In the modern era of cloud platforms, borderless web technologies, and increasingly hybrid digital economies, the legal boundaries governing how states can impose corporate income taxes have become more complex than ever before. What used to be a simple standard—protecting remote sellers whose only activity was solicitation—has now become a battlefield where state tax authorities and digital enterprises clash over what counts as “doing business” inside a state.
This unfolding conflict is sharply illustrated in New Jersey’s recently updated regulation targeting companies whose interactions with customers occur primarily over the internet. The rule attempts to broaden the definition of in-state business activity by evaluating how digital platforms, online support features, and customer-facing technologies operate within the economic space of New Jersey residents.
In November 2025, a business trade group initiated a challenge in New Jersey court seeking to invalidate this regulation. They argue the rule violates P.L. 86-272, a federal law enacted decades before the internet existed, which shields out-of-state companies from state income taxes as long as their in-state activities are limited to solicitation of sales of tangible goods.
The dispute is not just a tax story—it is a clear reflection of America’s ongoing struggle to update legal frameworks for an economy reshaped by digital transformation.
2. Understanding P.L. 86-272: An Old Law in a New Digital World
To appreciate the weight of the current challenge, one must understand P.L. 86-272, a foundational law governing interstate business taxation. Passed in the late 1950s, its original purpose was to protect businesses engaged in traditional sales models—mail orders, catalogs, or traveling sales representatives—from being subjected to multiple state income taxes when they had no physical operations in those states.
Under the statute, states are prohibited from imposing income tax on a company whose only activity in the state is the solicitation of sales of tangible personal property, with orders approved and shipped from outside the state.
For decades, this law gave businesses a predictable framework for operating across state lines without fear of aggressive tax enforcement. But the explosion of digital commerce has challenged the relevance of the statute. Businesses today do far more than solicit sales electronically—they provide real-time customer service through chatbots, interactive online tools, product recommendations powered by machine learning, and rich content experiences that go beyond traditional solicitation.
States argue that these activities fundamentally change the relationship between companies and the residents they serve, rendering P.L. 86-272 outdated. Tech companies and national retailers, however, maintain that digital interactions should not automatically trigger state tax obligations.
New Jersey’s rule represents the boldest interpretation yet, aiming to classify a wide range of online interactions as taxable business activity.
3. What New Jersey’s Regulation Attempts to Do
New Jersey’s regulation attempts to modernize the interpretation of “business activity” by addressing the reality that digital tools often provide experiences that once required physical presence.
The regulation outlines a set of conditions in which a business providing online interactions with New Jersey customers would be considered to have crossed the threshold of simple solicitation. These activities may include:
- Offering post-sale customer support via interactive digital tools
- Using web-based portals that allow customers to perform account functions
- Providing virtual consultations, configurations, or product trials
- Operating AI-driven systems that personalize customer experiences
- Offering online chat support beyond basic question-response solicitation
- Running platforms that facilitate complex transaction processes or service commitments
The goal, according to the state, is to ensure that modern digital engagements are treated with the same scrutiny as in-state physical activities.
However, critics argue the regulation overextends state taxing power and ignores the basic foundation of interstate commerce protections that Congress intended when it enacted P.L. 86-272.
4. The Business Group’s Challenge: An Argument Grounded in Federal Supremacy
The trade organization representing affected companies contends that the New Jersey rule violates federal law by conflicting with the protections that P.L. 86-272 still provides. Their petition claims:
a. The regulation improperly expands the definition of non-solicitation activities
The rule reinterprets routine digital interactions—now essential to any modern business—as taxable triggers. According to the group, these activities are the digital equivalent of catalog content, order forms, or customer questionnaires, all of which historically fell under protected solicitation.
b. States cannot unilaterally modify a federally established protection
The argument emphasizes the supremacy of federal law over state regulations. Congress intentionally designed P.L. 86-272 to create uniformity across the country. Allowing states to redefine protected activities would undermine the uniformity that federal law ensures.
c. The rule threatens interstate commerce with inconsistent, burdensome compliance obligations
If each state begins to craft its own interpretation of digital activity, companies could face a tangled web of inconsistent rules, creating substantial compliance challenges. Multistate businesses—especially ecommerce and SaaS companies—would need to track, categorize, and evaluate every digital customer interaction on a state-by-state basis.
d. The rule introduces uncertainty and instability for digital-first businesses
Since modern commerce requires interactive online features, the regulation casts a shadow over nearly any company operating a dynamic website or cloud-based customer experience.
