New Jersey Appellate Court Finds Payroll Tax Unconstitutional

The BR State + Local Tax Spotlight

In a precedential decision, New Jersey’s intermediate appellate court ruled that a Jersey City ordinance imposing a payroll tax was unconstitutional. Mack-Cali Realty Corp. v. State, No. A-3097-18, 2021 N.J. Super. LEXIS 21 (N.J. Super. Ct. App. Div. February 16, 2021). Jersey City, New Jersey, is home to many companies’ back office operations in the New York metropolitan area. Therefore, we suspect that many companies will have this issue. 

Facts: New Jersey has for many years had controversies regarding underfunding of schools in poorer districts. In 2018, a state statute was modified to allow Jersey City to enact a payroll tax, which had previously only been allowed for Newark, New Jersey, to assist with school funding. Jersey City’s ordinance became effective on January 1, 2019.

Under the Jersey City ordinance, employers must pay a tax of one percent of “payroll.” 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.” Mack-Cali, 2021 N.J. Super. LEXIS 21 at *14. A group of plaintiffs, which included real estate developers, urban renewal entities, business owners with operations in Jersey City, labor unions, and business trade associations, challenged the payroll tax, arguing among other things that the payroll tax is unconstitutional.

The Decision: The court held that the ordinance is internally inconsistent and violates the Due Process Clause and Commerce Clause of the U.S. Constitution. The court found that if New York City had a tax that is substantially similar to Jersey City’s and a person worked in New York City and was supervised from Jersey City, the employee (and her services) would be taxed more than once—once by New York City by working in New York City and once by Jersey City by being supervised from Jersey City. Further, there was not a sufficient mechanism in the ordinance to ensure that the person would not be taxed twice.  

While Newark’s tax ordinance has the same constitutional flaw identified in Jersey City’s tax, Newark’s tax forms gloss over the question. A recent Newark payroll tax booklet states that “‘Payroll’ means an amount equal to the total remuneration paid by an employer to employees, which is subject to withholding by the employer for Federal income tax purposes for services, other than domestic services in a private residence. The Employer is responsible for the Payroll Tax.” City of Newark, 2021 Payroll Tax Booklet (2021).

This article is one in a series of articles written for the April 2021 edition of The BR State + Local Tax Spotlight.