New Jersey’s Appellate Division concluded that a Jersey City payroll tax violated the dormant Commerce Clause because there was no mechanism to resolve disputes if two taxing entities, in different states, impose a payroll tax on the same employee.  The lower court had previously dismissed the case, ruling that the Jersey City payroll tax was not prohibited by federal or state constitutions.

The payroll tax was enacted for the stated purpose “to establish a payroll tax on the payrolls of Non-Jersey City residents for the benefit of Jersey City school.  “Payroll” includes the total remuneration paid by employers to employees for services performed within the city or performed outside of the city but supervised in the city.”  Plaintiffs, a group of business owners, real estate developers, labor unions and trade associations, challenged the state and federal constitutionality of the payroll tax.  After disposing of the state constitutional challenges, the Court also rejected Plaintiffs’ argument that the payroll tax was unconstitutionally discriminatory, as it applies equally to all employers whether in state or out of state, and upheld the provision that exempted payroll paid to Jersey City residents from taxation.  However, the Court concluded that neither the applicable statute nor the Ordinance provide a mechanism to resolve disputes if two taxing entities, in different states, impose a payroll tax on the same employee, resulting in a violation of Commerce Clause internal consistency and thus the second “fairly apportioned” prong of the Complete Audit.  The Court remanded the case to the lower court to determine the remedy for the discrimination.