Sales tax changes on the docket in New Jersey

Update 9.4.2018: Starting October 1, 2018, short-term rentals will be subject to tax in New Jersey. The Garden State will also start taxing remote sellers doing a certain amount of business in New Jersey on October 1.

Only in office a few months, New Jersey Governor Phil Murphy is shaking things up. Among other changes, he wants to increase the state sales tax rate; tax electronic cigarettes, rideshare, and home-share services; and legalize and tax marijuana.

Increase state sales tax rate

The New Jersey state sales tax rate has been reduced over the past two years. To offset an unpopular gas tax rate increase, it went from 7 percent to 6.875 percent on January 1, 2017, then dropped again to 6.625 percent at the start of 2018. Last year, there was an attempt to reduce it even further, but it went nowhere.

Gov. Murphy proposes bringing the state sales tax rate back to “an even seven percent.” He explains why in the FY19 Budget Book, “Let’s be honest, the impact of the three-eighths of one percent sales tax decrease has been nearly imperceptible to the average family, but has directly impacted our ability to provide better services to, and greater future investment in, that family.”

Increasing the state sales tax rate as proposed is expected to raise $581 million annually. Yet as of this writing, no legislation proposing a state sales tax hike has been introduced. It’s expected to be a hard sell.

Legalize and tax marijuana

There have been calls in the past to decriminalize the possession of small amounts of marijuana in New Jersey. The new governor would go further. In his annual budget address, he proposed “the careful legalization, regulation, and taxation of marijuana sales to adults.”

According to the Budget in Brief, “This Administration plans to legalize adult-use marijuana by January 1, 2019” (access to medical marijuana would also be expanded). This is expected to generate $80 million in revenue in FY 2019. It would also save the state money, as it would reduce amounts spent on policing and prosecuting people for possession of small amounts of cannabis.

Senate Bill 830 would levy a tax of 7 percent on marijuana and marijuana products sold to persons aged 21 or older. This tax would escalate over time to 10 percent in the second year, 15 percent the third year, 20 percent the fourth year, and 25 percent “in year five and beyond.”

Tax electronic cigarettes

Taxing electronic cigarettes is also part of the plan, and two bills seeking to tax them have already been introduced.

Senate Bill 1184 would impose the tobacco products wholesale sales and use tax on e-cigarettes and similar tobacco-substitute smoking devices. It would also increase the general tax rate imposed on tobacco products from 30 to 68 percent as well as increase other tax rates to the following:

• 75 percent upon the receipt from every sale, use, or distribution of an electronic cigarette
• $2.70 per cigar
• $0.54 per cigarillo
• $0.135 per little cigar
• $0.135 per single-dose smokeless tobacco product
• $4.15 per ounce of pipe or smoking tobacco
• $2.25 per ounce of moist snuff

Assembly Bill 1586 would tax electronic cigarettes and similar tobacco-substitute smoking devices as above but wouldn’t increase other taxes on tobacco products.

Tax firearms

As a gubernatorial candidate, Phil Murphy promised that if elected he would “tax gun sales to prevent violence.” His Budget in Brief recommends “raising firearm fees, many of which have not been updated since the 1960s.” However, as of this writing, few details have been provided.

Tax remote sales

In his Budget in Brief, Gov. Murphy says taxing “certain remote sales” would modernize the tax base. No further details have been released at this point, but if the administration does go through with this plan, it will be in step with many other states around the country.

Tax rideshare services

A tax on rideshare services would also modernize the tax base, according to the Budget in Brief.

In 2017, then Governor Chris Christie struck a deal with Uber, which was threatening to leave the state. Out of the negotiations came Assembly Bill 3695, which prevents counties, municipalities, and the state from imposing a tax or fee “that only applies to a transportation network company or transportation network company driver.” (The state may impose the “initial and annual permit fee.”)

Of course, this wouldn’t prevent the state or localities from extending the general sales tax to these services.

Tax transient accommodations

Home-share platforms like Airbnb and VRBO have helped reshape the lodging industry, yet Gov. Murphy would have them subject to the same taxes as traditional hotels and motels.

Assembly Bill 1753, introduced in early January, would impose the state sales and use tax and hotel and motel occupancy taxes on transient accommodations, and authorize various municipal taxes and fees on them. It defines “transient accommodation” as “a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences.”

Furthermore, it would allow a transient space marketplace (e.g., Airbnb, or VRBO) to collect and remit applicable taxes on behalf of its hosts, but only on transient accommodations booked through the platform. If hosts book lodging another way — for example, through Craigslist or their own website — they would be liable for the tax.

Sales and use tax compliance for many businesses will be affected if any of these proposed changes take effect. Keep an eye on them by reading the Avalara blog.