P.L. 2021, Chapter 197 was enacted on August 17, 2021. The law extends the Urban Enterprise Zone (UEZ) Program for 10 years, prohibits the creation of new zones, limits Sales Tax exempt purchases made by UEZ businesses, and eliminates employee tax credits for new applicants.
Supplemental law P.L. 2022, Chapter 42, enacted on June 30, 2022, allows supermarkets and grocery stores located in an urban enterprise zone that is not a food desert community to also be excluded from the $100,000 annual exempt purchase limitation if they meet certain criteria and are certified by the UEZ Program/Department of Community Affairs.
The annual limitation on exempt purchases is effective for all purchases made or delivered on or after January 1, 2022. There have been no changes made to the types of purchases that are eligible for exemption.
How does P.L. 2021, Chapter 197 affect the UEZ Sales Tax purchase exemption benefits?
Effective January 1, 2022, the law establishes annual limitations on purchases eligible for exemption from New Jersey Sales and Use Tax for businesses using an Urban Enterprise Zone Exempt Purchase Certificate (UZ-5) and the Contractor's Exempt Purchase Certificate (UZ-4). A qualified business can now make up to $100,000 in exempt purchases each calendar year using its UZ-5 exemption certificate.
There is a separate $100,000 annual exempt purchase limitation on purchases made by contractors hired to work on a qualified business's UEZ location. The limitation on contractors applies to aggregated purchases made by all contractors and subcontractors using a qualified business's UZ-4 exemption certificate.
Who is subject to the annual $100,000 limitation on exempt purchases?
Qualified UEZ businesses and contractors or subcontractors, hired to perform work at the qualified business's UEZ location.
What is the accounting period for the annual $100,000 exempt purchase limitation?
The annual $100,000 limitation on exempt purchases applies from January 1 through December 31 of each calendar year.
What types of purchases are subject to exemption when a qualified business uses its UZ-5?
A qualified business, as determined by the Urban Enterprise Zone Authority, may use its UZ-5 exemption certificate to make tax exempt purchases of tangible personal property for exclusive use or consumption at the qualified business's location in a UEZ, and for services performed exclusively at the qualified business's location in the UEZ. The qualified business location is printed on the UZ-5.
What type of purchases may a contractor make that are eligible for exemption from Sales and Use Tax?
Qualified businesses may give their UZ-4 exemption certificate to contractors hired to perform work on the qualified business's real property located in the zone. The contractor(s) may provide the UZ-4 to sellers to make purchases of construction materials, supplies, and services without paying New Jersey Sales Tax. The construction materials, supplies, and services must be used exclusively to improve, alter, or repair the real property of a qualified business located in a UEZ. The qualified business's location is printed on the UZ-4.
Are there qualified businesses excluded from the annual $100,000 limitation on exempt purchases?
Supermarkets and grocery stores located in a food desert community, as designated by the New Jersey Economic Development Authority (EDA), are not subject to the annual $100,000 limitation on exempt purchases.
Supermarkets and grocery stores located in a UEZ but outside of a food desert community may apply to the UEZ Program of DCA, and receive certification of 12-month eligibility for the unlimited tax exemption. Requires submission of the UZ-4/UZ-5 Cap Exemption Annual Certification of Eligibility Application – Supermarkets and Grocery Stores.
To receive a 12-month certification of eligibility for the unlimited tax exemption from the UEZ Program of DCA, a supermarket or grocery store must prove it met the following requirements within 12-months prior to applying.
What happens when a qualified business meets the annual $100,000 limitation on exempt purchases?
Once a qualified business makes $100,000 of taxable UZ-5 purchases in one year, the business must stop using its UZ-5 and pay Sales or Use Tax on all taxable purchases made during the remainder of the calendar year.
What if a supplier does not charge Sales Tax once a qualified business has reached its annual $100,000 limitation on exempt purchases?
Once a qualified business has reached its annual $100,000 exempt purchase limitation and a supplier does not charge the required Sales Tax on a taxable transaction, the qualified business must remit Use Tax for that purchase.
What are the possible consequences for a qualified business that continues to issue its UZ-5 or UZ-4 after reaching the annual $100,000 exempt purchase limitation?
A business that provides either a UZ-5 or UZ-4 exemption certificate or relies on certificates issued beyond the purchase limitations will be liable for the Sales and Use Tax that should have been paid, plus penalties and interest.
How will contractors working on the real property of a qualified business know when the business has met the annual $100,000 limitation for the UZ-4?
The qualified business must keep track of all of the UZ-4 tax exempt purchases made by all contractors. Once the limitation on exempt purchases is reached, the qualified business must notify all contractors to cease using the UZ-4 exemption certificate, and to pay tax on any additional purchases for the remainder of the year.
What happens when the contractors hired to work on the real property of a qualified business reach the annual $100,000 limitation on exempt purchases?
Once the total of all taxable purchases made by all contractors hired by a qualified business reaches $100,000 in a calendar year, a qualified business may no longer provide its UZ-4 to contractors or subcontractors for the rest of the calendar year. At that point, the qualified business must advise its contractors and subcontractors that they can no longer use the UZ-4 to make exempt purchases that year.
What documentation do contractors need as proof that they performed work on behalf of an exempt qualified business?
Contractors should receive a UZ-5 from each qualified business that hires the contractor to erect structures or buildings on, or improve, alter, or repair the real property of the qualified business at its zone location. Contractors should keep the UZ-5 in their records.
