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New York's updated P.L. 86-272 regulation is challenged

Background

In 1959, a federal statute commonly referred to as Public Law 86-272 (P.L. 86-272) was enacted to limit a state’s power to impose a net income tax on an interstate business in specific situations. P.L. 86-272 generally provides that a state cannot assess a net income tax if an out-of-state company’s only business activity carried on within the state is limited to the solicitation of orders for sales of tangible personal property, which are approved and fulfilled by shipment/delivery from a point outside of the state.

Although P.L. 86-272 has remained unchanged since its enactment, the application of the law continues to evolve on a state-by-state basis as companies continue to advance the way they do business. For example, many businesses have grown by utilizing the internet (e.g. via a website or app) to reach and interact with new and existing customers throughout the country.

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.

New York regulations contested:

The New York Department of Taxation and Finance (the Department) adopted revised regulations on P.L. 86-272 in December 2023 (see 20 N.Y.C.R.R § 1-2.10) (Revised Regulations). The Revised Regulations state that “in order to be exempt by virtue of P.L. 86-272, the activities in New York State of employees or representatives, or activities engaged in via the Internet, must be limited to the solicitation of orders for the sale of tangible personal property” (emphasis added). The Revised Regulations further provide multiple examples of unprotected activities conducted via the internet (e.g. providing internet chat assistance to customers).

American Catalog Mailers Association (ACMA) filed a complaint on April 5, 2024, with the New York Supreme Court of Albany County requesting that the Revised Regulations be deemed invalid. The complaint states, in part, the Revised Regulations “effectively erase longstanding federal protections against overreach by state tax agencies, such as the Department,” and that “only Congress, not the Department, has the power to amend or repeal this federal statute.” ACMA argues that the Revised Regulations directly conflict with and effectively rewrite P.L. 86-272 through its guidance on internet activities and therefore, are invalid.

ACMA is a Washington-based not-for-profit organization created to advocate for its merchant members that sell merchandise through catalogs, by telephone and/or over the internet. ACMA argued that its members “have relied in good faith on the plain text of P.L. 86-272, not to mention decades of settled law and practice, could suddenly find themselves at risk of audits by the Department stretching back nearly a decade, and ultimately imposing taxes, penalties and interest.”

ACMA also argued against the Department’s position that the Revised Regulations are retroactive to Jan. 1, 2015, citing that the MTC’s guidance that the Revised Regulations stem from wasn’t published until 2021.

What’s next?

Additional states, including New Jersey and California, have issued guidance related to the application of P.L. 86-272 in the context of internet activities as driven off the MTC statement.

However, ACMA also filed a suit and contested California’s P.L. 86-272 guidance related to internet activities. In turn, a California superior court recently deemed California’s guidance invalid on procedural grounds as it was not enacted in accordance with California’s APA procedures.

The Revised Regulations were adopted through formal regulatory processes, so it is less likely that procedural issues would arise. As such, the New York decision has the potential to issue a ruling that provides a more substantive analysis of whether the updated P.L. 86-272 guidance issued by New York is valid.

That said, it could take years for the New York case to be settled. In the meantime, taxpayers who have historically claimed P.L 86-272 protection should evaluate their operations to confirm their position is still valid considering the new guidance.

If you have any questions, please reach out to your state tax advisor.

* The MTC is an intergovernmental state tax agency whose mission is to promote uniform and consistent tax policy and administration among the states. The MTC's guidance, including policy statements, are influential, but not necessarily indicative of any state's laws or regulations.

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. Baker Tilly US, LLP does not practice law, nor does it give legal advice, and makes no representations regarding questions of legal interpretation.

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