A set of temporary tax rules Gov. Phil Murphy’s administration put in place when pandemic shutdown orders forced many to work from home will be lifted at the beginning of October, according to details the state posted Tuesday.
The temporary rules have applied to employer income-tax withholdings, as well as New Jersey’s corporate business and sales taxes.
They will be lifted at the start of the next quarter on Oct. 1, according to updated guidance on tax rules from the New Jersey Division of Taxation.
The announcement of the tax-policy changes comes as cases of COVID-19 have ticked up in recent weeks, due in large part to the spread of the highly transmissible delta variant.
While the vast majority of cases, hospitalizations and deaths are now among unvaccinated people, delta can also be spread by those who have been immunized, fueling concerns about a possible new wave of the pandemic.
It remains to be seen how lifting the temporary rules may affect thousands of New Jersey residents whose companies are based in New York if they continue to work from home in New Jersey during an extended health crisis.
New Jersey was among several states that filed a legal brief last year in support of New Hampshire’s claim that Massachusetts had no right to collect income taxes from out-of-state residents working from home for companies that are based in Massachusetts.
But the U.S. Supreme Court refused to take up the case.
Renewing pre-pandemic rules
Officials from the New Jersey Department of Treasury say the lifting of the temporary rules means the state will go back to enforcing tax laws suspended last year due to the pandemic and also indicated the state will continue providing credit to residents for taxes paid to other jurisdictions.
“There is a possibility that some taxpayers may be affected by this change, particularly given the aggressive stance that certain jurisdictions, like New York, have taken as to their sourcing rules and right to income,” Treasury spokeswoman Danielle Currie said.
“If New York does extract additional tax payments from New Jersey residents, New Jersey will provide relief from double taxation — provided residents properly claim the resident credit on their tax returns,” she said.
New York has long maintained that it has a right to tax the income earned by the employees of New York-based companies when they are working from home in New Jersey or other states as a matter of “convenience.”
That held true even during the pandemic, when many offices were shut down as a public-health precaution, forcing many New Jersey residents employed by New York-based companies to pay New York income taxes while working from home for a prolonged time in New Jersey.
New Jersey’s tax laws, on the other hand, generally dictate that income is “sourced based on where the service or employment is performed.”
However, the Murphy administration last year put in place temporary tax rules that instructed employers for income-tax withholding purposes to source income “in accordance with the employer’s jurisdiction” due to the pandemic.
The updated guidance from the New Jersey Division of Taxation indicates the “temporary relief period with regard to employer withholding tax for teleworking employees” will come to an end on Oct. 1, 2021 — meaning Trenton will once again place its emphasis on where the work was performed.
“As required under the long-standing pre-pandemic rules, beginning on and after October 1, 2021, employers should resume sourcing income based on where the service or employment is performed and withhold New Jersey Gross Income Tax from such wages,” the notice said.
Temporary rules related to the so-called geographic “nexus” for the corporate-business tax and for sales-tax purposes that were also put in place during the pandemic will also be lifted on Oct. 1, 2021, according to the notice.
Pandemic tax rules an issue of ‘national importance’
New Jersey officials have estimated more than $1 billion in tax credits may be paid out under current tax policies to homebound commuters to offset income taxes that New York collected from New Jersey residents during the pandemic.
In the legal brief submitted to the Supreme Court, New Jersey’s attorney general referred to those estimates and also argued the bistate tax issues highlighted by the pandemic are “serious and of national importance.”
But in late June, the high court declined to take up the case involving New Hampshire and Massachusetts, leaving the issue largely unsettled.
Beyond its impact on individual taxpayers, the issue has fiscal implications for the state.
In New Jersey, income-tax revenue is constitutionally dedicated to funding specific items in the state budget, including direct property-tax relief programs and aid payments to K-12 school districts that can help ease pressure on local property taxes. That means any shift in income taxes from New York to New Jersey could have a major impact on the state budget.
Lawmakers have also highlighted differences between the two states’ tax structures that could also result in meaningful tax savings for individual taxpayers.
And some lawmakers — noting the current shift to remote work is likely to endure, at least in some form, until well after the pandemic wanes — have been urging Murphy to not let the issue go even after the recent setback in the courts.
But Currie, the Treasury spokeswoman, said “any permanent changes to how New Jersey sources its Gross Income Tax would need to be made through legislative action.”
There is no similar tax conflict between New Jersey and Pennsylvania due to a long-standing reciprocal compact that allows residents to pay income taxes where they live, regardless of where they work.