Alert
Adjust Online Business Practices in Light of New York Internet Activities Rule Rulings
A recent ruling by a New York supreme court—New York’s trial level court—regarding the state's Internet Activities Rule marks a significant development in the interpretation of Public Law 86-272.
Adopted in 1959, PL 86-272 is a federal preemption of state income taxation; a law prohibiting any state from applying its income taxing power to any business whose activities in the state are limited to the solicitation of sales for tangible personal property.
The NY court ruled in favor of the New York Department of Taxation & Finance and upheld the Department’s new interpretation of the Federal law. At the same time, the court struck down New York’s attempt to apply the rule retroactively to 2015 and held it could only be applied to activities engaged in on or after December 27, 2023, the publication date of the final rule.
Who’s Affected by the Ruling
Any business that sells products online and interacts with customers in New York could be significantly affected by this ruling.
Key groups include:
- Businesses engaged in internet commerce. Companies operating online and selling tangible personal property (TPP), particularly those based outside of New York but selling to New York customers, may need to review their activities toward customers in New York to understand the tax compliance implications of the recently upheld agency interpretation.
- Industry associations. Organizations advocating for businesses in the e-commerce space will be impacted as they work to represent their members' interests in light of the ruling
Background on PL 86-272
Over the decades, PL 86-272 has sparked significant debate regarding the scope of its protections, particularly as internet commerce has grown exponentially in the last 20 years.
In the past several years, some states began adopting a more aggressive interpretation of their power to tax remote businesses engaging in internet commerce. In 2021, the Multistate Tax Commission (MTC) adopted a model interpretive rule regarding PL 86-272, which laid some of the groundwork for states to clarify their tax policies in the context of online activity by out-of-state sellers.
Following this, New York adopted its own Internet Activities Rule in December 2023 as part of a broader corporate regulatory rewrite, drawing from the MTC's model rule and providing specific examples to delineate protected and unprotected internet activities under PL 86-272.
The New York rule aims to address the complexities introduced by modern internet business practices, outlining activities that could disqualify companies from the protections of PL 86-272, such as using the internet (through chat or email functionality) to provide post-sale customer support, updating firmware or software through the internet, soliciting for employment applications or branded credit card applications through the internet, or using internet cookies for purposes beyond solicitation.
The plaintiff, the American Catalog Mailers Association (ACMA), argued that the New York rule violated a number of US Constitutional provisions by contradicting and attempting to override the protections of federal law embodied in PL 86-272.
The court found that PL 86-272 didn’t preclude the state’s interpretation and that the activities described in the rule went beyond the activities protected by PL 86-272.
The court did rule in the ACMA’s favor on the issue of retroactivity. New York had asserted that its rule would be retroactive to the adoption of the state’s new corporate tax regime in 2015. The court found this retroactive application was unfair and violates taxpayers’ Due Process rights. The court struck down the retroactive application to 2015 and held that the rule was only valid from its publication in December of 2023.
Examples Cited by the Court
Among the examples cited by the court, the New York rule deems these activities aren’t protected under this PL86-272:
- Chat or email. An out-of-state business “regularly advises customers on how to use products after the products have been delivered.”
- Cookies. An out-of-state business uses cookies to “gather customer search information that will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale.”
- Automatic updates. An out-of-state business uses the internet to automatically update firmware or software at customer-sited equipment or other tangible property
- Hiring. An out-of-state business uses the internet to solicit employment applications for positions unrelated to sales solicitation
- Other non-tangible property solicitations. An out-of-state business solicits applications for a company-branded credit card or other services
This regulatory shift reflects the evolving landscape of commerce and taxation in the digital age.
Timing Considerations
The New York Internet Activities Rule will apply only to activities engaged in after December 27, 2023, the publication date of the final rule, meaning businesses should be able to rely on the prior interpretation of PL 86-272 for actions taken prior to this date.
Companies should begin analyzing their internet activities and compliance strategies immediately, as the rule will affect their tax obligations starting on or after December 27, 2023.
Additionally, with the likelihood of an appeal and ongoing federal legislative developments regarding PL 86-272, businesses must stay informed about potential changes that could impact compliance requirements.
Next Steps
Businesses should assess their internet activities to ensure compliance with the New York Internet Activities Rule and consult legal or tax advisors for guidance. They should also monitor any developments related to appeals or federal legislation that may affect their tax obligations.
We’re Here to Help
For more information about how the interpretation of PL 86-272 affects your business, contact your Moss Adams professional.