New York State Updates Draft Corporate Franchise Tax Regulations

The BR State + Local Tax Spotlight

On April 29, 2022, the New York State Department of Taxation and Finance (the “Department”) released what it refers to as a “final update” to its draft corporate franchise tax regulations relating to all topics except for apportionment, which it indicated will be forthcoming in summer 2022. The Department anticipates that it will commence the State Administrative Procedure Act process in fall 2022 to formally propose and adopt these draft regulations and asks that comments be provided by June 30, 2022. Once finalized, these regulations will provide welcome guidance on the corporate franchise tax reform law that went into effect over seven years ago on January 1, 2015.

The most potentially far-reaching of these revised draft regulations are the provisions—now addressing Public Law 86-272 (“P.L. 86‑272”) protection for activities conducted via the Internet. In general, P.L. 86-272 provides businesses with immunity from state income taxes when their activities in a state are limited to the solicitation of sales of tangible personal property. The updated draft regulations, which the Department notes are “largely modeled after the [Multistate Tax Commission] model statute,” address whether certain business activities conducted over the Internet go beyond solicitation of sales of tangible personal property and are thus no longer protected from state income taxation by P.L. 86-272.

Under the updated draft regulations, while presenting “static text or images” will not remove P.L. 86‑272 protection, activities such as replacing damaged products or giving technical advice on how to use products will be considered to go beyond mere solicitation and remove P.L. 86‑272 protection. The draft regulation provides several examples illustrating which Internet activities do and do not qualify for P.L. 86-272 protection. Qualifying activities include providing a static list of frequently asked questions (FAQs) on a website, placing cookies on customers’ computers as long as those cookies are only used for purposes entirely ancillary to soliciting sales (such as remembering items in a shopping cart), and maintaining a website that enables customers to purchase, select a delivery method, and pay for tangible personal property offered for sale. 

Among the activities that would not qualify for P.L. 86-272 are: offering an electronic chat service that advises customers on the use of purchased products; soliciting and receiving branded credit card applications; placing cookies on customers’ computers that will be used for purposes that are ancillary to the solicitation of sales (such as to develop new products or identify new items to offer for sale); offering extended warranty plans for sale; allowing customers to apply for non-sales positions with the company through the website; providing upgrades and repairs remotely; and contracting with New York customers to stream videos and music. 

Due to the extensive nature of Internet activities that can cause a business to lose P.L. 86‑272 protection under the draft regulations, a business seeking to maintain its protected status may want to carefully tailor its website to curtail any potentially problematic activities if the regulations are adopted in their current form. However, at the current time, the Department’s website reminds taxpayers that the draft regulations are not final and may not be relied upon.

This article is one in a series of articles written for the May 2022 edition of The BR State + Local Tax Spotlight.

© 2022 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.