New York’s New Regulations on P.L. 86-272: Could Your Website Expose You to New York State Tax

On December 27, 2023, New York State’s draft regulations implementing corporate tax reform measures, introduced by 2014 legislation amending New York State’s Article 9-A corporate franchise tax, became final. The new regulations are retroactive to January 1, 2015, and include massive changes to the way virtual activities within New York affect a corporation’s ability to claim protection from New York State corporate income taxes under Public Law 86-272.

P.L. 86-272 is a 1962 federal law that protects  corporations involved in interstate commerce from taxation in a state where their only activities are the solicitation of sales for tangible personal property, provided that orders are sent outside the state for approval and fulfilment. Other de minimis activities in connection with such solicitations will generally not expose a company to taxation in a state. New York has long adopted this protection in 20 NYCRR 1-3.4(b)(9T), (Repealed December 27, 2023).

In 2022, The Multistate Tax Commission revised its Statement of Information on P.L. 86-272 in light of the Supreme Court’s decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), which removed the physical presence requirement for a corporation to have nexus in a state. Though that decision involved a sales tax case, the Multistate Tax Commission applied this broader principle to P.L. 86-272, considering virtual activities that may expose a company to state income and franchise tax liability regardless of whether they are physically present in the taxing state.

New York has now adopted a similar position under 20 NYCRR 1-2.10. Under these new regulations, maintaining a website that is accessible in New York may expose an out of state corporation to New York state [corporate income and franchise] tax if certain virtual activities take place that  are considered more than mere solicitation of sales.

For example, a potential issue arises if after-sale customer assistance is offered through either email or a website chat function. While a website’s static FAQ page is permissible under the new regulation, interactive online customer assistance is expressly outside the protections of P.L. 86-272.

Another new consideration involves the treatment of “cookies” gathered by a website. While specific  categories of cookies are considered ancillary to the solicitation of sales, namely those that  store customer information or that identify items that are placed in a shopping cart or viewed in a previous browsing session, little guidance is given as to many other categories of cookies. The types of cookies left in limbo under the new regulation include some essential cookies used by virtually all websites, including load-balancing cookies that connect information between user and host web-servers. The list also includes non-essential cookies like analytics and customization cookies that allow the website owner to better understand site traffic, advertising cookies that customize a user’s ad experiences, and social networking platform tracking cookies. Some of these categories are typically third-party cookies that are placed on a website by parties other than the website’s owner. New York’s regulation fails to address whether such third-party placement would be treated differently than first-party cookies placed directly by the website’s owner in determining that owner’s protection under P.L. 86-272.

Given the recency of this new regulatory framework, there is little guidance as to how the regulations will apply in individual factual circumstances. In the coming months and years, nuances will emerge as taxpayers apply the regulations, and New York begins to challenge such application in the audit process. However, it is apparent that a corporation  maintaining a website that relies on P.L. 86-272 protection in New York should conduct a robust review of its website set up to ensure it does not inadvertently expose the corporation to taxation in New York under this new regulatory framework.