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  • NJ Applies Retroactive Tax To Lottery Winners

NJ Applies Retroactive Tax To Lottery Winners

Kelly Phillips ErbJuly 16, 2009May 17, 2020

When New Jersey Governor Corzine and the legislature were scrambling to find ways to fill the holes in their budget, it was clear that they wanted to utilize “sin” or “vice” taxes as much as possible. Unlike income taxes that affect everyone, sin taxes only affect people who engage in certain behaviors. The behaviors considered “sinful” vary from state to state but generally include drinking and smoking. New Jersey, however, added another vice to the list: gambling.

Yes, gambling. But not the Atlantic City quarter slots kind of gambling (yes, I said quarter slots can you tell that I’m not a risk-taker?).

A more sinful, sinister kind of gambling: playing the lottery.

Beginning in 2009, New Jersey will begin taxing lottery winnings – something the state has never done before – at a maximum rate of almost 11%. I know what you’re thinking: “taxgirl, beginning in 2009? Aren’t you a little late to the party? It’s July.”

Yes, I know it’s July. The law took effect July 1 but lottery winners are taxed on the winnings retroactively to January 1. That has some lottery winners furious.

But players dollar scratch cards can relax a little: only prizes of more than $10,000 will be affected. Tax rates will begin at 1.4% and increase to 10.8% depending on the amount of winnings. Other tax provisions based on filing status, etc., will apply.

While lottery winners are outraged over the new law, including recent winners of the Mega Millions jackpot, the state is fairly confident that the law will stay “as is.” The reality is that lottery winners make up a small percentage of the state’s voters taxpayers and it’s not a cause that many citizens will rally around. The state is betting (pun completely intended) that a tax increase on the beneficiaries of what’s considered a stroke of luck will not earn much sympathy from taxpayers who are already concerned about their own tax burdens.

What do you think? Fair or no?

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Kelly Phillips Erb
Kelly Phillips Erb is a tax attorney, tax writer, and podcaster.
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lottery, New-Jersey, sin-tax

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11 thoughts on “NJ Applies Retroactive Tax To Lottery Winners”

  1. Robert D Flach says:
    July 16, 2009 at 10:11 am

    KPE-

    NJ politicians should worry about their own multitude of “sins” and “vice” and leave the poor already overtaxed resident alone.

    Net in-house state lottery winnings either should be fully taxed like other net gambling winnings or totally tax-exempt – period. Otherwise tax exempt income should not be subject to tax if it gets too high or you are considered to be wealthy.

    You should not be taxed simply for the reason that you can afford it!

    Cut down on the “business as usual” pork that NJ politicians gorge themselves on and you will probably be able to lower taxes!

    TWTP

    Reply
  2. Philip Miles says:
    July 16, 2009 at 10:39 am

    Here was my thought process:

    – What about the Constitutional bar on ex post facto laws?
    – Wait, maybe that’s just U.S. Congress
    – Nooo, surely that’s covered by 14th amendment due process clause, right?

    30 Seconds of research tells me that retroactive tax laws are somehow magically OK because of some case US v. Carlton? I guess I should read the case first, but it sounds like bunk to me. Maybe a future entry for taxgirl?

    Reply
  3. JBruce says:
    July 16, 2009 at 11:49 am

    Foo — I wanted to be the first to mention “no bill of attainder nor ex post facto law shall be passed.”
    US v Carlton and other cases have established a certain amount of “retroactivity” to be permissible in tax legislation. Typically you will find that a lot of tax legislation is d esigned to “take effect” at the time the legislation is introduced rather than when it is passed and signed into law. This, supposedly, would deny taxpayers the advantage of rearranging their finances between the time they are “notified” of the potential changes and their actually becoming law. This also applies to rule-making government entities such as the FDA, SEC, etc etc.
    Example: the massive Tax Reform Act of 1986 eliminated the preferential income tax treatment of capital gains. However, the “retroactive” date of the law prevented taxpayers from selling appreciated assets under the more favorable provisions of the old law before the new legislation was passed into law.

    Reply
  4. J G says:
    July 16, 2009 at 1:05 pm

    I suggest the victims of NJ organize a 1 day lottery strike. The loss of revenue from 1 lost day of ticket sales would almost certainly wipe out any tax gain from the winners. You’ve got to deny the state what it wants – money.

    Reply
  5. Eric says:
    July 16, 2009 at 10:49 pm

    The words “retroactive” and “tax” should never be used together. It is grossly unfair. Would it have killed them to say “from now on” ?

