NEW PROCESSING FEE ON PARTNERSHIPS
However, the largest tax increase, introduced deceptively as a Processing Fee, is a brand new tax on entities treated for federal income tax purposes as partnerships. This includes partnerships, limited liability companies and limited liability partnerships. Every such entity with more than two partners will be subject to a $150 per partner fee [A. 2501, 21]. This is a new tax on people who already pay individually upon the profits of these entities. This is a tax in the vein of "if it moves, let’s tax it" and disguised in the Treasurer’s remarks as a processing fee. This has nothing to do with the abuses that were identified by the Governor involving large corporations not paying taxes!
Think of all the small investment clubs that will be paying this $150 per partner fee. Investment clubs of ten or twenty people will now be paying thousands of dollars in these new fees when they are only passing through hundreds of dollars of interest and dividend income. How many small real estate investment Limited Liability Companies will now be subject to a tax they never anticipated? How many start-up businesses will abandon an attempt to commence their business due to the toll charge placed on them through this tax or the increase in the corporate minimum tax proposed by others?
When the State of New Jersey set up LLCs and LLPs, there was an implicit understanding. The understanding was that these entities would pass through their profits and losses and the individual owners would be taxed at one level of taxation. There would be no entity level taxation. This is why our state’s economy grew so rapidly in the 1990s. We offered a simplified set of tax rules, few tax traps and a single level of taxation for most small businesses. Today, the Governor and A. 2501 attempts to violate that agreement with a proposal first presented just a few weeks ago!
Ten years ago this week, I was proud to support legislation that enacted the first steps in eliminating the double-taxation of S Corporations in New Jersey. As part of that bill, the requirement to file a Form NJ-1065 was added to raise funds for New Jersey. Presumably, this would provide information to the Division of Taxation to find those, particularly non-residents, who were failing to report partnership income to New Jersey. How ironic that this initial requirement is now used ten years later as an excuse to put the government’s hands in our pockets?
Taxes should be assessed on some theory of ability to pay. This fee clearly violates that premise. If the Governor believes he needs more money, he should be brave enough to request an increase in major taxes and not disguise the increase through an unfair fee.
I am one of 20,000 CPAs in New Jersey. I currently represent nineteen companies that are required to file partnership returns. Only four of those entities represent active businesses. The remaining fifteen represented are investment vehicles. Of those fifteen, ten have more than two partners. If my firm is typical, there are 200,000 investment partnerships in New Jersey that will be impacted by the proposed user fee. What do you suppose will happen if you stifle 200,000 investment partnerships? How many new investment partnerships will look to do business in New Jersey when New Jersey is one of very few states (the only one I am aware of) to impose such a fee? The partnership and LLC business forms are simple and easy to work with. Yet, they provide great flexibility. Also, they have been inexpensive to operate because neither the Federal nor State governments place any taxes or fees upon them. By enacting this legislation, you are placing a new toll charge on investment and business startups in New Jersey. This can only slow our economic recovery.
Last night I was at a restaurant in East Brunswick enjoying a Father’s Day dinner with my family. I ran into an old friend of mine, a Milltown Jaycee. We chatted briefly about my testimony today. He nearly fell off his chair. His family has nine partnerships with ten partners each. Each partnership owns a single property to minimize their liability. The new tax on partnerships will cost this family $13,500 per year!