New York Supreme Court Narrows Public Law 86-272 Shield for Online Sellers

(NEW YORK, NY) — The New York Supreme Court, Albany County, upheld New York’s internet activities regulations on April 28, 2025, ruling that the state can treat some online conduct by out-of-state sellers as activity beyond protected solicitation under Public Law 86-272.

In American Catalog Mailers Association v. Department of Taxation and Finance, the court granted the Department’s cross-motion for summary judgment and held that the rules under 20 NYCRR § 1-2.10(f) are not preempted by Public Law 86-272 and do not violate the Supremacy Clause.

The regulations identify online conduct that New York says exceeds “mere solicitation” of sales of tangible personal property, which strips an out-of-state seller of the federal statute’s shield against New York corporation franchise tax. The examples include web-based chat support, placing targeted cookies on users’ devices, and processing online credit card applications.

That ruling did not give the state everything it sought. The court blocked retroactive application of the regulations to tax years before their December 2023 publication date, finding that retroactive enforcement would violate due process.

The case sits at the center of a tax fight that has spread well beyond catalog sales. Public Law 86-272, enacted long before modern e-commerce, limits a state’s power to impose a net income tax on an out-of-state business when the company’s in-state activity amounts only to soliciting orders for tangible personal property, with orders approved and shipped from outside the state.

New York’s internet activities regulations apply that old federal rule to current online business practices. Instead of treating every website feature as protected solicitation, the state drew lines between activity tied to asking for an order and activity it views as carrying on business in a broader sense.

That distinction became the central issue in the Albany County case. The state argued that some interactive website functions do more than ask a customer to buy something, and the court agreed that the regulations validly identify examples of online conduct that fall outside the federal protection.

At the same time, the ruling did not erase the protected category altogether. Ancillary solicitation activities remain exempt, leaving room for businesses to argue that a given feature on a website supports solicitation rather than operating as independent business activity.

American Catalog Mailers Association, which represents catalog and internet merchants, appealed to the New York Supreme Court, Appellate Division, Third Department. That court affirmed the trial court’s decision on the merits in a ruling issued Thursday before May 11, 2026.

The affirmance strengthens New York’s position, but it does not close the litigation path. Further appeals to the New York Court of Appeals remain possible, and the case leaves open several kinds of disputes that online sellers can still bring.

One opening lies in the line between losing protection under Public Law 86-272 and having the constitutional connection, or nexus, needed for a state to tax a business at all. The New York rulings do not say that a website feature that pierces the federal protection automatically creates substantial nexus for income tax purposes.

That matters because the legal tests are separate. A business can lose the shelter of Public Law 86-272 if its internet activity goes beyond solicitation, yet still argue that the activity does not create substantial nexus under South Dakota v. Wayfair, Inc., 585 U.S. 138.

Out-of-state sellers that lack nexus remain beyond New York’s taxing reach, even if the federal solicitation protection no longer applies. That leaves room for fact-specific challenges over whether a particular online tool, standing alone or combined with others, creates the required connection to the state.

Web-based chat support is one example likely to draw that kind of scrutiny. New York’s regulations treat some chat functions, especially where they support customers beyond the act of solicitation itself, as activity outside the federal safe harbor, but a seller can still contest whether that same feature establishes nexus under the Constitution.

Targeted cookies raise a similar issue. The regulations list placing targeted cookies on users’ devices as conduct that can pierce protection, yet the constitutional question remains separate and could turn on how those cookies function and how closely they tie the seller to activity in New York.

Processing online credit card applications also falls into that contested space. New York treats that function as something more than asking for an order for tangible personal property, but sellers may still press the narrower point that not every internet function outside Public Law 86-272 amounts to taxable presence under nexus doctrine.

The Albany County ruling also preserves another lane for litigation, retroactivity. Because the court invalidated enforcement for tax years before December 2023, companies facing assessments tied to earlier periods may pursue refund claims or other retroactivity challenges.

That part of the decision turned on due process, not on the validity of the regulations themselves. New York could apply the rules prospectively after publication, the court held, but it could not reach backward to years before the rules were published and attach tax consequences to conduct that businesses had not yet been told would trigger the state’s interpretation.

The case may ripple beyond New York because other states have adopted or considered Multistate Tax Commission guidance on Public Law 86-272 after Wayfair. A favorable ruling for tax authorities in one state can encourage similar enforcement elsewhere, while the retroactivity ruling offers sellers a framework for challenging older assessments.

That interstate effect is likely to sharpen attention on the wording of each state’s rules. New York acted through formal regulations, a point that can matter in court, and the dispute contrasts with a California case that lacked formal regulations.

None of this changes New York’s separate sales tax rules for remote sellers. Businesses that exceed the state’s sales tax economic nexus threshold of $500,000 in gross revenue and 100 transactions annually must collect and remit sales tax under post-Wayfair rules.

Marketplace facilitators such as Amazon, eBay, and Etsy handle sales tax for third-party sellers that meet those thresholds. The income tax ruling on the internet activities regulations does not alter those collection duties.

That split between income tax and sales tax will likely remain a source of confusion for online retailers. A company can face one set of questions about whether website functions pierce Public Law 86-272 for corporation franchise tax and another about whether its revenue and transaction volume trigger economic nexus for sales tax.

Businesses reviewing their exposure now will have to examine website interactivity closely against the examples in 20 NYCRR § 1-2.10(f). Chat tools, cookies, online applications, job postings, and post-sale customer functions can carry different consequences depending on how they operate and which tax type is at issue.

The state’s rules do not treat every internet feature as disqualifying. Activities that remain ancillary to solicitation stay exempt, preserving a narrower safe harbor for sellers whose websites do little more than invite orders and support that solicitation function.

That makes classification disputes likely. Sellers can still litigate whether a specific feature on their site belongs on the solicitation side of the line or whether it reflects separate business conduct that removes federal protection.

The Appellate Division’s affirmance gives New York stronger footing as it defends those regulations, but the court decisions still leave a layered map of future fights: whether a site feature is truly outside “mere solicitation,” whether the state can apply its interpretation to earlier years, whether the seller has nexus under Wayfair, and whether similar rules elsewhere survive review.

For online merchants, the practical pressure now falls on the details of the website itself. A chat box, a cookie, or an application form may look routine to customers, but in New York’s tax system those tools can determine whether a remote seller stays inside Public Law 86-272 or steps into a courtroom.