Tax Insight

New York appellate division upholds regulation interpreting P.L. 86-272

Insight
5 minute read
May 11, 2026

What happened?

The New York Supreme Court, Appellate Division affirmed the trial court’s decision that New York’s regulation applying Public Law (P.L.) 86-272 is not preempted. Because the plaintiff trade association brought a “facial” challenge to the regulation, the court limited its review to whether the regulation “as written” revokes franchise tax immunity where P.L. 86-272 requires it or obstructs Congress’s purposes in enacting the federal law. The court stated that “whether the Department can, in practice, administer the regulation in accord with Public Law 86-272's in-state activity requirement...will need to be assessed on a factual record, not the text of the regulation itself.”

[American Catalog Mailers Ass'n v. Dep't of Tax’n and Fin., N.Y. App. Div. (3d Dep’t), No. CV-25-0865, 5/7/2026]

Why is it relevant?

The decision represents a setback in efforts to obtain judicial guidance on an expansive interpretation of P.L. 86-272 and its application to out-of-state businesses’ internet activities. This interpretation, first adopted by the Multistate Tax Commission (MTC) in 2021 and since adopted by California, Massachusetts, and New Jersey as well as New York, has the potential to recast many common internet-enabled customer interactions as constituting “in-state” business activities and nullifying P.L. 86-272's protections. It remains to be seen whether this decision is appealed. However, it is important to note that the Department did not appeal the trial court’s order that the regulation could not be applied retroactively, and therefore that portion of the ruling is now binding.

Actions to consider

Taxpayers engaging in sales of tangible personal property that avail themselves of P.L. 86-272's protections against the imposition of state net income taxes should monitor this litigation and actions in other states to determine the potential impact on their multistate tax liability. The application of P.L. 86-272 can impact both direct tax imposition and apportionment calculations (e.g., throwback sales).