The New York Appellate Division unanimously affirmed a lower court order holding that New York’s regulation 20 NYCRR 1-2.10 – which addresses the application of P.L. 86-272 to Internet-based business activities – is not preempted by the federal statute. The American Catalog Mailers Association, a trade group representing merchants who sell goods through catalogs, telephone, and the Internet, challenged the regulation on its face, arguing that the regulation impermissibly severs the protection of P.L. 86-272 from geography and exposes out-of-state businesses to franchise tax liability regardless of whether their activities occur in New York. The court rejected the challenge, since the regulation, read as a whole, expressly and repeatedly limits its scope to a corporation’s activities “in New York State.”
The regulation includes detailed examples addressing when Internet-based activities (such as posting static FAQs, providing post-sale customer support via chat, or placing cookies on customers’ devices) qualify as solicitation, activities ancillary to solicitation, or de minimis. For example, cookies entirely ancillary to solicitation, such as those placed for remembering items in a shopping cart during a current web session, will not eliminate the protections of P.L. 86-272. But cookies placed for reasons not entirely ancillary to solicitation, such as tracking customer search information, along with other examples of non-solicitation Internet activity, will subject an out-of-state business to franchise tax liability.
The court noted more than once that it addressed the regulation as written, and that concerns whether New York can administer the regulation in accord with P.L. 86-272’s in-state activity requirement would need to be assessed on a factual record with respect to activities of a particular business.