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Comments on New York's Proposed Changes to Corporate Income Tax Nexus and P.L. 86-272


October 10, 2023

Submitted via electronic mail at:







ALBANY, NY  12227

Re: Comments on Proposed 2023 Amendments to Business Corporation Franchise Tax Regulations, Franchise Tax on Banking Corporations Regulations, and Franchise Taxes on Insurance Corporations Regulations.

On behalf of National Taxpayers Union Foundation (“NTUF”), we write with comments on the Department of Taxation and Finance’s notice and request for public comment on proposed changes to corporate income tax nexus and interaction with federal Public Law 86-272, also known as the Interstate Income Act of 1959. 


For nearly five decades, NTUF has striven to give policymakers the tools to make informed, pro-taxpayer policy choices. Our Interstate Commerce Initiative has sought to draw attention to the growing problem of states taxing and regulating outside their borders, creating burdensome and often overlapping systems that taxpayers have to figure out how to navigate.

The proposed changes to New York’s interpretation of P.L. 86-272 would, by administrative fiat and without any change in the underlying federal law, essentially remove the protections of P.L. 86-272 from any businesses employing a modern, functional online sales operation. New York should endeavor to look past the chance to claim additional revenue and consider the deleterious effects on the broader interstate economy.

New York’s Proposed Reinterpretation of P.L. 86-272 Violates the Spirit of the Law

P.L. 86-272 most importantly protects foreign businesses from facing corporate income tax nexus if their sole activity in a state is:

“the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State.”

For decades, this has been understood to apply to online sales. Yet, the proposed changes to the interpretation of P.L. 86-272 would restrict P.L. 86-272’s protections to only the most minimalist online operations. 

Improvements in technology should not be viewed as an excuse to expand tax jurisdictions. When digital activities have clear traditional counterparts, there should be no difference in these activities’ treatment for tax purposes.

Consider some examples laid out in the proposed regulation in which the hypothetical business is found not to fall under the protection of P.L. 86-272:

Example 7: A foreign corporation regularly provides assistance to its customers after its products have been delivered, either by email or electronic “chat” that customers initiate by clicking on an icon on the corporation’s website. For example, the corporation regularly advises customers on how to use products after the products have been delivered. Since this activity does not constitute, and is not entirely ancillary to, the solicitation of orders for sales of tangible personal property, the corporation is not exempt from tax under this section. 

Email and electronic “chat,” much like phone calls, are convenient alternatives to a New Yorker traveling all the way to a foreign business’s out-of-state location to ask questions. Would the latter activity expose a foreign business to New York corporate income tax nexus? No, and New York should consider an alternative approach that would be consistent with this non-digital equivalent.

Example 9: A foreign corporation’s website invites viewers in New York State to apply for non-sales positions with the corporation. The website enables viewers to fill out and submit an electronic application, as well as to upload a cover letter and résumé. Since this activity does not constitute, and is not entirely ancillary to, the solicitation of orders for sales of tangible personal property, the corporation is not exempt from tax under this section.

Less “advanced” (or convenient) alternatives include accepting emailed job applications from New Yorkers, allowing New Yorkers to mail in job applications to a foreign location, and letting New Yorkers to travel to a foreign location to hand in a job application in person. Would any of these activities expose a foreign business to New York corporate income tax nexus? No, and New York should consider an alternative approach that would not create this inconsistency.

Example 10: A foreign corporation places Internet “cookies” onto the computers or other electronic devices of is [sic] customers. These cookies gather customer search information that will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale. Since this activity does not constitute, and is not entirely ancillary to, the solicitation of orders for sales of tangible personal property, the corporation is not exempt from tax under this section. 

Example 11: The same facts as example 10 except that the 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 customers have provided to avoid the need for the customers to re-input the information when they return to the corporation’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 the computers or other devices of its customers. Since this activity is entirely ancillary to the solicitation of orders for sales of tangible personal property, the corporation, under the facts of this example, is exempt from tax under this section. 

Examples 10 and 11 concern cookies, which do not have much of a traditional counterpart. Nevertheless, they remain an integral part of any modern browsing experience.

The distinction between the use of cookies in Examples 10 and 11 assumes a separability that may not exist in reality. For example, cookies “gathering items placed in shopping carts” and “reminding what products they have considered during previous sessions” would be difficult to not use to adjust production schedules and inventory amounts. In other words, though Example 11 theoretically sets out an example of a business that still enjoys the protection of P.L. 86-272, it appears highly unlikely that this extremely restrictive definition would allow for any real-life foreign businesses to use cookies and still enjoy the protection of P.L. 86-272.

What’s more, past attempts to assert nexus on the basis of foreign businesses’ use of cookies have failed in other states. Earlier this year, the Massachusetts Supreme Judicial Court struck down an effort by the state of Massachusetts to assert sales tax nexus on an out-of-state business retroactively because of that business’s use of cookies. New York should consider an alternative approach consistent with the Massachusetts legal decision.

