On April 29, 2022, the New York State Department of Taxation and Finance (the “Department”) released what it calls a “final update” to its Proposed Franchise Tax Rules. undertaking on all matters except for distribution, which he indicated. will be published in the summer of 2022. The Department anticipates that it will begin the State Administrative Procedure Act process in the fall of 2022 to formally propose and adopt these draft regulations and requests that comments be provided d by June 30, 2022. Once finalized, these regulations will provide welcome guidance on the Business Franchise Tax Reform Act which came into effect over seven years ago on January 1, 2015.
Of these proposed revised regulations, the most likely to have far-reaching implications are provisions that now address Public Law 86-272 (“PL 86-272”) protection for activities conducted via the Internet. In general, PL 86-272 provides businesses with immunity from state income tax when their activities in a state are limited to soliciting sales of tangible personal property. The updated draft regulations, which the ministry says are “largely modeled on the [Multistate Tax Commission] Model Law,” determining whether certain business activities conducted over the Internet go beyond soliciting sales of tangible personal property and are therefore no longer protected from state income tax by PL 86-272.
Under the updated draft regulations, while the presentation of “static text or images” does not remove PL 86‑272 protection, activities such as replacing damaged products or providing technical advice on the use products will be deemed to go beyond mere solicitation and remove PL 86 -272 protections. The proposed rule provides several examples illustrating Internet activities that are eligible and ineligible for PL 86-272 protection. Qualifying activities include providing a static list of frequently asked questions (FAQs) on a website, placing cookies on customers’ computers so long as those cookies are used for purposes entirely incidental to soliciting sales (such as storing items in a shopping cart), and maintaining a website that allows customers to purchase, select a delivery method and pay for tangible personal property offered for sale.
Activities that would not qualify for PL 86-272 include: providing an electronic chat service that advises customers on the use of purchased products; solicit and receive branded credit card applications; placing cookies on customers’ computers that will be used for purposes incidental to the solicitation of sales (such as developing new products or identifying new items to offer for sale); offer extended warranty plans for sale; allow customers to apply for non-commercial positions within the company through the website; provide remote upgrades and repairs; and contracting with clients in New York to stream videos and music.
Due to the extensive nature of Internet activity that can cause a business to lose PL 86-272 protection under the proposed regulations, a business seeking to maintain its protected status may want to carefully tailor its website to reduce any potentially problematic activity. if the regulations are adopted in their current form. However, at this time, the Department’s website reminds taxpayers that the proposed regulations are not final and cannot be relied upon.