The trade group argues that only Congress, not individual states, has the authority to redefine the boundaries of interstate commerce in the digital age.
5. New Jersey’s Perspective: A Push to Modernize Tax Law
While the challenge is strong, New Jersey maintains that digital commerce has fundamentally reshaped business-consumer interactions. The state argues:
- Many internet activities today serve the same function as physical activities once performed by in-state employees.
- Digital tools allow companies to operate within a state’s economy without physical presence.
- Tax fairness requires adapting rules to reflect modern technology.
New Jersey’s position reflects a larger national trend: states increasingly assert that digital experiences with local consumers create economic presence equivalent to brick-and-mortar operations.
6. The Larger National Context: States vs. Digital Commerce Expansion
New Jersey is not alone. Several states have introduced interpretations or guidance documents related to digital versions of business activities traditionally considered unprotected under P.L. 86-272. These moves are part of a larger effort to adapt tax enforcement to the digital age.
Yet this creates a patchwork—some states adopt aggressive stances, others follow the traditional definition, and many remain undecided.
This inconsistency is problematic for digital businesses. Companies now must track:
- Which states consider online chat support a protected activity
- Which states view customer account portals as in-state operations
- How AI-based customer journeys are interpreted state-by-state
- Where cloud interactions classify as business activity
Such complexities are virtually impossible to manage at scale without significant compliance infrastructure.
The New Jersey case could set precedents that either unify or further fragment how states approach digital tax enforcement.
7. The Technology Sector’s View: Innovation vs. Regulatory Barriers
Tech companies, ecommerce enterprises, SaaS providers, and cloud-based businesses have voiced concerns about aggressive interpretations of state nexus rules. Their perspective is shaped by several realities:
a. Digital services depend on interactivity
Features such as live chat support, guided demos, AI-generated recommendations, and account dashboards are core components of user experience. Classifying these as taxable in-state activities places tech companies at a disadvantage simply for offering industry-standard functionality.
b. Removing or limiting interactive tools reduces product value
If regulations force companies to disable interactive features for users in certain states, the user experience becomes fragmented. This undermines competitiveness.
c. Software-driven businesses cannot operate with state-specific restrictions
Tech companies build products for universal access and seamless scalability. Adapting functionality to align with state taxation rules breaks the efficiency model that powers the digital economy.
d. Compliance costs may overwhelm smaller tech firms
Startups and smaller digital businesses may struggle to comply, limiting innovation and competition.
The challenge to New Jersey’s rule is therefore not just a legal matter—it is a fight for the future of how digital businesses engage customers across states.
8. What Happens Next? Potential Outcomes and Industry Impact
The court’s decision could reshape the regulatory landscape. Potential outcomes include:
Outcome 1: The regulation is struck down
This would reinforce P.L. 86-272 as a dominant protection for digital commerce. Other states may hesitate to issue similar regulations. Businesses may enjoy greater stability and clarity.
Outcome 2: The regulation is upheld
States across the U.S. may accelerate efforts to reinterpret protected activities. Compliance complexity would surge. Tech companies might consider restructuring customer-facing digital experiences or adjusting their tax planning strategies.
Outcome 3: A partial ruling
The court may permit some components while rejecting others. This could still create confusion but might also push states toward more standardized frameworks.
Regardless of the ruling, this case could become a catalyst for a national conversation around updating federal tax protections for the digital era.
9. The Broader Significance: A Turning Point for Digital Tax Law
The New Jersey dispute represents more than a conflict over one rule—it embodies the tension between:
- Legacy federal law
- Modern digital commerce
- State fiscal pressures
- Rapid evolution of technology
As businesses rely increasingly on cloud platforms, machine intelligence, data-driven personalization, and online interactivity, the definition of “business activity” becomes both more expansive and more ambiguous.
This challenge may push Congress to consider revisiting P.L. 86-272, potentially updating its outdated framework to reflect digital realities. Until then, the courts must interpret a mid-20th-century law through a 21st-century technological lens.