A New York court recently ruled that Public Law (P.L.) 86-272, which provides limited protections against state income taxes, does not bar state taxation of non-solicitation business activities over the internet.1 The court also ruled that the law cannot be applied retroactively to its 2015 proposal date.
Background on P.L. 86-272
In 1959, the U.S. Congress passed P.L. 86-272 to restrict a state's authority to levy a net income tax on interstate businesses engaged solely in soliciting orders for the sale of tangible personal property from within a state. While the law has remained unchanged since its inception, its application has evolved to accommodate the changing business environment that increasingly relies on web-based methods for customer outreach.
In 2021, the Multistate Tax Commission (MTC) released an updated policy statement on the protections P.L. 86-272 offers to internet-based activities. States then began issuing their own guidelines, often incorporating elements of the 2021 MTC statement.
The Controversy
New York Rule Changes
In 2015, the New York State Department of Taxation and Finance introduced draft apportionment regulations with broad implications. On December 27, 2023, the Department finalized those rules with retroactive application to the 2015 proposal date.
For New York purposes, P.L. 86-272, as outlined in 20 N.Y. CRR Sec. 1-2.10(f), notes that “solicitation activities do not include those activities that the corporation would have reason to engage in apart from the solicitation of orders, but chooses to allocate to its New York State sales force, or to engage in via the Internet, including interacting with customers or potential customers through the corporation's website or computer application.”
According to the new regulations, a business can qualify for P.L. 86-272 protection only if the activities carried out by its employees or representatives in New York State or conducted via the internet are limited to soliciting orders for the sale of tangible personal property. The revised regulations provide several examples of internet-based activities that would not qualify for protection, such as a company offering online chat assistance to customers who have received their products.
Under the revised regs, taxpayers whose activities pierce the protection are not exempt from state income taxes. Examples of piercing activities provided by the regulations include the opportunity to apply online for a non-sales position and the placement of specific internet “cookies” on a company website.
The Challenge to the New Rules
On April 5, 2024, the American Catalog Mailers Association (ACMA), a Washington-based nonprofit trade association that advocates for its merchant members that sell products via catalog, telephone, and internet, sued to have the revised regulations deemed invalid. It argued that the new regulations “effectively erase longstanding federal protections against overreach by state taxing agencies” and that only the U.S. Congress, not the states, has the power to amend or repeal P.L. 86-272.
The ACMA further alleged that the revised regulations are invalid because they directly conflict with and essentially rewrite P.L. 86-272 guidance on internet activities.
Lastly, the ACMA took issue with the Department’s position that the new regulations are retroactive to January 1, 2015, noting that the MTC updated policy statement from which the regulations were derived was not released until 2021.
Validity of the Revised Regulations
Determining that the revised regulations followed the MTC’s guidance for when internet activity goes beyond mere solicitation, the court ruled that P.L. 86-272 did not preempt New York from adopting the changes. It said the regulations do not broadly tax any and all internet sales but rather identify, for tax purposes, “those internet activities that establish a substantial nexus between an out-of-state seller and New York.” Further, the court noted that any internet activity considered ancillary to solicitation remains exempt.
Retroactivity of the Revised Regulations
The court agreed with the AMCA that the rule’s nine-year length of retroactivity was excessive and that the state failed to provide a substantial reason for such retroactivity.
In siding with the ACMA, the court declared that the revised regulations, as applied to any period before their December 2023 publication date, would violate a plaintiff’s due process of law. It found significant that the merchant members of the ACMA were not forewarned of the rules’ retroactive application, which exposed them to New York income tax liabilities for periods previously protected under the rules.
BDO Insights
- The ACMA decision could have broader implications. For instance, on April 30, the U.S. House Judiciary Committee proposed the first amendment to P.L. 86-272 since its inception. The proposal would define the term “solicitation of orders” as any business activity that facilitates the solicitation of orders, even if that activity may also serve some independently valuable business function apart from solicitation.
- Taxpayers should ask their advisers which activities may be deemed protected by or to pierce P.L. 86-272.
- The Department has 30 days to appeal the retroactivity decision. At the time of publication of this Alert, the Department had not made any public statements regarding whether it will seek appeal.
Please visit BDO’s State & Local Tax Services page for more information on how BDO can help.
References
1 Am. Catalog Mailers Ass’n. v. Dep’t Tax. & Fin., 2025 NY Slip Op 31588(U) (N.Y. Sup. Ct., Albany County 2025).