Tax Reform Friday: New Jersey Feeling GILTI About Leaving Cash on the Table?

States Ponder Conformity

With billions in potential tax revenue dangling in front of their eyes, New Jersey may be the first state to take action in response to the new global intangible low taxed income (GILTI) provisions. A bill introduced late last month in the state would tax GILTI at the state level, which would make New Jersey the first state in the nation to explicitly conform to the new rules under I.R.C § 250 and to tax a portion of income under I.R.C § 951A. Policy experts and legislators alike differ on the provision’s likely effects and may look to New Jersey as a state tax conformity test balloon. States need more time to consider the most complex tax reform provisions, the logic goes, before they understand how the provisions work in the real world, and how conformity may affect the states’ vital businesses.

I.R.C § 250 and 951A Snapshot: Where are we now?

State responses up to this point can be roughly divided into two groups: states with static federal conformity and those with rolling federal conformity. A majority of states with static conformity dates have passed conformity bills that update the state’s conformity date. Although most static conformity states have conformed to the 2017 tax act, specific carve-outs were created to decouple from new or complex federal provisions, I.R.C §§ 250 and 951A among them. So far, no static conformity state has remained coupled to these two code provisions, requiring instead a state modification on the taxpayer’s tax return.

Much less certainty exists in the rolling conformity group. All rolling conformity states conformed to the new provision once it passed but have at this point failed to provide any guidance. Some states, such as Pennsylvania, New Jersey, Maryland, and Mississippi, need not worry: the starting point for the calculation of state corporate tax begins with Line 28, after subpart F income but before special deductions such as I.R.C § 250. “Line 28” states likely decouple from § 250, for now, with most legislative sessions having adjourned. Other states, such as Colorado, Florida, and Michigan, currently conform to the new provisions and use a different starting point, but have not specified how the provision will operate, nor have they released tax return forms. Until official policy is announced, state taxation of GILTI under I.R.C §§ 250 and 951A remains murky.

New Jersey: Bold Step Forward?

New Jersey has taken up the I.R.C §§ 250 and 951A conundrum in the legislature through the introduction of A. 4495. The bill would tax 50 percent of GILTI and provide conformity to the GILTI deduction under I.R.C § 250. New Jersey is an odd-ball “Line 28” static conformity state with no single general conformity date but several conformity dates corresponding to specific I.R.C. provisions. The lack of a specific conformity date grants New Jersey the flexibility to cherry-pick provisions and code versions that benefit the state. Both chambers of the New Jersey legislature have already voted in favor of the bill, but require another vote in each chamber before sending it to Gov. Phil Murphy (D)’s desk. 

Policy makers around the country are at loggerheads over whether to support state taxation of GILTI. Without the ability to offset the state tax with foreign tax credits, it has the potential to be a windfall for state coffers, which could fund some of Murphy’s more ambitious goals. Opponents wonder if New Jersey can weather constitutional and other challenges that may be made on a state’s authority to tax such income. State taxation of GILTI could become more trouble than it is worth. 

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Should states be allowed to tax income from other countries?

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