NY draft to address Internet activities and P.L. 86272: PwC

In brief

New York’s Department of Taxation and Finance amended its draft corporate tax regulations that would provide for revised Public Law 86-272 guidance, modeled after the Multistate Tax Commission (MTC) model statute, which addresses activities conducted via the Internet. The Department is accepting public comments on these proposed amendments until June 30, 2022.

The takeaway: This development is one part of an overall process to draft new corporate income tax regulations, which taxpayers should consider before the formal adoption commences. The revised P.L. 86-272 proposals come on the heels of nearly identical guidance issued by California’s Franchise Tax Board in the form of a Technical Advice Memorandum. Companies that historically have relied on P.L. 86-272 protection in New York should analyze their operations to evaluate whether their immunity would remain intact.

A draft regulation is not precedent, and the web site states that the draft should not be relied upon. New York aims to formally propose this draft regulation later in 2022.

In addition to the revised P.L.86-272 provisions, new amendments to the draft regulation, include amendments to examples related to NOLs and unabsorbed NOLs, short-period returns, and the MTA surcharge.

In detail

Revised MTC Policy

On August 4, 2021, the MTC adopted a revised policy statement addressing activities conducted via the Internet. The MTC stated that “as a general rule, when a business interacts with a customer via the business's website or app, the business engages in a business activity within the customer’s state.” However, the MTC recognized that “when a business presents static text or photos on its website, that presentation does not in itself constitute a business activity within those states where the business’s customers are located.”

The MTC cited the US Supreme Court’s finding in South Dakota v. Wayfair, Inc. that an Internet seller “may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.” While the Court was not interpreting P.L. 86-272, the MTC considers the Court’s analysis 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 the statute.”

New York draft regulation

The draft regulation amends its overall statement regarding P.L. 86-272 protection. Thus, in order to be exempt by virtue of P.L. 86-272, the activities in New York State of employees or representatives, or activities engaged in via the Internet must be limited to the solicitation of orders for the sale of tangible personal property. For example, P.L. 86-272 protection remains where (1) the solicitation of orders via the Internet are in New York State for sales of tangible personal property (2) the orders are sent outside New York State for approval or rejection, and if approved, are (3) filled by shipment or delivery from a point outside New York State. The examples in the draft regulation largely mirror those adopted in California by the Franchise Tax Board. View our insight. Below is an overview of the examples contained in the draft regulation.

Examples of disqualifying activities

Electronic post - sale assistance: A company regularly provides post-sale assistance to customers via either electronic chat or email that customers initiate by clicking on an icon on the business's website. For example, the corporation regularly advises customers on how to use products after they have been delivered. The draft regulation provides that the company would lose its P.L. 86-272 protection because this activity does not constitute, and is not entirely ancillary to, the solicitation of orders for sales of tangible personal property.

Soliciting branded credit cards: A company solicits and receives on-line applications for its branded credit card on its website. The issued cards will generate interest income and fees for the corporation. The corporation would lose its P.L. 86-272 protection because the activity does not constitute and is not ancillary to solicitation of orders for sales of tangible personal property.

Website accessed by NY viewers: A company has a website that invites New York viewers to apply for non-sales positions. The website enables viewers to fill out and submit an electronic application, and also to upload a cover letter and resume. Under the draft regulation, the company would lose P.L. 86-272 protection because the activity does not constitute and is not ancillary to solicitation of orders for sales of tangible personal property.

“Cookies”: A company places Internet cookies onto the computers or other electronic devices of its customers. These cookies gather customer search information used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale. Under the draft regulation, the company would lose P.L. 86-272 protection because the activity does not constitute and is not ancillary to solicitation of orders for sales of tangible personal property.

Remote fixes, upgrades: A corporation remotely fixes or upgrades products previously purchased by its customers by transmitting code or other electronic instructions to those products via the Internet. Under the draft regulation, the corporation would lose its P.L. 86-272 protection because this activity does not constitute and is not ancillary to solicitation of orders for sales of tangible personal property.

Warranties: A corporation offers and sells extended warranty plans via its website to New York customers who purchase the business' products. The corporation would lose its P.L. 86-272 protection because this activity involves selling, or offering to sell, a service that is not entirely ancillary to the solicitation of orders for sales of tangible personal property.

Marketplace providers: A corporation contracts with a marketplace provider that facilitates the sale of the company’s products on the provider's on-line marketplace. The provider maintains inventory, including some of the corporation’s products, at fulfillment centers in New York. The corporation would lose its P.L. 86-272 protection because this activity involves the maintenance of the corporation’s products in the state.

Streaming videos and music: A corporation that sells tangible personal property via the Internet also contracts with New York customers to stream videos and music to electronic devices for a fee. Under the draft regulation, the company would lose its P.L. 86-272 protection because this activity involves streaming, which does not constitute the sale of tangible personal property.

Examples of non-disqualifying activities

Website FAQs: A foreign corporation solicits sales of tangible personal property on its website and provides assistance to customers by posting a list of static FAQs and answers. This activity is deemed de minimis.

“Cookies”: A company places Internet cookies onto the computers or other electronic devices of its customers. These cookies gather customer information that is used only for purposes entirely ancillary to the solicitation of orders for tangible personal property, such as:

to remember items that customers have placed in their shopping cart during a current web session,
to store personal information that customers have provided to avoid the need for the customers to re-input the information when they return to the seller's website,
and to remind customers what products they have considered during previous sessions.

The cookies perform no other function, and these are the only types of cookies delivered by the corporation to its customers' computers or other devices. Under this scenario, the corporation would not lose P.L 86-272 protection because the activity is entirely ancillary to the in-state solicitation of orders for sales of tangible personal property.

Maintaining a website: A corporation offers for sale only items of tangible personal property on its website. The website enables customers to search for items, read product descriptions, select items for purchase, choose among delivery options, and pay for items. The corporation does not engage in any other in-state business activities.

Under this example, the corporation would not lose its P.L. 86-272 protection because it engages exclusively in activities in New York State that either constitute solicitation of orders for sales of tangible personal property or are entirely ancillary to solicitation.