Article

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

June 3, 2025 · Authored by Shannon Bonner, Kristina Stibrich

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.

b. Retroactive application denied

In contrast to the above conclusion, the Court found in favor of the plaintiffs in granting summary judgment on the retroactive application of the Regulation. The Court details the timeline of the imposition of the Regulation stating that in April 2022, the Department published draft regulations including the P.L. 86-272 guidance on internet activities noting they were in draft and “should not be relied on.” The final regulations were published in December 2023, and provided, for the first time, their retroactive application to January 2015.

When evaluating the retroactive application, the Court reviewed previous New York cases with a focus on fairness. It cited a previous decision stating, “a retroactive tax violates due process only if it is ‘so harsh and oppressive as to transgress the constitutional limitation.’” (see Caprio v. New York State Dept. Of Taxation & Fin. 25 NY 3d 744, 752 (2015)). The Court stated the plaintiff was not given notice of the retroactive application, “which exposes its members to New York income tax liability for time periods during which their activities were thought to be exempt from taxation.” Additionally, the Court noted the length of the retroactive period (i.e., nine years) was excessive. As such, the Court held the application of the Regulation relating to P.L. 86-272 to any time before its publication date in December 2023, violating plaintiff’s due process of law.

Additional P.L. 86-272 activity

In addition to the above case, a few other P.L. 86-272 developments have happened over the past few months including:

a. Federal

A federal proposed bill, H.R. 427, would expand the definition of ‘solicitation of orders’ to “include business activities that serve an independently valuable business function apart from the solicitation of orders.” HR 427 – the “Interstate Commerce Simplification Act of 2025” - was introduced on Jan. 15, 2025. Historically, P.L. 86-272 has never been amended, and solicitation of orders has not been defined. As such, the proposed bill would potentially provide much broader protection for taxpayers.

b. Massachusetts

Massachusetts Department of Revenue (MA DOR) issued proposed amendments to its corporate income tax nexus regulation on March 28, 2025. The amendments are aimed to “clarify that certain in-state activities conducted by a vendor through an Internet website accessible by persons in the state may not be protected activities within the meaning of Public Law 86-272.” The proposed amendments would repeal and replace 830 CMR 63.39.1(4)(e), which is the provision addressing P.L. 86-272 protection in the state.

c. New Jersey

New Jersey issued draft regulations in February 2025, to implement corporate business tax reform changes enacted in 2023. The proposed rule at N.J.A.C. 18:7-1.9A is intended to “provide clarity on what internet activities may or may not exceed the protections at P.L. 86-272. The proposed new rule incorporates the concepts and principles of the Multistate Tax Commission’s P.L. 86-272 guidelines, but also provides additional details for certain types of activities or situations that the Multistate Tax Commission’s guidelines did not address, which includes subscription services for web-connected devices, consumer data sales, and electronic payments.”

New Jersey accepted comments until April 19. The proposal did receive opposition including comments from the American Commerce Marketing Association, concluding the proposal is unlawful and contradictory to a controlling federal statute.

What’s next?

ACMA has appealed the above decision as of May 13, 2025.

While the decision has been appealed, the current ruling is significant as it substantively addresses the MTC’s guidance applicable to internet activities as enacted by New York, which may give support to similar guidance in other states (e.g., New Jersey, Massachusetts).

Taxpayers who claim P.L. 86-272 protections should review their activities in light of the above guidance to determine any potential impact. If you have any questions, please reach out to your Baker Tilly state tax advisor.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.