States Don’t Have to Stop At P.L. 86-272’s Protections

Much is also made throughout the draft proposal of P.L. 86-272’s focus on “tangible personal property,” considering the sale of anything from streaming services to software to New Yorkers as creating corporate income tax nexus for foreign corporations. While it is true that these activities fall outside the scope of a law that was drafted long before such goods and services existed, that does not mean that New York must consider them as creating New York corporate income tax nexus.

While Congress understandably did not explicitly protect digital commerce back in 1959, it has since acted to prevent states from imposing discriminatory burdens on digital commerce. The Internet Tax Freedom Act and subsequent Permanent Internet Tax Freedom Act prohibit states from imposing “multiple or discriminatory taxes on electronic commerce” — in other words, taxes on electronic commerce that are not imposed on e-commerce’s traditional counterparts.

It makes little sense that the sale of tangible goods into New York would not, on its own, create New York corporate income tax nexus while the sale of digital goods into New York would. In the interest of horizontal fairness, why is New York not exempting the latter even though P.L. 86-272 does not explicitly say that it must?

Digital products and services are not the only things that, while not covered by P.L. 86-272, New York should consider adopting a more common-sense position on. Consider Example 14:

Example 14: A foreign corporation contracts with a marketplace provider that facilitates the sale of the corporation’s products on the provider’s online marketplace. The marketplace provider maintains inventory, including some of the corporation’s products, at fulfillment centers in New York State. Since this activity involves the maintenance of the corporation’s products in New York State, the corporation is not exempt from tax under this section.

While this activity may create corporate income tax nexus for the marketplace provider, the fulfillment relationship often takes inventory entirely out of control of the foreign business contracting with the marketplace provider. California State Treasurer Fiona Ma compared the relationship between marketplace sellers and marketplace providers offering fulfillment services to that of consignors and consignees in urging California’s Franchise Tax Board not to take a similar position (concerning Amazon and sellers participating in Fulfillment By Amazon) to that which New York proposes to take.

The third-party supplier that participated in the Fulfillment by Amazon (FBA) program did not know where their products went, who or where the products went to, the amount that was ordered, or when the products were purchased. 

Though Ma’s testimony concerned sales tax nexus, the principle is the same. The business availing itself of fulfillment services often has no control or even awareness of where its inventory is being sent to, and yet New York wishes to claim that these activities create corporate income tax nexus for the third-party business as well as the fulfiller. New York may not be prohibited from doing this by P.L. 86-272, but that does not mean it should. New York should consider an alternative approach consistent with Treasurer Ma’s position, which does not impose nexus obligations on third-party suppliers on the basis of subsequent marketplace facilitator inventory activity in violation of the due process clause.

Further, New York should consider an alternative approach that enhances and builds on the taxpayer protections of P.L. 86-272, rather than narrowly limit the protections. Further, New York should add further examples of activity that would be protected by New York’s interpretation of P.L. 86-272 to reduce taxpayer confusion.

Interstate Compliance Burdens Are Cumulative

Proposed regulatory reinterpretation of P.L. 86-272 should not be considered in a vacuum. Rather, this is one more way in which states like New York are increasingly reaching across their borders to create additional compliance burdens for small retailers that use the internet to reach customers around the country.

This preexisting trend has only been exacerbated by the Supreme Court’s decision in South Dakota v. Wayfair, under which states gained the ability to assert sales tax nexus on foreign corporations lacking any physical presence within the state. This has subjected small remote businesses that previously had sales tax nexus in one or two states to essentially nationwide sales tax compliance obligations. 

And while that has been the most obvious example of expanded compliance obligations, states like New York are creating many other headaches for small businesses. Aggressive assertion of withholding obligations for remote workers, proposed digital taxation and consumer privacy regulations, “delivery fees,” and many more concerns plague or threaten small businesses with overwhelming burdens.

Efforts to whittle away at P.L. 86-272’s protections must be considered in this context. The shortsighted pursuit of additional revenue will become one more reason for businesses to avoid New York, lest they become caught up in an increasingly sticky tax web. New York should not proceed with this regulation without comprehensive analysis of the costs of benefits to both intrastate and interstate market participants, such as that laid out by the Pike v. Bruce Church case.

Should more states follow the leader, the effects on state revenues will become increasingly neutral, with various states’ aggressive pursuit of foreign businesses’ revenue canceling each other out. The only lasting effect is likely to be the punishment to small businesses increasingly pushed to sell out to larger competitors by the impossibility of managing 50-state compliance operations. 


New York’s proposed changes to its interpretation of P.L. 86-272 represent an effort to stick the final nail in the coffin of an important protection for businesses operating across state lines. The internet, which was once an opportunity for small businesses to compete with large, established competitors by reaching customers around the country, is being warped into an excuse to pile increasingly unmanageable tax obligations on small businesses around the country. 

Rather than seeking to use even the flimsiest connection to the state to assert nexus, New York should instead consider reversing course — rather than asserting nexus everywhere it is not legally prohibited from doing so, New York should seek to set itself up as a leader in crafting a tax system that fairly and reasonably connects tax nexus to substantial connections to the state. 

The first step in doing this would be to withdraw these misguided regulatory changes which will only contribute to an increasingly difficult compliance environment for small online retailers.