NJ Supreme Court to Decide Constitutionality of Jersey City Payroll Tax

The Supreme Court of New Jersey has agreed to determine whether Jersey City’s 1% payroll tax is constitutional. Earlier this year, the Appellate Division held in Mack-Cali Realty Corp. v. State of New Jersey that the ordinance was unconstitutional, concluding that it ran afoul of the Commerce Clause.

Facts of Mack-Cali Realty Corp. v. State of New Jersey

In November 2018, the Jersey City city council unanimously approved an ordinance establishing a one percent payroll tax to be paid by employers. The ordinance was authorized under Assembly Bill No. 4163, which amended the Local Tax Authorization Act (LTAA) to allow any municipality having a population over 200,000 to impose and collect an employer payroll tax. Any municipality that has adopted an employer payroll tax may create an exception for wages of employees who are residents of the municipality, which Jersey City elected to do.

The goal of the new law is to offset reductions in school aid. Accordingly, it requires that employer payroll tax revenues be paid to the school district on a monthly basis if the municipality has a median household income of $55,000 or more. Presently, Jersey City is the only municipality that is both eligible to impose an employer payroll tax and meet the median household income threshold which triggers the requirement to use employer payroll tax revenues for school purposes.

Under Jersey City Ordinance 18-133 (Ordinance), the city may impose a payroll tax on employers conducting business within Jersey City if they have a payroll in excess of $2,500 in any calendar quarter and employ non-resident employees working within Jersey City or supervise employees from within Jersey City. The term “payroll” is defined as “the total remuneration paid by employers to employees…for services…performed with the City of Jersey City; or…performed outside of the City of Jersey City but…supervised…in Jersey City.”

Plaintiffs — real estate developers and urban renewal entities in Jersey City; business owners with operations in Jersey City; labor unions, which members provide personnel and services to Jersey City businesses and some of which have members that live in Jersey City; and business trade associations — challenged Jersey City Ordinance 18-133. Plaintiffs filed a verified complaint and order to show cause seeking to declare the Ordinance and the 2018 amendments to the LTAA violated the United States and New Jersey Constitutions. They also alleged the Ordinance was ultra vires, void for vagueness and violated contractual rights certain plaintiffs had under tax abatement agreements with the City pursuant to the Long-Term Tax Exemption Law (LTTEL).

Appellate Division’s Decision in Mack-Cali Realty Corp. v. State of New Jersey

The trial court ruled that the statutory amendments were constitutional, and the Ordinance was a valid, constitutional exercise of the City’s authority. The Appellate Division reversed with regard to the Plaintiffs’ Commerce Clause claims. It held that the Ordinance and the LTAA violate the Due Process Clause and Commerce Clause of the U.S. Constitution.

According to the appeals court, the Ordinance could hypothetically allow taxing authorities in different states to both impose a payroll tax on the same employee. For instance, if a resident of New York City came to work for an employer in Jersey City, the employer could be taxed by both taxing authorities. As emphasized by the panel, “neither the statute nor the ordinance provides a mechanism to resolve disputes if two taxing entities, in different states, impose a payroll tax on the same employee.”

The Appellate Division stayed its order 45 days for the parties to “seek further review,” which they did.

Issues Before New Jersey Supreme Court

The New Jersey Supreme Court granted certification on September 27, 2021. The justices agreed to decide the following question: “Did the ‘residency exemption’ in Jersey City’s payroll tax violate the Commerce Clause of the United States Constitution?”

Oral arguments have not yet been scheduled.

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