New Jersey has become the latest battleground in the growing national conflict between state tax authorities and the rapidly evolving digital economy. Earlier this year, the New Jersey Division of Taxation finalized a regulation that expands how the state interprets business activity conducted over the internet. Industry groups quickly challenged the rule, arguing that it violates the long-standing federal protections outlined in Public Law 86-272—an act that restricts how states may impose income taxes on out-of-state companies whose only activity is the solicitation of orders.
At the heart of the controversy is a regulatory shift that attempts to modernize the interpretation of nexus in the age of digital commerce. As more businesses operate entirely online, states have grown increasingly aggressive in asserting taxation authority. But critics argue that New Jersey’s approach not only exceeds the boundaries set by federal law but also imposes unfair burdens on companies whose digital interactions are passive, automated, or purely informational.
This article examines the regulatory clash, the broader landscape of interstate tax law, and the deeper implications for technology-driven businesses across the United States.
The Roots of the Dispute: Understanding P.L. 86-272
To fully appreciate why New Jersey’s regulation has ignited pushback, one must understand the historical context of Public Law 86-272 (1959). Passed long before the internet existed, the federal statute was designed to limit states from imposing income taxes on out-of-state sellers whose activities within the state are restricted solely to “soliciting orders” for tangible goods. It was a protective measure—an attempt to prevent states from aggressively taxing interstate commerce.
For decades, P.L. 86-272 remained relatively stable and unchallenged. Traditional businesses could easily determine whether they crossed the line from soliciting to conducting taxable activities. But the explosion of e-commerce in the 2000s and the rise of digital-only businesses introduced unprecedented challenges.
Does a website count as a salesperson?
Does hosting online chat support break immunity?
Do cookies placed on a user’s device count as in-state activity?
In 2021, the Multistate Tax Commission (MTC) attempted to answer these questions by releasing updated guidance, asserting that many routine digital activities—such as interactive chat tools, automated customer portals, and user-specific recommendations—constitute business activity inside a state. However, the MTC guidance is advisory, not law.
New Jersey, by adopting this guidance into an enforceable regulation, has stepped into legally murky waters.
New Jersey’s Controversial Regulation: A New Definition of Nexus
The New Jersey Division of Taxation’s updated rule interprets certain digital activities as business activities that exceed the limitations protected under P.L. 86-272. These include:
1. Online customer service portals
Interactive tools allowing customers to troubleshoot, chat, or request support.
2. Cookies used for personalized marketing
Tracking user behavior to provide targeted recommendations or pricing.
3. In-state digital engagement through servers
Any online infrastructure that touches New Jersey users in a “meaningful” way.
4. Post-sale digital interactions
Providing automated repair instructions, digital upgrades, or customer dashboards.
The regulation explicitly leans on the MTC’s position—despite the fact that federal courts have never affirmed the MTC’s interpretation.
Industry groups argue that New Jersey has adopted a maximalist approach, effectively treating most modern digital business features as taxable activities.
The Industry Pushback: A Question of Overreach
A prominent industry association swiftly raised concerns about the regulation, warning that New Jersey had blurred the boundaries of federal protections. According to the association, the state’s interpretation erodes P.L. 86-272’s safeguards and threatens to impose tax burdens on companies whose contact with the state is purely digital and entirely automated.
Critics argue that New Jersey’s move amounts to regulatory overreach, effectively rewriting federal law by expanding the definition of in-state business presence through administrative fiat. They warn that if left unchallenged, the regulation could embolden other states to adopt similarly aggressive rules.
The business community is especially concerned because:
- Many e-commerce companies rely heavily on automated systems.
- Personalized digital experiences are now industry standard.
- Compliance costs are high for small- and medium-sized firms.
- States are pushing beyond what Congress arguably intended.
The association formally submitted its critiques to the state, asserting that the regulation contradicts federal law and burdens interstate commerce—potentially violating the U.S. Constitution’s Commerce Clause.
The Larger National Conflict: Digital Commerce vs. State Authority
New Jersey is not acting in a vacuum. The United States is currently in the middle of a historic dispute over how states can tax digital businesses. Several states—including California, New York, Minnesota, and Oregon—have taken steps to interpret digital interactions as tangible physical presence, despite the lack of federal judicial precedent.
The issue intensified after South Dakota v. Wayfair (2018), a landmark Supreme Court ruling that allowed states to impose sales tax obligations on out-of-state online sellers, even without physical presence. Although the ruling dealt with sales tax—not income tax—it signaled a broader willingness to modernize tax frameworks.
