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Marijuana and Taxes: Holiday Gifts for New Jersey Employers?

Publisher: Day Pitney Employment and Labor Quarterly Update
December 31, 2018
Day Pitney Author(s) Michael T. Bissinger

Employers may find themselves wishing that certain potential "gifts" from the New Jersey Legislature—a new payroll tax and the advancement of a bill legalizing recreational marijuana use—stay under wraps.

Large Municipal Employers Should Brace for a New Payroll Tax

On July 24, New Jersey Governor Phil Murphy signed into law Assembly Bill A4163, allowing municipalities with populations over 200,000 to impose an employer payroll tax as a means to provide additional funding to school districts. The new law also allows municipalities to exempt from taxation remuneration paid to employees who are residents of the municipality; i.e., employers would have to pay a tax only for employees working in the municipality who do not also live there.

On November 20, Jersey City was the first municipality to take advantage of the new law. Jersey City Council members unanimously approved City Ordinance 18-133, implementing a new payroll tax pursuant to the State law. The Ordinance applies to all employers (except federal, state and local governments and their agents; interstate agencies; and certain insurance companies) with at least one employee and $2,500 in quarterly payroll. Beginning January 1, 2019 (and lasting through December 2020), the Ordinance imposes a one percent tax on payroll for employees performing services in Jersey City, or outside Jersey City as long as their work is supervised from Jersey City. Notably, employers will not be required to pay a tax on the payroll of Jersey City resident employees as long as they can provide satisfactory written proof of the employees' addresses to Jersey City's Chief Financial Officer (or his/her agent).

The Ordinance also imposes record-keeping requirements on employers. Employers must maintain such records as "will enable the filing of true and accurate returns" for a period of seven years from the filing date or due date, whichever is later. Jersey City is empowered to inspect records, perform audits, assess and collect any payroll taxes owed, and file suit to collect unpaid taxes.

Jersey City employers also face stiff penalties for violations of the Ordinance, including 12 percent annual interest on any unpaid taxes, a 0.5 percent penalty for each month during the period in which the tax remains unpaid, fines up to $2,000 and imprisonment up to 90 days.

While employers should prepare themselves to comply with the Ordinance, its future is not yet set in stone. On December 11, a collection of companies, labor unions and others filed suit against the State of New Jersey, the City of Jersey City and Jersey City officials claiming that the new tax is unconstitutional. Employers would be well-served to monitor the suit, as it could decide the fate of Jersey City's new Ordinance.

Recreational Marijuana Inches Closer

New Jersey employers have spent the past eight years acclimating to the State's medical marijuana law. In 2010, New Jersey enacted the Compassionate Use Medical Marijuana Act (CUMMA), a law that decriminalizes the use of medical marijuana for qualifying patients. In drafting CUMMA, however, the legislature left employers—and courts—scratching their heads as to whether employers must accommodate an employee's use of medical marijuana, such as by waiving zero-tolerance drug policies and mandatory drug testing. As we reported last quarter, at least one federal court has determined that such an accommodation is not required. However, that decision was limited to the specific facts of the case and is not binding on other courts.

While courts continue to wrestle with the implications of CUMMA on employers of qualifying patients, a new set of problems is on the horizon. On November 27, a joint meeting of New Jersey's Senate Budget and Appropriations Committee and the Assembly Appropriations Committee approved a bill that would legalize the recreational use of marijuana statewide. The bill, known as the New Jersey Regulatory and Expungement Aid Modernization Act, would legalize possession and personal use of up to one ounce of marijuana for any reason by people at least 21 years of age. In its current form, the bill would allow use of marijuana at an individual's home and in designated consumption spaces, enable individuals to have marijuana delivered to their home, and impose a 10 percent tax. As the "Expungement" in the bill's title indicates, those individuals previously convicted of possessing or distributing less than an ounce of marijuana could quickly see their conviction's expunged.

The bill currently contains two notable provisions for employers. First, in a bit of welcome news, it makes clear that employers would not be required to "permit or accommodate the use, consumption, possession, transfer, display, transportation, sale, or growing of marijuana items in the workplace." Employers would also still be able to prohibit marijuana use or intoxication during work hours. However, the bill expressly prohibits employment actions, such as refusing to hire, disciplining or discharging any employee "because that person does or does not smoke or use marijuana items." This prohibition comes with the caveat that employers may be able to show a rational basis for doing so that is reasonably related to employment.

The bill is still in its early stages and must pass both houses (likely enduring amendments along the way) before heading to the Governor's desk. Governor Murphy has long favored the legalization of marijuana, and approval of this new law in some form should be expected.

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