Navigating Nexus: New Jersey Becomes Third State To Redefine Taxable Boundaries
Joining California and New York, New Jersey is the latest state to issue guidance redefining what activities will and will not be considered protected under Public Law 86-272.
Commonly known in the state tax community as PL 86-272, 15 U.S. Code §381(a) states:
No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following:
- the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and
- the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1)
The federal intent behind the enactment of PL 86-272 was to protect interstate commerce by limiting state taxing authority. The interpretation of such limitation has been the subject of much litigation over the last 65 years.
Evolution of PL 86-272
In an effort to provide additional framework around the law, in 1986 the Multistate Tax Commission (MTC) adopted a statement of policies on implementing PL 86-272. The MTC statement outlined business activities it deemed “protected” and “unprotected.” This list was recognized by taxing authorities and tax practitioners alike, and it was often incorporated into state statues or regulations.
Impact of Internet Activities
On Aug. 4, 2021, the MTC adopted a revised “statement of information” specifically focused on Internet activities. The revised statement added 11 new scenarios to its list of “protected or unprotected activities” where a business operates a website with no other contact in the state. There are a few of these scenarios which taxpayers should pay close attention to, including:
- Regularly providing post-sale assistance to in-state customers through an electronic chat or email that customers initiate by clicking on an icon on the business’ website.
- The business’ website invites viewers in a customer’s state to apply for non-sales positions with the business. The website enables viewers to fill out and submit an electronic application and upload a cover letter and resume.
Unraveling the Novelty: Internet vs. Traditional Methods
Neither of these activities are novel; businesses have been offering post-sale assistance and gathering employment applications outside of its physical geographic footprint for years. What is novel is the method by which this communication is accomplished. Submitting a post-sale question via the Internet exceeds PL 86-272 protections, while submitting the same questions via a telephone call would not.
Perhaps even more puzzling is the second scenario, whereby the acceptance of an employment application is deemed to exceed PL 86-272. How does the location of the applicant impact the businesses activity in the state? The scenario does not appear to require the actual employment be in the state to create nexus. Rather, it seems to focus on where the application was submitted and doesn’t make reference to whether the applicant was, in fact, employed.
While the MTC guidance is not binding on states, the adoption of such scenarios and positions seems to be gathering steam. To date, California and now New Jersey have incorporated these “unprotected” activities into department guidance, and New York has incorporated these activities into “draft” regulations. Businesses should be aware of the potential consequences – or, in some cases, opportunities – that come with this expanded jurisdictional reach.
KSM’s State & Local Tax Group follows legislative activity across the country. If you have questions about how these or other pieces of legislation might affect your business, please contact your KSM advisor or complete this form.
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