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New Jersey Supreme Court Requires Factual Record in Jersey City Payroll Tax Dispute

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The New Jersey Supreme Court upheld a lower court decision that Jersey City’s payroll tax New-Jersey-Seal-300x300was not a facial violation of the U.S. Constitution but remanded the matter to create a factual record to evaluate an as-applied challenge to the tax.

Enacted in 2018, the Jersey City payroll tax applies to employers with payroll exceeding $2,500 in any calendar quarter and is based on the employer’s nonresident employee payroll sourced to Jersey City.  The payroll tax statute sources a nonresident employee’s payroll to Jersey City if the employee works in or is supervised from Jersey City.

In December 2018, a group of employers subject to the tax filed suit asserting that the tax is unconstitutional.  The taxpayers’ key arguments are that the tax violates two of Complete Auto’s four requirements for state taxes to be valid under the U.S. Constitution’s Due Process and Commerce Clauses.

  • First, plaintiffs assert that the tax discriminates against interstate commerce because it taxes only nonresident payroll and exempts Jersey City resident payroll.
  • Second, plaintiffs assert that the tax is not fairly apportioned because sourcing payroll to Jersey City if either the nonresident employee’s or supervisor’s locations are in Jersey City creates the risk of multiple taxation.

The lower court found that the tax does not discriminate against interstate commerce on its face because Jersey City resident payroll is exempt for both in-state and out-of-state businesses.  The lower court remanded the matter to the trial court to create a factual record regarding whether the tax discriminated against non-New Jersey economic interests in practice or resulted in unfair apportionment.  Plaintiffs appealed to the New Jersey Supreme Court.

The New Jersey Supreme Court upheld the lower court’s conclusion that the tax was not invalid on its face and that a factual record was needed to determine whether the statute was otherwise unconstitutional.  Specifically, the New Jersey Supreme Court upheld the determination that a factual record was necessary to determine whether the tax discriminated against New Jersey economic interests or was unfairly apportioned due to the risk of multiple taxation.

Mack-Cali Realty Corp. v. State, No. 085465, 2022 WL 1739950 (N.J. May 31, 2022).