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State and Local Tax

The 200-Transactions Nexus Threshold Creeps into State Corporate Income Tax

Rebecca Newton-Clarke, J.D.  Checkpoint Catalyst Editor/Author

· 14 minute read

Rebecca Newton-Clarke, J.D.  Checkpoint Catalyst Editor/Author

· 14 minute read

In the five-plus years since Wayfair1 was decided, states and businesses have grappled with the level of economic contact needed to establish nexus with a state, and with the constitutionality of sales and use tax thresholds that assert nexus against out-of-state sellers having only 200 separate transactions into a state. A few states have dispensed with these transactions-focused thresholds, and many states now tie economic nexus for sales and use tax only to receipts. Still, the pending demise of the transactions-based metric has so far been greatly exaggerated, more than 20 states and other jurisdictions currently asserting economic nexus for sales and use tax purposes against remote sellers making 200 or more separate sales (of varying kinds) into the state or jurisdiction. Despite widespread concern that this sort of relatively low transactions-based threshold may not pass constitutional muster, at least two states—Hawaii and New Jersey—have introduced it into the corporate income tax sphere through legislation. Hawaii’s economic nexus test for corporate income tax purposes, applicable for tax years beginning in and after 2020, is statutorily framed as a rebuttable presumption. New Jersey’s law applies for tax years ending on and after July 31, 2023, and guidance from the New Jersey Division of Taxation establishes that a corporation that meets this threshold but whose activities are protected by Public Law 86-272 will be liable only for the minimum tax.2 This article from Checkpoint Catalyst touches on the continued popularity of the 200-transactions economic nexus standard for sales tax purposes and considers the risks for businesses and tax advisors as the approach finds its way into the corporate income tax environment amid the whittling away of P.L. 86-272 protections.

The debate over sales tax volume thresholds.

Following the decision of the U.S. Supreme Court in South Dakota v. Wayfair,3 which established the constitutional validity of economic nexus for sales and use tax purposes, many states took inspiration from South Dakota’s approach and enacted laws asserting sales and use tax nexus against out-of-state sellers who in the current or preceding year have $100,000 in gross receipts from sales into the state or make sales into the state in 200 or more separate transactions. The types of transactions targeted vary from state to state, with some states looking only to retail sales or sales of tangible personal property and others also including services, electronically delivered items, or both. Although the Wayfair Court endorsed economic nexus for sales and use tax based on sufficient “economic contacts,” it did not explicitly endorse the 200-transactions standard for all sellers; on the contrary, the Court emphasized that South Dakota’s law included safeguards (such as the state’s adoption of the Streamlined Sales and Use Tax Agreement) that would prevent South Dakota’s economic nexus standard from being an undue burden on interstate commerce.4 A number of scholars and practitioners have argued since then that a threshold based on 200 transactions may not always be adequate to meet the requirements of due process and minimum contacts established by the U.S. Constitution. For example, in some states, a small seller making 200 taxable sales of electronic downloads into a state at $1 each could be subject to sales and use tax collection and remittance requirements under the plain language of the law. In other states, even non-taxable sales of this kind could trigger nexus.

Perhaps as a result of these criticisms and the uncertainty over what constitutes a sufficient small seller safe harbor following Wayfair, over the years a number of states—including South Dakota itself, along with California, Colorado, Iowa, Louisiana, Maine, North Dakota, Washington, and Wisconsin—have dispensed with the volume threshold and now look only to a specified dollar amount of receipts.5 Even so, 20 states and the District of Columbia currently assert nexus against remote sellers engaging in 200 or more transactions (of various specified kinds) into the state or jurisdiction.6

Importation into the income tax sphere.

Notwithstanding the debate over the constitutionality of 200-transactions nexus thresholds on the sales and use tax front, two states—Hawaii and New Jersey—have carried the approach into the corporate income tax sphere through legislation.7 For tax years beginning in and after 2020, Hawaii law establishes a presumption that a person lacking a physical presence in Hawaii is systematically and regularly engaging in business in the state and subject to Hawaii income tax if, during the current or preceding calendar year, the person engages in 200 or more business transactions with persons within the state, or the sum of the value of the person’s gross income attributable to sources in Hawaii equals or exceeds $100,000 or, for a person that does business within and outside the state, the numerator of the person’s sales factor for the state equals or exceeds $100,000.8 Furthermore, although Hawaii is a member state of the Multistate Tax Commission (MTC), in 2020 the Hawaii Department of Revenue issued guidance establishing its position that making sales or engaging in transactions in Hawaii that meet or exceed the economic nexus threshold will breach the immunity of P.L. 86-272, a position that appears to push beyond the MTC’s aggressive P.L. 86-272 approach.9 In other words, engaging in 200 transactions with Hawaii customers not only establishes nexus for an out-of-state company, it negates the company’s ability to claim P.L. 86-272 protections. The Department informally confirmed the agency’s continued adherence to this position in response to a November 2023 inquiry from Checkpoint Catalyst concerning the agency’s position on the MTC’s August 2021 Revised Statement on P.L. 86-272.10 “Generally, the Department looks at nexus to determine whether or not Public Law 86-272 protection is available,” a representative of the agency observed in a non-binding response.11

