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The New York Department of Taxation and Finance (NY DOTF) recently released updates to Parts 1 through 3 of the Article 9-A Business Corporation Franchise Tax draft regulations (draft regulations)¹ identifying which activities conducted over the internet would be protected by P.L. 86-272. P.L. 86-272 is a federal law that prohibits states from imposing state income tax on out-of-state sellers whose in-state activities do not exceed soliciting orders of tangible personal property.

The NY DOTF's positions on protected and nonprotected internet activities largely follow those expressed in the recently revised Statement of Information concerning practices of the MTC and supporting states under P.L. 86-272 (Statement) issued by the Multistate Tax Commission (MTC).

Comments on the draft regulations are due by June 30, 2022. The NY DOTF said that this is the final update for public comment and that later this year it intends to begin the State Administrative Procedure Act (SAPA) process to formally propose and adopt these regulations. It is unclear how long it will take for the draft regulations to be adopted as final.²

Background

In 2018, the US Supreme Court held in South Dakota v. Wayfair³ that a physical presence was not required under the dormant Commerce Clause for a state to require an out-of-state seller to collect sales taxes. Following this ruling, the MTC began revising the Statement, which it first issued in the 1980s and updated periodically "to address changes that have occurred during the past two decades in the economy and the way that business is conducted." Although the Wayfair Court was not interpreting P.L. 86-272, the MTC said in the Statement that states supporting the revisions "consider the Court's analysis as to virtual contacts to be relevant to the question of whether a seller is engaged in business activities in states where its customers are located for purposes of [P.L. 86-272]."

On August 4, 2021, the MTC approved the revised Statement, adding a section on activities conducted over the internet. For a detailed discussion of the Statement, see Tax Alert 2021-1608.

NY DOTF's position

Section 1-2.10 "Foreign corporations — Public Laws 86-272" of the draft regulations addresses how out-of-state sellers should apply P.L. 86-272 to business activities conducted over the internet. A corporation could be exempt from NYS taxation under the protection of P.L. 86-272 if its internet activities are limited to soliciting orders over the internet in NYS for sales of tangible personal property. These orders must be sent outside NYS for approval or rejection and be filled by shipment or delivery for a point outside NYS. The draft regulations would make clear that certain activities (see below) such as interacting with customers or potential customers through its website or computer application are not exempt under P.L. 86-272. Presenting static text or images on its website, however, would not cause a corporation to become taxable.

Under the draft regulations, the NY DOFT would view protected business activities for purposes of P.L. 86-272 to include:

• Providing assistance to customers by posting a static list of frequently asked questions on the corporation's website (Example 6)
• Placing on customers' computers or other electronic devices "cookies" that gather customer information for uses "entirely ancillary" to soliciting orders for tangible personal property (e.g., remembering items added to a customer's shopping cart during a web session, storing personal information provided by the customer, reminding customers of items they considered on prior visits to the website) (Example 11)
• Offering only tangible personal property for sale on the corporation's website, with the website allowing customers to search for items, read product descriptions, purchase items and select delivery options (assumes that the corporation does not engage in any New York business activities not described in the example) (Example 16)

Under the draft regulations, the NY DOFT would view unprotected business activities to include:

• Regularly providing post-sale assistance to customers through an electronic chat or email that customers initiate by clicking on an icon on the corporation's website (Example 7)
• Soliciting and receiving online applications for its branded credit card through the corporation's website (Example 8)
• Placing on the corporation's website an invitation for New York viewers to apply for non-sales positions within the corporation (the website enables viewers to fill out and submit an online application and submit a resume and cover letter) (Example 9)
• Placing on New York customers' computers or other electronic devices "cookies" that gather customer search information for use in adjusting production schedules and inventory amounts, developing new products or identifying new items to offer for sale (Example 10)
• Remotely fixing or upgrading New York customers' previously purchased products by transmitting code or other electronic instructions to those products over the internet (Example 12)
• Offering and selling extended warranty plans through the corporation's website to New York customers who purchase the business's products (Example 13)
• Contracting with a marketplace facilitator to facilitate the sale of the corporation's products on the marketplace facilitator's online marketplace, where the marketplace facilitator maintains inventory, including that of the corporation, at fulfillment centers in New York (Example 14)
• Contracting with New York customers to stream videos and music to electronic devices for a fee (Example 15)

Implications

While the draft regulations are not yet final and "should not be relied upon" (per the NY DOTF), they demonstrate how NYS will treat these activities. Out-of-state businesses conducting activities via the internet should consider evaluating their NYS activities and determine whether they may be unprotected under the draft regulations.

The draft regulations do not provide an effective date and could be applied retroactively.

In addition, the above should be considered for New York City corporation business tax purposes because NYC intends to issue rules that generally correspond to the NYS draft regulations. NYC will make its draft regulations available after NYS has finalized its new and revised regulations and indicates that it will initiate adoption under SAPA.

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ENDNOTES

¹ This Alert is limited to NYS's treatment of internet activities and PL-86-272. NYS also released "final updates" to their Parts 5-10 draft regulations, which are not discussed in this Alert. The NY DOTF also intends to release this summer, before the State Administrative Procedure Act (SAPA) process, draft regulations on apportionment, other services and other business activities, and digital products/services. Additional information on the draft regulations, as well as other draft regulations related to NYS's corporate franchise tax reform, is available on the NY DOTF proposed regulation website.

² For a discussion of the SAPA process, see D. Schmutter, K. Ryan, S. Cohen, M. Musano, "New York State Draft Regulations: Now, Next and Beyond" (State Tax Notes Nov. 9, 2020).

³ South Dakota v. Wayfair, Inc., 585 U.S. ___, 138 S. Ct. 2080 (2018).