Paul Williams (Law360): NY Internet Activity Rule Not Barred By Fed. Law, Panel Says

A New York rule that outlines when out-of-state businesses’ online activities exceed federal protections against state income taxes isn’t preempted by federal law, a state appeals court ruled Thursday, saying the federal statute’s goal of shielding certain interstate businesses from tax isn’t impeded by the regulation.

The ACMA asked the court to invalidate portions of the rule that say out-of-state businesses lose P.L. 86-272 protections when they engage in online activities with New York customers that go beyond solicitation. Those include offering post-sale assistance to customers through email or electronic chat and placing certain cookies on a customer’s device.

But the panel said the rule didn’t single out internet activities but instead considered them in the context of all of a company’s activities in New York when determining whether businesses can claim P.L. 86-272 protections.

Hayes Holderness, a tax professor at University of Richmond School of Law, said the ruling was “well-grounded,” in part because Congress hasn’t expressly said states can’t interpret P.L. 86-272 for internet activity.

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Darien Shanske, a tax professor at the University of California Davis School of Law, …who supported the MTC’s project to update its P.L. 86-272 interpretation, said in seeking a ruling against New York’s rule on preemption grounds, the ACMA was “asking for a finding of sweeping unconstitutionality as to these regulations that are on their face reasonable.”

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Andrew Appleby, a professor at University of Tennessee Winston College of Law, said the ruling wasn’t surprising because courts tend to shy away from finding that federal laws preempt state taxing powers unless the federal statute is specific about the actions that are preempted.

Additional Coverage:

Perry Cooper (Bloomberg Law): NY Income Tax Expansion to Online Activity Survives Legal Attack

Federal law doesn’t preempt New York’s additional income tax obligations on out-of-state online retailers, a state appeals court ruled Thursday.

The American Catalog Mailers Association asked the New York Supreme Court, Appellate Division, Third Department, to overturn a 2025 trial court ruling upholding the state’s regulation expanding the reach of its income tax. The group argued that the rule runs afoul of Public Law 86-272, a federal law that prohibits states from imposing income taxes on out-of-state businesses that only solicit sales of tangible personal property in the state.