On April 28, 2025, the New York Supreme Court for Albany County (court) held in American Catalog Mailers Associations¹ that 20 NYCRR Section 1-2.10 (hereafter, regulation), which identifies protected and unprotected internet activities under P.L. 86-272,² is not preempted by federal law but may only be applied prospectively from when issued (i.e., as of December 2023) and not retroactively to 2015.

Background

In April 2022, the New York State (NYS) Department of Taxation and Finance (Department) released updates to its Article 9-A Business Corporation Franchise Tax draft regulations identifying which activities conducted over the internet would be protected by P.L. 86-272. The Department updated the regulation in response to the US Supreme Court's ruling in Wayfair.³ The Department's interpretation on protected and nonprotected internet activities largely followed the Multistate Tax Commission (MTC) revised Statement of Information concerning practices of the MTC and supporting states under P.L. 86-272, which added a section on activities conducted over the internet. (See Tax Alert 2022-0734). The NYS draft regulations stated that they were not final and "should not be relied upon." The final regulations, which include the internet activities rules, were adopted by the Department on December 27, 2023. The final regulations applied retroactively to tax years beginning on or after January 1, 2015. (See Tax Alert 2024-0140.)

In April 2024, the plaintiffs, an industry trade association for catalog, online, direct mail and other remote-selling merchants and their suppliers filed a motion for summary judgment in the New York Supreme Court for Albany County, seeking to have the final regulation invalidated on the grounds it conflicts with federal law in violation of the Supremacy Clause of the US and NYS constitutions. The plaintiffs also asserted that the regulation rewrites and expands NYS's right to impose tax on out-of-state sellers that do not engage in business in the state, despite the limitations under P.L. 86-272. Alternatively, if the regulation was not declared invalid in whole or in part, the plaintiff sought to have the regulation declared invalid to the extent it applies to any period before the date of the regulation's publication, so as not to violate its members' due process rights.⁴

Court upholds the regulation but disallows retroactive application

The court denied the plaintiff's motion for summary judgment as to the invalidity of the regulation and granted the plaintiff's motion for summary judgment regarding the retroactive application of the regulation.

In dismissing the plaintiff's motion for summary judgment that the regulation is invalid, the court found no conflict between P.L. 86-272 and the regulation since P.L. 86-272 does not preempt NYS's implementation of the regulation. The court explained that P.L. 86-272 does not prohibit NYS from identifying and regulating which internet activities exceed the solicitation of orders. The court also determined that the regulation "does not broadly tax any and all internet sales." Rather, it identifies internet activities that create nexus and, as such, "does not subject out-of-state sellers who engage in more than solicitation within the State, to duplicative or unfair taxation." Accordingly, the court held the regulation is not preempted by P.L. 86-272, because it does not violate the Supremacy Clause of the US and NYS constitutions.

In granting the plaintiffs motion for summary judgment on the retroactive application of the regulation, the court held that the regulation can only apply when issued, i.e., as of the December 2023 publication date, finding that retroactive application of the regulation violates the due process clauses of the US and NYS constitution. In so holding, the court found the retroactive period was "excessive" and that plaintiffs were "not forewarned" of the retroactive application of the regulation. The court explained that the Department indicated the draft regulations were not final and should not be relied upon until final. Moreover, retroactive application was not specified until the final regulation. Further, plaintiffs, which thought their activities would be exempt from taxation, had no opportunity to alter their behavior in anticipation of retroactive application of the regulation.

Implications

It is not yet known if either party will appeal the court's decision. As indicated previously, the court's determination addressed the retroactive application of the internet activity rules in 20 NYCRR Section 1-2.10. Whether a court would reach a similar conclusion on retroactive application of other provisions in the Article 9-A Business Corporation Franchise Tax regulations is not conclusive.⁵ Taxpayers subject to the regulations should consider the retroactive application of other provisions under their particular facts and circumstances.

Out-of-state taxpayers also should revisit their P.L. 86-272 protection positions not only in NYS but in other states based on the court's ruling.⁶ This case may provide a "roadmap" for other states in considering whether to adopt similar P.L. 86-272 internet activity rules.

Of note, Congress is currently considering a proposal that would amend P.L. 86-272 to explicitly define "solicitation of orders" to mean "any business activity that facilitates the solicitation of orders even if that activity may also serve some independently valuable business function apart from solicitation." The above language, which was initially introduced as HR 427 the "Interstate Commerce Simplification Act of 2025," was added to the House Judiciary Committee's portion of its federal budget reconciliation bill. Taxpayers should monitor this proposed provision.