State tax authorities saw an opportunity. Businesses saw a warning.
Wayfair opened a door, but federal law still draws a boundary. P.L. 86-272 continues to shield income taxes for soliciting product orders. The question now: does digital activity invalidate that protection?
New Jersey believes it does.
Many industry groups firmly disagree.
The Technology Perspective: Digital Tools Are No Longer Optional
From a tech-industry standpoint, New Jersey’s regulation seems to misunderstand the essential role of digital interactivity in modern commerce. Today:
- Customer service chatbots are baseline expectations, not strategic business decisions.
- Cookies are essential for security, personalization, and UX—not merely marketing.
- Online knowledge bases are fundamental components of customer support.
- Automated services operate without human intervention, often from distributed cloud servers.
Classifying these activities as “in-state business contact” raises an existential question for digital companies:
How can an online business remain compliant with 50 different states’ interpretations of digital presence?
Experts warn that New Jersey’s rule could force companies to either:
A. Disable digital tools for New Jersey users
(making them second-class customers)
B. Register for income tax in New Jersey
(even if they only sell products online with no physical presence)
C. Risk audits, penalties, and litigation
None of these options scale well in a digital economy that depends on automation, personalization, and cloud-based infrastructure.
Legal Scholars Weigh In: An Inevitable Court Battle?
Tax scholars and legal analysts predict that the constitutionality of such digital-activity rules will likely be tested in federal court. Several issues make New Jersey’s position vulnerable:
1. P.L. 86-272 has not been amended by Congress
States cannot unilaterally expand their authority beyond federal restrictions.
2. The MTC’s guidance is not legally binding
It represents advisory opinions, not federal law.
3. No court has ruled that digital interactivity nullifies P.L. 86-272 protections
The regulation is legally untested.
4. The Dormant Commerce Clause still limits states from burdening interstate commerce
This precedent remains strong.
Legal observers believe an eventual lawsuit is inevitable. New Jersey may become the test case that decides whether states can use digital behavior to redefine economic nexus.
Business Impact: Small- and Medium-Sized Companies at Greatest Risk
The companies most vulnerable to New Jersey’s regulation are not major tech giants—they already employ large accounting teams and multi-state compliance experts.
The real burden falls on:
- Specialty e-commerce brands
- AI-powered SaaS startups
- Subscription-based digital platforms
- Direct-to-consumer product sellers
- Remote-only businesses
- Cloud-enabled microvendors
- One-person digital shops
For these businesses, every new nexus rule introduces:
- Additional compliance costs
- Mandatory tax registrations
- Fire drill-style website changes
- Higher legal exposure
- Customer-experience compromises
- Reduced scalability
The digital economy relies heavily on uniformity and predictability—two qualities now threatened by state-by-state reinterpretations of federal law.
New Jersey’s Position: Modernize the System for a Modern Economy
New Jersey argues that the regulation is essential to prevent revenue loss and reflect the realities of digital commerce. The Division of Taxation maintains that:
- Digital selling tools function like in-state sales representatives
- Online engagement counts as non-solicitation activity
- Targeted digital services demonstrate economic presence
- Automation should not shield a company from tax responsibility
From their perspective, the era of remote sellers enjoying tax immunity is outdated.
State officials also note that the regulation closes loopholes exploited by companies that generate substantial economic value in New Jersey without physically operating there.
In short, New Jersey believes the regulation is a necessary modernization effort.
The Central Question: What Counts as ‘Solicitation’ in the Digital Age?
The core legal issue revolves around a deceptively simple question:
Does digital engagement count as business activity within a state?
Historically:
- Human salespeople
- Marketing teams
- In-state consultations
…were considered taxable activities.
Today:
- Chatbots
- AI-driven recommendation engines
- Customer self-service portals
- Automated emails
- Server-processed interactions
…stand in for human-operated functions.
Detractors argue that Congress never intended the definition of “solicitation” to be dependent on the specific technologies used to support customers. They insist that P.L. 86-272 should be interpreted functionally—not technologically. If the underlying activity is solicitation, the tool used should be irrelevant.
New Jersey argues otherwise.
A Clash That Could Shape the Future of Digital Taxation
The conflict emerging in New Jersey is more than a regulatory dispute—it is a preview of the next era of digital tax policy.
The outcome could determine:
- How states regulate online businesses
- How companies design their digital tools
- Whether P.L. 86-272 survives in its current form
- How automated systems are treated under tax law
- Whether cloud infrastructure constitutes presence
This regulation could be the opening chapter in a wave of litigation that defines the ground rules for the digital economy for decades.