New Jersey Tax Court Leaves Unresolved Issue of Whether a Freight-Forwarder Had Nexus

By: Michael Colavito, SALT Director

At a glance

• The main takeaway: A New Jersey Tax Court opinion concluded that a freight-forwarder was not entitled to protection from income tax nexus under P.L. 86-272 because it was providing services but left unresolved the issue of whether the taxpayer had nexus.
• Assess the impact: It is possible that a future decision will address this issue and provide guidance on the whether the taxpayer’s contacts within the state were sufficient for nexus.
• Take the next step: Aprio’s State and Local Tax (SALT) team can help you understand your company’s income tax nexus footprint, both physical and economic.

Schedule a free consultation today to learn more!

The full story

The New Jersey Tax Court’s recent decision in H & M Bay, Inc. v. Dir., Div. of Taxation ^[1] leaves taxpayers with unanswered questions as to the breadth of the state’s application of its Corporation Business Tax (CBT) nexus rules. The Tax Court concluded that the record was inadequate for it to determine whether the taxpayer was exercising its corporate franchise in New Jersey or whether the taxpayer’s receipts derived from New Jersey-sourced were de minimis. Arguably, the more interesting issue addressed in the case was the determination of whether a taxpayer is exercising its corporate franchise in a state and how that might differ from the more widely addressed nexus standards of “doing business” in a state and “deriving receipts” from in-state sources. 

A closer look at the case

The taxpayer was a Maryland-based “less-than-truckload” freight-forwarder of temperature-controlled items. The taxpayer’s business consisted of:

1. Coordinating the shipment of a customer’s goods through orders submitted to their Maryland location;
2.  Arranging for the pick-up of the customer’s goods by an independently owned trucking company and delivery of such goods to one of the taxpayer’s seven consolidation centers, all of which were located outside of New Jersey; and
3. The combining of multiple customers’ shipments at a consolidation center and arranging for an independently owned trucking company to pick-up and deliver the consolidated shipments to the customer’s buyer. 

In disputing an assessment of New Jersey CBT of $7,700, the taxpayer contended that it was not subject to tax because it was protected by Public Law 86-272, and it did not otherwise have nexus in New Jersey due to its lack of connections with the state and because its New Jersey-sourced receipts were de minimis. The taxpayer’s arguments were based on it not owning or renting any trucks, equipment, offices, warehouses, or other facilities in New Jersey, not having any employees working in the state, and all shipments to and from New Jersey being undertaken by independently owned trucking companies.  

The Division of Taxation (the Division) argued that the taxpayer had nexus in New Jersey because it coordinated the weekly pick-up and delivery of freight in New Jersey, availed itself of New Jersey’s roadways, and that the independently owned trucking companies should be viewed as agents of the taxpayer.

The ruling explained

In addressing the issues in the case, the Tax Court easily concluded that the taxpayer was not protected from income taxation by Public Law 86-272, as the protections afforded under the federal law apply only to sellers of tangible personal property, and the taxpayer in this case performs a service. The Tax Court then went on to address whether the taxpayer exercised its corporate franchise in the state or derived receipts from in-state sources. In examining whether the taxpayer exercised its corporate franchise in New Jersey, the Tax Court’s analysis focused on whether the taxpayer “engag[ed] in contacts” and its relationship with such contacts. The Tax Court held that it was unable to conclude on this issue due to the record not clearly establishing how many of the taxpayer’s orders originated from customers domiciled in New Jersey.

The Division alleged that the taxpayer coordinated the delivery of over 45,000 freight orders into New Jersey during the period of review. However, the Tax Court noted that it was not clear from the record how many, if any, of the shipments were made on behalf of the taxpayer’s New Jersey customers. The Tax Court seemed to find it relevant that some of the shipments may have been made to a customer’s consignee located in New Jersey, suggesting that such a delivery would not be treated as being made to a “contact” in the state. 

The Tax Court came to a similar conclusion regarding whether the taxpayer derived receipts from

sources within this state. The Tax Court acknowledged that New Jersey law (for the years at issue) offered no minimum threshold under which this nexus standard is to be applied, and that a “de minimis” exception exists in this context to prevent the taxation of a businessmerely due to one in-state sale. 

Thus, the Tax Court concluded that the taxpayer must “regularly provide services” to customers within the state to establish nexus under the “deriving receipts from in-state sources” standard.  The record only included undisputed evidence that the taxpayer averaged just under $19,000 in revenue from one New Jersey customer over a seven-year period. The Tax Court concluded that this alone was not sufficient to establish that the taxpayer “regularly engaging in consistent and systematic services for New Jersey domiciled customers,” but that there may be additional facts that could establish that the taxpayer derived receipts from other in-state sources. 

The bottom line

This decision is somewhat unique in that it more thoroughly addresses what it means for a taxpayer to be “exercising” their corporate franchise in a state. This standard, at least under New Jersey CBT law, clearly does not require a physical presence in the state. However, the decision leaves unresolved the extent of in-state “contacts” that is required to trigger this nexus test.

Notably, this case addressed taxable years from 2013 to 2019, and New Jersey’s CBT law now provides for a minimum threshold of $100,000 of in-state receipts that must be exceeded for an out-of-state business to establish nexus in New Jersey. This minimum threshold applies to tax years ending on or after July 31, 2023. Nonetheless, any future resolution of the nexus issues in this case could be instructive regarding how similar matters may apply in states that do not have a specific minimum income tax nexus threshold. Aprio’s SALT team has experience helping companies understand where they have a state income tax nexus footprint, both physical and economic. We can assist your business to determine its state income tax compliance obligations so that you do not incur any unexpected tax liabilities and penalties. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter

---

[1] Docket No. 012545-2021, 12/18/2023.