October 13, 2006
FOR IMMEDIATE RELEASE
New Jersey Supreme Court Affirms “Economic Nexus” Under Commerce Clause.
Physical Presence Bright-line Nexus Standard Rejected for Income Tax
On October 12, 2006, the New Jersey Supreme Court issued a per curiam opinion
affirming a lower court decision that held that the Commerce Clause “substantial
presence” test did not require a physical presence for purposes of the state’s
Corporation Business Tax (corporate income tax). Lanco, Inc. v. Director, Div.
of Taxation, Docket No. A-89-05 (N.J. October 12, 2006).
At issue was whether New Jersey could constitutionally subject a foreign corporation
to the Corporation Business Tax when the corporation had no physical presence in New
Jersey but derived income through licensing agreements with a company conducting retail
operations in the state.
Lanco, Inc. (“Lanco”) licensed intellectual property, consisting principally of trademarks,
trade names, and service marks, to Lane Bryant, a clothing retailer. Lanco had no real or
personal property or personnel in the state. The Tax Court held that the lack of physical
presence in the state constitutionally precluded New Jersey from imposing its income tax on
Lanco. On appeal, the New Jersey Superior Court (Appellate Division) held in Lanco, Inc. v.
Director, Div. of Taxation, 879 A.2d 1234 (N.J. Super. 2005) that the physical presence
requirement applicable to sales and use taxes as laid down by the U.S. Supreme Court in
Quill Corp. v. North Dakota, 504 U.S. 298, 112 S. Ct. 1904 (1992) did not apply to income
taxes and reversed the Tax Court.
In affirming the Superior Court decision, the Supreme Court noted that a split of authority
had developed regarding whether Quill was limited to sales and use taxes but believed that the
better interpretation of Quill was the one adopted by those states that have limited the U.S.
Supreme Court’s holding to sales and use taxes. Consequently, the New Jersey Supreme Court
affirmed that New Jersey could constitutionally apply the Corporation Business Tax to a taxpayer
without physical presence in New Jersey.
New Jersey is the second state whose highest court has sanctioned an economic nexus approach to
taxing corporations without physical presence. South Carolina was the first with its Supreme
Court decision in Geoffrey, Inc. v. South Carolina Tax Comm’n, 437 S.E 2d 13 (S.C. 1993). A
number of state lower courts have also ruled on this issue, and it was to these decisions that
the New Jersey Supreme Court was referring when it noted that there was a split of authority on
the issue of physical presence for income tax nexus.
Lanco has 90 days from the New Jersey’s Supreme Court’s decision to file a petition for certiorari
with the U.S. Supreme Court.
If you have any questions regarding the above information, please contact Mr.
Glenn McCoy, Principal of the Ryan & Company New York office, at 212.871.3901, or Mr. Frank DeLuca,
Director of the Ryan & Company Atlanta office, at 404.365.0922.
Mr. McCoy and
Mr. DeLuca can also be reached via e-mail.
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