What documentation do contractors need as proof of exempt purchases made when erecting structures or buildings on, or improving, altering, or repairing the real property of a qualified business in a UEZ?
Contractors hired to work on the real property of a qualified business in a UEZ should receive a UZ-4 from the qualified business. A contractor issues copies of the UZ-4 to sellers of construction materials and supplies, and subcontractors. Contractors should provide the qualified business with a copy of the invoice for each exempt purchase that is made on their behalf. Since qualified businesses are required to report annual UZ-4 tax exempt purchases to the Department of Community Affairs, the contractor's exempt purchase documentation is necessary for an accurate reporting.
Are there any types of purchases made by contractors that are not subject to the annual $100,000 limitation on exempt purchases?
There is no limitation on the purchase of taxable goods and services, including construction materials, supplies, and services made by a contractor who is erecting new structures, or "substantially improving, altering, or repairing" the real property of a qualified business at its zone location.
What is considered "substantially improving, altering, or repairing" the real property of a qualified business?
"Substantially improving, altering, or repairing" the real property means any reconstruction, rehabilitation, addition, or other improvement to a structure, of which the total cost is equal to or exceeds 50 percent of the market value of the structure before the start of the construction of the improvement.
What records are qualified businesses required to keep for tax reporting purposes?
Qualified businesses are required to keep detailed records (e.g., contracts, purchase orders, invoices, etc.) of their own direct UZ-5 tax exempt purchases and the UZ-4 tax exempt purchases made by contractors. These records provide the basis for reporting the Sales Tax exempt purchases through the Division of Community Affairs' portal which has always been a UEZ program requirement for qualified businesses. The Division will request these records during an audit.
What are the possible annual tax savings for a qualified business in light of the annual purchase limitations?
On and after January 1, 2022, qualified UEZ businesses are entitled to annual Sales Tax savings of up to $6,625 (6.625% State Sales Tax rate x $100,000) on retail purchases made by a business when using its UZ-5, as well as an annual Sales Tax savings of up to $6,625 on purchases that are made by all contractors using the UZ-4 of the qualified business.
If a qualified business or contractor makes taxable purchases of tangible personal property on or before December 31, 2021, and the tangible personal property is delivered on or after January 1, 2022, are the purchases subject to the annual exempt purchase limitations?
A sale takes place when the tangible personal property is delivered, or services are rendered to the purchaser. Therefore, purchases that are delivered on or after January 1, 2022, are subject to the annual $100,000 exempt purchase limitations for the 2022 calendar year.
Are there purchases not eligible for exemption when a qualified business issues its UZ-5 to sellers?
A qualified business may not use its UZ-5 for purchases of motor vehicles, energy, telecommunications, or utility services (transportation or transmission of energy) even if such purchases are for exclusive use at the qualified business's UEZ location.
Are there any contractor purchases that are not eligible for exemption using a UZ-4?
The UEZ purchase exemption does not apply to leases, rentals, purchases, or uses of construction equipment, electricity, natural gas, and related transmission services. For additional guidance on the types of contractor purchases ineligible for exemption from Sales Tax with a UZ-4, see TB-67: Contractor Exemption for Improving, Altering, or Repairing the Real Property of Qualified Exempt Entities .
Are there other types of tax exempt purchases that a UEZ business can make?
Yes. All other Sales Tax exemption certificates are available for use by a UEZ business, with no exempt purchase limitation, see S&U-6, Sales Tax Exemption Administration .
Does the new law put a limitation on reduced Sales Tax rate purchases in the zone?
The new law does not impose any changes to the UEZ reduced Sales Tax rate benefit. Qualified sellers of most tangible personal property that are authorized to do so, may still collect Sales Tax at 50 % (currently 3.3125%) of the full State Sales Tax rate (currently 6.625%) on taxable purchases. The same order and delivery requirements must be met for the reduced rate to apply to eligible taxable sales transactions.
What sellers are eligible to sell at the reduced Sales Tax rate?
A retailer selling tangible personal property from its location in a zone or UEZ-impacted business district and granted a UZ-2 certificate from the UEZ Authority may collect Sales Tax at 50% of the full State Sales Tax rate.
Are there certain retail sales that are ineligible for the reduced Sales Tax rate?
Sales Tax on retail sales of motor vehicles, alcoholic beverages, cigarettes, energy (natural gas and electricity), manufacturing equipment, machinery or apparatus, and charges for services must be collected at the full New Jersey Sales Tax rate (currently 6.625%).
Is the reduced Sales Tax rate benefit limited to sales made to customers residing or working in UEZ or UEZ-impacted business districts?
Any person purchasing qualified goods from a certified UEZ business is eligible to pay the reduced Sales Tax rate, which is 50 % of the full State Sales Tax rate.
Can a sales transaction qualify for the reduced Sales Tax rate if the customer places an order by phone and the seller delivers the merchandise from its in-store inventory?
No, Sales Tax must be collected at the full rate unless the transaction was conducted in-person. However, the reduced Sales Tax rate may be applied to orders that are made in-person at a participating UEZ business and then delivered to the customer either directly via the business or through a common carrier.
For additional questions regarding the administration of the UEZ Sales Tax exemptions, contact the Regulatory Services Branch:
For additional questions regarding the Department of Community Affairs and the UEZ Program:
Applicable Laws and Rules
P.L. 2021, Chapter 197, N.J.S.A. 52:27H-60 et seq.