USA – NEW YORK Trends and Developments Contributed by: Eugene J. Gibilaro and Joshua M. Sivin, Blank Rome LLP
New York’s regulations on internet activities In the latest round of efforts to narrow P.L. 86-272, New York State’s December 2023 regulations attempt to limit the federal protection for New York State pur - poses back to 1 January 2015 (the date of New York’s statutory corporation tax reform) when companies use modern technology to interact with customers. The New York State Department of Taxation and Finance has adopted regulations that identify certain online activities as exceeding the P.L. 86-272 safe harbour. See 20 NYCRR 1-2.10. Under New York’s approach, the following activities may cause a business to lose P.L. 86-272 protection: • offering customer support through “chat” features on a corporation’s website; • accepting credit card applications online; • allowing New York residents to apply for non-sales jobs via its website; • using internet “cookies” to collect customer infor - mation via its website; • remotely fixing or upgrading products previously sold to customers located in the state; • selling extended warranties online; • working with an online marketplace; and • selling tangible personal property online while also contracting with customers to stream videos or music to electronic devices for a fee. These regulations largely follow guidance from the Multistate Tax Commission, which some other states There are serious questions about whether the cur - rent positions of New York and some other states are consistent with the federal law. P.L. 86-272 protects “solicitation of orders,” and courts have interpreted this protection to include activities that are ancillary to solicitation, as well as de minimis (very small) activi - ties. New York and other states are now taking the position that basic internet-based activities, such as providing a mobile app or using “cookies” to track customer information, go beyond what is protected. From a taxpayer’s perspective, these rules seem overly aggressive. Having a mobile app that allows have also adopted in various forms. Concerns about regulatory overreach
tions under the reformed Business Corporation Tax. The City has indicated that its BCT regulations are expected to be “substantially similar” to the State’s, but some differences will exist to reflect the City tax’s distinct features. Until these regulations are finalised, there is uncertainty about how the City will interpret its rules. Taxpayers should keep an eye on the City’s rule - making process and be ready to adjust as additional guidance becomes available. Taxpayers should also keep in mind that the lack of guidance at the City level may present opportunities to resolve matters favour - ably during audit when disputes arise over issues for which the City has no official position. P.L. 86-272: The Erosion of a Safe Harbour Before apportionment and entity-level differences, businesses must first consider threshold nexus ques - tions, that is, whether they are subject to New York tax in the first place. For decades, many out-of-state businesses have relied on a federal law known as P.L. 86-272 to limit their state income tax exposure. That protection is now under significant threat both nation - ally and in New York in particular. Background on P.L. 86-272 P.L. 86-272 is a federal law enacted in 1959 that pro - tects a seller of tangible personal property from a state’s net income tax. This protection applies if the seller’s in-state activities are limited to solicitation of orders as long as the orders are sent outside the state for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the state. When these conditions are met, the business is protected from state income tax even though it has employees soliciting customers within the state. See 15 U.S.C. § 381. For more than 60 years, P.L. 86-272 has been a reli - able safe harbour for companies with limited physi - cal presence in a state. A manufacturer or distributor could send sales representatives into a state to meet with customers, take orders, and develop relation - ships without triggering income tax nexus, so long as the company’s activities did not exceed the statutory protection.
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