On September 5, 2023, the New Jersey Division of Taxation (NJ DOT) issued guidance (TB-108) describing activities that will create nexus with New Jersey for Corporation Business Tax (CBT) purposes to reflect recent legislative changes (i.e., adoption of a bright-line economic nexus standard and, in the context of combined reporting, adoption of the Finnigan method to allocate receipts).¹ Significantly, the NJ DOT expanded its lists of protected and unprotected activities under P.L. 86-272 to include various activities conducted over the internet as well as sales involving financial products, financial instruments and financial services; these added protected and unprotected activities are discussed below. This new guidance applies to privilege periods ending on and after July 31, 2023.²

The NJ DOT's positions on protected and nonprotected internet activities generally follow those expressed in the most recent revised Statement of Information concerning practices of the MTC and supporting states under P.L. 86-272 (Statement) issued by the Multistate Tax Commission (MTC), with some modifications, including guidance on internet and financial activities not addressed in the MTC's Statement (e.g., activities involving digital assets and internet advertising services). For a detailed discussion of the Statement, see Tax Alert 2021-1608.

NJ DOT's position on activities that are protected or unprotected by P.L. 86-272

P.L. 86-272 is a federal law prohibiting states from imposing state income tax on out-of-state sellers whose in-state activities do not exceed soliciting orders of tangible personal property. P.L. 86-272 does not apply to sales of intangible property or services. The NJ DOT said that, for an out-of-state corporation's in-state activities "to meet the [P.L.] 86-272 standard, the activities must either be limited solely to speech or conduct that invites an order OR be ancillary activities related to the requests for an order."

The NJ DOT views sales and activities involving financial products, financial instruments and financial services as not being sales of tangible personal property and therefore not protected by P.L. 86-272. The NJ DOT specifically noted that the following activities are not protected by P.L. 86-272:

• Soliciting credit cards and other financial products and services from New Jersey customers
• Offering, soliciting, selling, accepting or buying digital assets (e.g., virtual currency, non-fungible tokens) and offering services related to those assets

The NJ DOT also expanded its list of protected and unprotected activities under P.L. 86-272 to include various activities conducted over the internet. The following describes select protected and unprotected activities.

Protected activities

The NJ DOT views the following in-state internet and financial activities of a corporation as protected by P.L. 86-272:

• Providing assistance to customers by posting frequently asked questions on the taxpayer's website (Example 9)
• Placing on customers' computers or other electronic devices software, apps or cookies that are ancillary to soliciting orders that are neither sold to data brokers or other third parties nor used to gather data to sell services to the taxpayer's business customers (Example 10)
• Offering only tangible personal property for sale on the taxpayer's website, with the website allowing customers to search for items, read product descriptions, purchase items and select delivery options without engaging in any in-state activities or other activities that exceed P.L. 86-272 protection (Example 11)
• Accepting electronic payment (e.g., credit card, other electronic method) for the online purchase of tangible personal property (this does not apply when the taxpayer is paid with a digital asset that the taxpayer resells, as part of its business, to an in-state customer) (Example 12)
• Inviting and/or accepting applications for employment through an internet-based platform if the only in-state positions being offered are sales jobs and the employee would only conduct a solicitation function and in-state non-solicitation jobs are not being offered (Example 13)

Unprotected activities

The NJ DOT views the following in-state internet and financial activities of a corporation as not protected by P.L. 86-272:

• Selling internet advertising services to New Jersey business customers that allow the taxpayer to provide targeted advertising to New Jersey individuals based on information mined from software, apps or cookies the taxpayer placed on the individual's computers or devices (this activity is not addressed in the Statement) (Example 20)
• Offering, soliciting, selling, accepting or buying digital assets (e.g., virtual currency, non-fungible tokens) and offering services related to those assets (this activity is not addressed in the Statement) (Example 15)
• Soliciting credit cards and other financial products and services from New Jersey customers (Example 14)
• Regularly providing post-sale assistance to customers through an electronic chat or email that customers initiate by clicking on an icon on the corporation's website (Example 21)
• Inviting and/or accepting, through an internet-based platform, applications for employment that are not specifically targeted to in-state residents or for in-state non-sales jobs (Example 25)
• Placing on New Jersey customers' computers or other electronic devices software or ancillary data (e.g., apps or cookies) that gather market or product research that is packaged and sold to data-brokers or other third parties (Example 19)
• Remotely fixing or upgrading New Jersey customers' products by transmitting code or other electronic instructions to those products over the internet as part of a subscription service purchased by the customer or as part of a warranty service contract (Example 18)
• Offering, selling, providing maintenance or performing such under a warranty/extended warranty service contract, whether in person or over the internet (Example 16)
• Contracting with a marketplace facilitator to facilitate the sale of the corporation's products on the marketplace facilitator's online marketplace, where the marketplace facilitator maintains inventory, including that of the corporation, at fulfillment centers in New Jersey (Example 17)
• Contracting with New Jersey customers to stream (not download) videos and music to electronic devices (Example 22)
• Contracting with New Jersey customers for subscription services (this activity is not addressed in the Statement) (Example 23)
• Contracting with New Jersey customers to provide certain business services via internet-connected devices, computers and machines (collectively, "device") using an application installed on the device, where the services are conducted on the taxpayer's computer and transmitted back to the customer's device based on information from the customer's in-state device (Example 24)
• Such services include quality control, manufacturing production line maintenance, research and development, product design, logistics, regulatory and other types of services

Additionally, the NJ DOT explained that the state's adoption of the Finnigan method to source New Jersey receipts precludes a combined group from claiming P.L. 86-272 protection; i.e., if one member of a combined group has activities that are either not protected by, or exceed the protections of, P.L. 86-272, the combined group cannot claim P.L. 86-272 protection.

Implications

Out-of-state businesses whose activities are protected by P.L. 86-272 are still subject to the New Jersey CBT minimum tax if they have nexus, or are registered, with New Jersey.

Out-of-state businesses that have claimed P.L. 86-272 protection in New Jersey under the prior guidance in TB-79(R) should consider evaluating their New Jersey activities to determine whether they continue to fall within that protection under the new guidance in TB-108. In particular, businesses should consider whether their company website and business and financial activities transacted over the internet constitute activities that are now unprotected activities under TB-108.

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Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor

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ENDNOTES

¹ For more on the changes to the CBT enacted in 2023, see Tax Alert 2023-1182.

² For a discussion of CBT nexus for privilege periods ending before July 31, 2023, see TB-79(R) (revised Sept. 5, 2023).