New York court upholds PL 86-272 regulation; rejects retroactive application

On April 28, a New York court upheld New York’s corporate tax regulation, implementing P.L. 86-272 guidance relating to internet activities but rejected the retroactive application back to 2015.

This decision is one of the latest developments regarding P.L. 86-272 among the states.

Background

In 2021, the Multistate Tax Commission (MTC) issued a revised policy statement addressing the protections afforded by P.L. 86-272 in relation to activities conducted via the internet. In response, specific states have begun to issue their own guidance, often incorporating certain provisions of the MTC statement.

The New York Department of Taxation and Finance (the Department) adopted final regulations on its updated interpretation of P.L. 86-272 in December 2023 (the Regulation), which were retroactive to 2015. The Regulation is generally in line with the MTC guidance and provides multiple examples of unprotected activities conducted via the internet (e.g., providing internet chat assistance to customers).

In April 2024, American Catalog Mailers Association (ACMA) filed a complaint with the New York Supreme Court of Albany County (the Court) requesting that the Regulation be deemed invalid, arguing that it directly conflicts with and effectively re-writes P.L. 86-272. Additionally, ACMA contested the retroactive nature of the Regulation.

New York decision

The Court upheld the validity of the Regulation related to its guidance on P.L. 86-272 but denied the retroactive application back to 2015. Specifically:

a. Regulations upheld

The Court cited the U.S. Supreme Court’s Wayfair decision in holding that in addition to physical presence, economic presence and virtual contacts can establish nexus. Additionally, the Court found no conflict between P.L. 86-272 and the Regulation and stated, “P.L. 86-272 does not prohibit the State from identifying and regulating which internet activities are construed to constitute more than solicitation of orders for taxation purposes, in this evolving virtual world, the challenged regulations do not conflict with the tax exemptions set forth in the Federal law.” Rather the Court found that the Regulation identifies internet activities that establish substantial nexus and “does not subject out-of-state sellers who engage in more than solicitation within the State, to duplicative or unfair taxation.” The Court concluded that the Regulation is not preempted by P.L. 86-272 and does not violate the constitution.