What a Recent New Jersey Tax Ruling on P.L. 86-272 Means for Businesses

July 29, 2021

Aerial view of the New Jersey Shipyard with numerous cranes, gantries and shipping containers, captured at golden hour

By: Jess Johannesen, SALT Senior Manager

At a glance:

  •  The main takeaway: A new tax court ruling out of New Jersey calls into question businesses’ protection under Public Law 86-272 (P.L. 86-272).
  • Impact on your business: L. 86-272 provides protection from income tax liability in states where businesses would otherwise have nexus, but depending on the scope of your business operations, that protection may or may not apply.
  • Next steps: Aprio can review your activities to determine whether your business is protected under P.L. 86-272 in states in which you operate, and if so, claim any income tax refunds for prior periods.

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The full story:

In a recent New Jersey Tax Court ruling, the Court held that a wholesale produce distributor’s activity in the state was protected by Public Law 86-272 (P.L. 86-272) for all but one of the seven tax years at issue.[1]

What is P.L. 86-272?

P.L. 86-272 is a federal law that prohibits states from imposing a net income-based tax on a business engaged in the sale of tangible personal property when the business’s activities in a state are limited to “sales solicitation,” as long as the approval of orders occurs outside the state and the shipment or delivery originated outside the state.

The law does not specifically identify what activities constitute protected solicitation. However, the U.S. Supreme Court has held that protected solicitation activities go beyond a simple verbal request for orders, but may also include other activities that are “entirely ancillary to requests for purchases.”[2]  If a taxpayer engages in activity deemed by the state to be unprotected and such activity is not de minimis, the taxpayer will be subject to the state’s income tax.

Breaking down the case in question

The taxpayer in this case, whose tax year ends on January 31, is a wholesale distributor of fresh fruits and vegetables, with its headquarters and warehouse located in Pennsylvania. During the contested period for tax years ending January 2002 through January 2008, the distributor did not maintain any offices or inventory in New Jersey, and any orders from customers in New Jersey were received and processed in Pennsylvania. The orders were fulfilled and shipped from the distributor’s Philadelphia warehouse. Most of the produce was delivered by third-party carrier trucks, and testimony showed that between 11% and 14% of packages shipped to New Jersey were delivered on the distributor’s own trucks for tax years 2004 through 2007.[3]

The state argued that two of the taxpayer’s activities in New Jersey were unprotected. The first involved a related entity that grew produce in New Jersey. The distributor purchased produce from this related entity and used third-party carriers in most years to pick up the produce. Testimony detailed that in 2006, there was a “falling out” with the third-party carrier which led to the distributor sending its own trucks to pick up produce from the related entity. According to the Court, evidence supported that during the tax year ending January 2007, the distributor used its own trucks on a systematic basis to pick up produce from this related entity.

The second activity involved the use of the distributor’s trucks to accept the return of rejected produce in New Jersey. As a produce wholesaler, the taxpayer was subject to the provisions of the Perishable Agricultural Commodities Act of 1930 (PACA). PACA requires that a wholesaler must accept the return of rejected produce within a reasonable time, not to exceed 24 hours of delivery. If rejected at the time of delivery, the produce was returned on the truck that delivered it to the customer. Testimony showed that in most cases, customers received a credit on their account instead of actually returning the produce.

To the extent produce was returned on the distributor’s trucks prior to the customers’ acceptance of the product, such activity of returning the rejected produce as mandated by PACA was considered to be ancillary to the sale of the product, and thus a protected activity under P.L. 86-272. However, the Court determined that PACA did not obligate the seller to retrieve the produce once accepted by the buyer.  As such, retrieving product on the distributor’s trucks which was accepted by the customers was not held to be a protected activity under P.L. 86-272.

Evidence demonstrated that less than 5% of packages shipped into New Jersey were rejected during the years at issue and that 1% or less were returned on the distributor’s trucks. Additionally, the ruling noted that the majority of those packages returned on the distributor’s trucks were rejected prior to acceptance within the activity protected by P.L. 86-272. Although the distributor’s practice of sending trucks into New Jersey for returns of accepted produce was not protected by P.L. 86-272, the Court held that such conduct was de minimis and not sufficient alone to establish that the distributor was subject to New Jersey income tax.

However, for the tax year ending January 2007, the Court concluded that the distributor’s activity of picking up produce from the related entity, combined with the de minimis conduct of sending the distributor’s trucks to New Jersey to pick up accepted but returned product, exceeded the protection under P.L. 86-272. Therefore, the taxpayer’s assessment for 2007 was upheld.

The bottom line

P.L. 86-272 provides protection from income tax liability in states where businesses would otherwise have nexus. For each state in which your business files income tax returns, Aprio can review your activities to determine whether your business is protected under P.L. 86-272, and if so, claim any income tax refunds for prior periods.

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.

Contact Jess Johannesen, SALT Senior Manager, at jess.johannesen@aprio.com or  Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] Procacci Brothers Sales Corp. v. Director, Division of Taxation, Docket Nos. 015626-2014, 05/25/2021.

[2] See Wisconsin Dep’t of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992). There is no one definite list of protected and unprotected activities, but many states are guided by the Multistate Tax Commission’s statement, which can be accessed at https://www.mtc.gov/Uniformity/Project-Teams/P-L-86-272-Statement-of-Information-Work-Group. However, the statement does not address every possible activity.

[3] There is a split among the states regarding whether or not mere delivery in the taxpayer’s own trucks is unprotected activity. New Jersey is one of the states that considers such activity protected under P.L. 86-272. See Chester A. Asher, Inc. v. Dir., Div. of Taxation, 22 N.J. Tax 582 (2006).


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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