New Jersey adopted the 200-transactions economic nexus standard for corporate income tax purposes more recently. By law, for tax years ending on and after July 31, 2023, the state asserts nexus against an out-of-state corporation if the corporation derives receipts exceeding $100,000 from sources in New Jersey during the fiscal or calendar year, or the corporation has 200 or more transactions delivered to the customer during the calendar or fiscal year.12 For service transactions, “delivered to a customer” for nexus purposes means the location where the benefit of the service is received for sourcing purposes.13

A New Jersey Division of Taxation Technical Bulletin establishes that a corporation that meets the economic nexus threshold but whose activities are protected by P.L. 86-272 will be liable only for the minimum tax. For tax periods ending on or after July 31, 2023, the Division’s guidance indicates that it does not consider P.L. 86-272 to protect a variety of online business activities.14 In targeting these remote electronic activities, the Division generally follows the MTC’s revisions to the Statement of Information on P.L. 86-272 dated August 4, 2021, and also specifies that unprotected activities include: offering, soliciting, selling, accepting, or buying digital assets, such as cryptocurrency and non-fungible tokens (NFTs), or offering services related to those assets; and selling targeted internet advertising services that rely on data mined from software or ancillary data, such as apps or cookies, placed on devices in New Jersey.

A December 2023 order of the New Jersey Tax Court serves as an affirmation that nexus continues to be both a distinct inquiry from P.L. 86-272 protection and the preliminary and paramount consideration, but also that nexus remains a highly fact-specific question that can spark protracted (and potentially costly) disputes.15The case involved a freight forwarder that provided less-than-truckload (LTL) services to customers in New Jersey by coordinating with its customers remotely and arranging pick-up of the customers’ temperature-controlled LTL shipments by independently owned trucking companies or carriers. The third-party trucking companies transported the shipments to the taxpayer’s consolidation centers in one of seven states (other than New Jersey) for redistribution by the taxpayer’s employees, and then collected the shipments for delivery to the taxpayer’s customers, some of whom were in New Jersey. The court declined to issue summary judgment in favor of the taxpayer or the Division, finding that the freight forwarder was engaged in activities exceeding the protection of P.L. 86-272 in New Jersey but that the record did not establish whether the freight forwarder had nexus with the state. The court found that the taxpayer’s activity of performing services for its customers did not constitute an activity protected by P.L. 86-272, which by its plain language protects only solicitation related to sales of tangible personal property. Resolving the nexus question, however, would involve delving into factual details beyond the record before the court. While the Division highlighted that the taxpayer identified approximately 238 customers having a domicile in New Jersey, for the tax years at issue the Division identified only one New Jersey domiciled customer, with shipments totaling approximately $130,000, or an average of $18,571 per year, which the taxpayer asserted were de minimis activities, revenue, and contacts with the state.

Observing that one of the central inquiries to be made by the court in discerning whether a taxpayer is exercising its corporate franchise in New Jersey is whether the taxpayer “engages in contacts within New Jersey,” the court noted that although the record revealed that the taxpayer had serviced more than 200 customers in New Jersey, the record failed to disclose how many of those customers placed freight shipment consolidation orders with the taxpayer during the tax years at issue. Questions concerning receipts, or a possible agency relationship between the taxpayer and trucking companies, were also incapable of resolution based on the record before the court, which found that it did not “possess a clear picture of the scope, nature, and extent” of the taxpayer’s or the taxpayer’s employees’ in-state business activities. With genuine issues of material fact remaining unresolved, the court denied the taxpayer’s motion for summary judgment and the Division’s cross-motion for summary judgment. Barring a settlement, the matter will proceed to trial.

Meanwhile, as discussed above, the Hawaii Department of Revenue explicitly takes the position that meeting the economic nexus threshold, in and of itself, breaches P.L. 86-272 immunity. In both states, the interplay between economic nexus and P.L. 86-272 protections is likely to be contested for years to come. The increasing complexity of sourcing electronically delivered goods and services, particularly in the case of difficult-to-trace transactions involving cryptocurrencies, could complicate matters further. Businesses wishing to limit corporate income tax assessments and controversy risks will need to pay close attention to the number and character of their business transactions into Hawaii and New Jersey and with customers in those states.

The larger takeaway.