    Reply
  6. Jay Starkman CPA says:
    July 22, 2009 at 7:32 pm

    The ex post facto prohibition applies only to criminal retroactive laws, an accident of early Supreme Court interpretation of the Constitution.
    The 1864 Civil War income tax increase was an emergency war measure, which retroactively applied to 1863 income. The 1913 Tax Act was enacted on October 3, and took effect on November 1, retroactive to March 1, four days after the Sixteenth Amendment was ratified. Stockdale v Atlantic Ins. Co., 87 US 323, 331 (1874) (1864 retroactivity); Brushaber v Union Pacific R. Co., 240 US 1 (1916) at 20 (1913 retroactivity).

    New Jersey has a reputation as a notoriously difficult state for a taxpayer
    to prevail in a dispute with the Division of Taxation. This is not a completely new tax, just removal of the income tax exemption for NJ lottery winnings. So, limited retroactivity is generally permitted.

    The state has recent experience with retroactive tax increases. NJ
    enacted a law on July 1, 2002 increasing the estate tax retroactive to
    January 1, 2002. Cynthia Oberhand died on March 28, 2002 and her
    estate was assessed an additional $25,915.49 estate tax as a result of
    the retroactive law. The state Tax Court held that the retroactive law
    was constitutional. Yet, in a big surprise, it ruled in favor of the estate.
    The court applied the equity principle of “manifest injustice ” to
    prevent application of a tax law which did not exist at her death. The
    appeals court reversed in favor of the state, saying “the doctrine of
    manifest injustice has no place in the judicial evaluation of retroactive
    tax laws.” The New Jersey Supreme Court sided with the taxpayer,
    agreeing with the Tax Court that retroactive application was manifest
    injustice. Oberhand v Director, 22 NJ Tax 55, 2005 STT 68-45 (Tax Ct Dkt No 004-150-2003, 2/23/05), 23 NJ Tax 431, 907 A2d 428, 2006 STT 196-17 (App Ct Dkt Nos A-3886-04T2 & A-4243-04T2, 9/26/06, 2008 NJ Lexis 110, 2008 STT 41-14 (NJ Sup Ct, Dkt. A-106 (Sep Term 2006), 2/27/08).

    Oberhand was based strictly on equity relief because the same NJ Tax Court Judge Harold A. Kuskin ruled three months later that this retroactive law was not manifest injustice under slightly different facts where the tax resulted from a disclaimer by the beneficiary. That retroactive tax was not triggered by the decedent. Rappeport v Director, 2005 STT 152-15 (Tax Ct Dkt No 003893-2003, 6/27/05). (When the 1894 income tax was before the U.S. Supreme Court the second time, it considered
    whether the tax was unconstitutional or manifest injustice. It opted for unconstitutional.) Anyway, Judge Harold Kuskin retired in June, so there may be no champion for challenging this tax.

    Reply
  7. lotto syndicate says:
    July 28, 2009 at 1:05 am

    This is really nice…..It is often quipped that the lottery is a tax on stupidity . I’ve always been bothered by this for two reasons: 1) one of the first people who said it to me was an arrogant professor who I always enjoy proving wrong, and 2) someone in my family (who has an advanced degree in mathematics) used to (and may still) play the lottery. So I figured there must be some fallacy in this statement.

    Reply
  8. Ralph says:
    July 31, 2009 at 2:52 pm

    New Jersey is such a corrupt state. Everyone else has to manage their household budgets by reducing spending and by looking for more efficient ways to survive. But the State does not have to be efficient. It can vote itself more money– thereby taking away funds needed in households for basic survival. Whenever a government agency enacts a new tax, it doesn’t mean it’s going to function any more efficienty– it allows for more spending. Look at all the revenue the government takes in…but it never ends a program…makes cutbacks…reduces spending or benefits. The taxpayer? They cannot vote themselves a bigger paycheck. Politicians are ruining our way of life.

    Reply
  9. Jim says:
    October 23, 2009 at 5:02 pm

    If the State really wanted to generate income, it would tax at the point of sale, just as they do with other “sin” taxes. What an idiotic law.

    Reply
  10. Mark says:
    November 14, 2009 at 6:48 pm

    It’s bad enough taxing lottery winnings anyway – some countries still pay out big prizes without any taxation. Needless to say backdating tax on winnings straightforward sucks.

    Reply
  11. Paul says:
    August 29, 2010 at 12:20 pm

    To be honest I have no idea why they don’t tax UK gambling earnings because we obviously have a massive shortfall in our government’s banks and they’re destroying us through taxes rising and benefits being slashed.

    Reply

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