On March 9, 2022, the New Jersey legislature unanimously passed, and New Jersey Governor Philip D. Murphy signed, Senate Bill No. 1889 (“SB 1889”), which, among other limitations, prohibits entities with certain ties to Russia or Belarus from benefitting from New Jersey state and local economic development incentives, including certain state and local tax incentives. While several other states’ pension funds have moved to divest themselves of Russian financial holdings, SB 1889—which was swiftly introduced and enacted in response to Russia’s invasion of Ukraine—appears to be the first legislation of its kind at the state level by limiting state economic development and tax incentives for private entities.
The law will remain in effect until the United States lifts its economic sanctions on Russia and Belarus; however, additional guidance is needed to clarify the types of activities/investments that the legislation is intended to target, as well as the state tax incentives that the legislation is intended to limit if a person is found to have engaged in the prohibited activities. In the interim, New Jersey taxpayers are encouraged to review their financial holdings and New Jersey tax profiles to determine how SB 1889 may impact them.
Summary of SB 1889
Effective immediately, the New Jersey Department of the Treasury (“NJ Treasury Department”) will, “using credible information available to the public,” begin developing a list of “persons” (a term that generally includes a natural person, any governmental or nongovernmental entity, or “any parent, successor, subunit, direct or indirect subsidiary, or any entity under common ownership or control with” such persons or entities) that it determines are “engaged in prohibited activities in Russia or Belarus.”
“Engaged in prohibited activities in Russia or Belarus” includes the following:
- Companies in which the Government of Russia or Belarus has any direct equity share;
- Having any business operations commencing after the effective date of SB 1889 (i.e., March 9, 2022) that involve contracts with or the provision of goods or services to the Government of Russia or Belarus;
- Being headquartered in Russia or having its principal place of business in Russia or Belarus, or
- Supporting, assisting or facilitating the Government of Russia or Belarus in their campaigns to invade the sovereign country of Ukraine, either through in-kind support or for profit.
Before adding a person to the list, the NJ Treasury Department is required to (1) provide notice of its intent to include the person on the list, and (2) provide such person with an opportunity to comment in writing that the person is not engaged in prohibited activities in Russia or Belarus (and, if the person demonstrates that it is not, the person will not be added to the list). Beginning after June 8, 2022 (i.e., after the 91st day next following the date of SB 1889’s enactment), the NJ Treasury Department will update the list on a rolling basis every six months.
Any person determined by the NJ Treasury Department to be engaged in prohibited activities in Russia or Belarus and added to the list shall be ineligible and shall not:
- Enter into or renew a contract with a New Jersey State agency for the provision of goods or services or the purchase of bonds or other obligations;
- File or renew a Public Works Contractor Registration with the New Jersey Department of Labor and Workforce Development;
- Be approved for or continue to receive an economic development subsidy from the New Jersey Economic Development Authority in but not of the Department of the Treasury, be awarded a municipal property tax abatement, or make or enter into a payment in-lieu of property tax agreement;
- Apply for or receive a tax clearance certificate from the New Jersey Director of the Division of Taxation in the NJ Treasury Department;
- Be certified by the Department of Community Affairs as an urban renewal entity for purposes of the “Long Term Tax Exemption Law,” and
- Be designated as a redeveloper by a public agency for the purpose of planning, replanning, construction, or undertaking of any project or redevelopment work in accordance with the “Local Redevelopment and Housing Law.”
For purposes of the above (and, as particularly relevant to New Jersey taxpayers), an “economic development subsidy” means “the provision of an amount of funds to a recipient with a value of greater than $25,000 for the purpose of stimulating economic development in New Jersey, including, but not limited to, any investment, bond, grant, loan, loan guarantee, matching fund, tax credit, or other tax expenditure” (emphasis added).
In addition, a person seeking to engage in any of the above enumerated activities must publicly certify that the person is not identified on the list maintained by the NJ Treasury Department as a person engaging in prohibited activities in Russia or Belarus. False certifications could potentially result in steep penalties, including a civil penalty of up to $1,000,000, termination of existing incentive contracts, or the ineligibility to engage in any of the above enumerated activities for three years.
The provisions of SB 1889 apply equally to, and will be enforced by, state agencies, local contracting units, boards of education, State colleges, and county colleges. SB 1889 expires upon the revocation of the federal sanctions contained in Executive Order 14024, signed by President Biden on April 15, 2021.
New Jersey taxpayers are encouraged to review their investments and operations for potential “prohibited activities in Russia or Belarus” and to consult with their advisors regarding the implications of any such activities, particularly those taxpayers who currently benefit from, or are expected to benefit from, New Jersey state and local tax credits or incentives. In addition, taxpayers expecting to need a certificate of tax clearance from the Division of Taxation—which is required in a host of situations (e.g., applying for state and local tax credits and incentives, effectuating corporate reorganizations or dissolutions, etc.)—should do the same.
From a state and local tax and incentive standpoint, SB 1889 does not clearly articulate the precise implications for a person determined by the NJ Treasury Department to be “engaged in prohibited activities in Russia or Belarus.” In addition to the vaguely-defined “prohibited activities” that the legislation is intended to prevent, the types of tax incentives that the legislation is intended to limit are not entirely clear. SB 1889 grants the New Jersey State Treasurer the authority to immediately adopt (notwithstanding the provisions of the state’s Administrative Procedure Act) rules and regulations, to be effective for a period not exceeding 360 days following the effective date of SB 1889, that the New Jersey State Treasurer determines to be “necessary to effectuate the purposes of [SB 1889].” Hopefully, the New Jersey State Treasurer will exercise this authority and issue additional guidance in the near term that clearly delineates the types of activities prohibited by SB 1889 and the types of tax incentives that it is intended to limit.