While the approach of two states may not necessarily augur a larger trend, tax advisors should be watchful and proceed with particular caution in any states where an economic nexus assertion based on the number of transactions could be an issue.  In cases of potentially significant exposure, requesting a ruling from the state tax agency on the front end may be the best option.

Checkpoint resources.

The Nexus Assistant chart on conformity to the MTC’s P.L. 86-272 Statement incorporates states’ responses to a unique Checkpoint Catalyst survey concerning states’ approaches to the Statement as revised in August 2021. Checkpoint Catalyst subscribers may preview this chart in Checkpoint Catalyst Topic # 1002: Nexus (Corporate Income and Business Activity Taxes), where states’ responses are being incorporated and analyzed across the topic. Other resources relevant to the issues explored in this article include: Checkpoint Catalyst Topic # 1007: Sales FactorCheckpoint Catalyst Topic # 1010: Electronically Delivered Goods and Services (Corporate Income and Business Activity Taxes)Checkpoint Catalyst Topic # 1050: Sales and Use Tax: NexusCheckpoint Catalyst Topic # 1051: Sales and Use Tax: Electronically Delivered Goods and Services; and Ford and Newton-Clarke, “Income and Business Activity Taxation of Cryptoassets: Multistate Nexus and Apportionment Concerns,” Checkpoint State Tax Updates, 01/09/2024.

1 South Dakota v. Wayfair, Inc., (2018, U.S.) 138 S. Ct. 2080201 L. Ed. 2d 403.

3 South Dakota v. Wayfair, Inc., (2018, U.S.) 138 S. Ct. 2080201 L. Ed. 2d 403.

4 See generally Hellerstein & Hellerstein: State Taxation ¶6.03. Due Process Clause Nexus Distinguished from Commerce Clause Nexus: The Rise and Fall of Quill’s Commerce Clause Physical-Presence Nexus Requirement.

5 For details, see the discussion of the various states’ approaches in Checkpoint Catalyst Topic # 1050: Sales and Use Tax Nexus.

6 These jurisdictions are Arkansas (Ark. Code Ann. §26-52-111(a)), the District of Columbia (D.C. Code Ann. §47-2001(w)), Georgia (Ga. Code Ann. §48-8-2(8)(M.1)Ga. Code Ann. §48-8-2(8)(M.3)), Hawaii (Haw. Rev. Stat. §237-2.5), Illinois (ILCS Ch. 35 § 120/2(b)), Indiana (Ind. Code §6-2.5-2-1(d)), Kentucky (Ky. Rev. Stat. Ann. §139.340(2)(g)), Maryland (Md. Regs. Code §, Michigan (Mich. Comp. Laws Ann. §205.52c(1)(a)Mich. Comp. Laws Ann. §205.52c(1)(b)), Minnesota (Minn. Stat. §297A.66, Subdivision 1(c)), Nebraska (Neb. Rev. Stat. §77-2701.13(2)), Nevada (Nev. Admin. Code §372.856(1)(c)), New Jersey (N.J. Rev. Stat. §54:32B-3.5(a)), North Carolina (N.C. Gen. Stat. §105-164.8(b)(9), Ohio (Ohio Rev. Code Ann. §5741.01(I)(2)(h)), Rhode Island (R.I. Gen. Laws §44-18.2-3(A)(i)), Utah (Utah Code Ann. §59-12-107(2)(c); however, HB17, which passed the Utah House on January 16, and is under consideration in the Senate Revenue and Taxation Committee, would remove the 200-transactions threshold and leave only the $100,000 receipts threshold), Vermont (Vt. Stat. Ann. Title 32 § 9701(9)(F)), Virginia (Va. Code Ann. §58.1-612(C)(11)), West Virginia (W. Va. Code §11-15A-6b(e)), and Wyoming (Wyo. Stat. §39-15-501(a)). Maryland’s economic nexus test is established by regulation of the Maryland Comptroller (Md. Regs. Code § rather than by law. Connecticut takes a different approach, requiring both 200 or more retail sales into Connecticut and gross receipts of at least $100,000 in the state (Conn. Gen. Stat. §12-407(a)(12)(G)Conn. Gen. Stat. §12-407(a)(15)(A)), so that the volume prong of the threshold effectively serves to extend the small seller safe harbor.

10 Email From Hawaii Department of Revenue to Checkpoint Catalyst, On File With Checkpoint Catalyst, 11/21/2023.

11 Email From Hawaii Department of Revenue to Checkpoint Catalyst, On File With Checkpoint Catalyst, 11/21/2023.

13 L. 2023 Chapter 96 § 6, eff for tax years ending on or after 07/31/2023; New Jersey Division of Taxation Technical Bulletin No. TB-107, 07/11/2023.

15 Re: H&M Bay Inc. v. Dir., Div. of Taxation, (12/18/2023, N.J. Tax Ct.) Dkt. No. 012545-2021.


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