 2012, the sales fraction will account for 70 percent of the apportionment and the property and payroll fractions will each account for 15 percent of the apportionment. For tax year 2013, the sales fraction will increase to 90 percent and the property and payroll fractions will each account for 5 percent of the apportionment. For tax year 2014 and thereafter, the sales fraction will account for 100 percent of the apportionment.
In addition, this law creates a modified sales fraction formula for airlines. Under its provisions, the prior sales fraction based on the ratio of departures is replaced by a sales fraction determined as the ratio of an airline’s revenue miles in-State divided by an airline’s total revenue miles.
—How Will This Affect My Business?—
The best way to illustrate the impact of this law is through an example. In this example, a business earns$35 million in nationwide profits. Assuming that: Total nationwide sales for the company were $160 million, and of that, $10 million were in NJ; and, Total nationwide property for the company was valued at $240 million, and of that, $60 million was in NJ; and, Total nationwide payroll for the company was $75 million, and of that, $25 million was in NJ;
The fractions under the old law would be as follows:
$10 million/$160 million = .0625 x .5 (because 50 percent fraction based on sales) = .0313
$60 million/$240 million = .25 x .25 (because 25 percent fraction based on property) = .0625
$25 million/$75 million =.3333 x .25 (because 25 percent fraction based on payroll) = .0833 When you add .0313 + .0625 +.0833 = .1771
The fraction of the corporation’s $35 million that is taxable by New Jersey equals .1771 percent (rounded up) under current law. Therefore, $6,198,500 of the $35 million is taxable by New Jersey. The corporation’s New Jersey corporate tax liability is $557,865 at the 9 percent CBT tax rate.
Once the single sales factor is fully phased-in, only $2,187,500, or 6.25 percent of the corporation’s $35 million, would be taxed by New Jersey. The resulting tax liability is $196,875 ($2,187,500 x 9 percent CBT). The law decreases the net income taxable in New Jersey by $4,011,000 or 64.9 percent, and that translates into $360,990 of tax savings.
—For More Information—
The NJ Division of Taxation has a fact sheet that can be found here http://www.state.nj.us/treasury/taxation/single_sales_factor_airline.shtml
Updated: December 18, 2017
This information should not be construed as constituting specific legal advice. It is intended to provide general information about this subject and general compliance strategies. For specific legal advice, NJBIA strongly recommends members consult with their attorney.