New York Court Upholds Internet Activities Nexus Rule

On May 7, 2026, the New York Supreme Court, Appellate Division, upheld the state’s nexus regulation, which incorporated several activities conducted via the internet. It was determined that the internet activities were not preempted by Public Law 86-272.¹ The court left open the possibility that there may be situations where the regulation, as applied to a particular taxpayer, may violate the Public Law.

The nexus regulation at issue (20 NYCRR 1-2.10) was adopted as part of an adoption of regulations that implemented the state’s 2014 tax reform legislation. The text of the regulation mirrors revised P.L. 86-272 guidance issued by the Multistate Tax Commission to address activities conducted via the internet. This challenge to the regulation, as being violative of P.L. 86-272, was brought by the American Catalog Mailers Association² (ACMA), an organization representing merchants who sell merchandise in interstate commerce through catalogs, by telephone and/or over the internet. Last year, the trial court upheld the regulation but declined to apply it retroactively.³ The ACMA appealed.

ACMA argued that the regulation is facially in violation of P.L. 86-272, which generally provides income tax immunity for a seller whose sole in-state activity is the solicitation of sales of tangible personal property if the orders are sent out of state for approval and the shipment of the property is from out of state. According to ACMA, “the regulation impermissibly severs immunity from geography, exposing foreign corporations to franchise tax liability without regard to whether their activities occur within New York.” The argument hinges on 1-2.10(d), which provides that for P.L. 86-272 immunity to apply, “the activities in New York State of employees or representatives, or activities engaged in via the Internet, must be limited to the solicitation of orders for the sale of tangible personal property.” Thus, the regulation severs internet activities from in-state activities. The court admitted that, if read in isolation, subsection (d) does in fact refer to internet activities without reference to geography. However, the court found ACMA’s argument foreclosed by the regulation’s repeated references to in-state activities and affirmed the validity of the regulation.

Notably, the court did recognize an underlying concern. If a seller of tangible personal property does not or cannot isolate its internet activities occurring in this state, the regulation may impose franchise tax liability on such seller based on its internet-based activity in general, which may or may not create sufficient nexus. The court noted that this concern, and whether the Department of Taxation and Finance can administer the regulation in accordance with P.L. 86-272, must be assessed on a factual record, not on the text of the regulation itself.

The court dismissed ACMA’s other arguments that 1) internet activities reaching New York can never constitute activity occurring within the state under P.L. 86-272, and 2) the regulation obstructs Congress’ objective to provide through Public Law 86-272 a clear rule of immunity for small businesses engaged in interstate commerce. As for the latter argument is concerned, the court ruled that the numerous examples provided by the regulation actually promotes Congress’ objective.

Ryan’s Take and Action Steps

While we wait and see whether ACMA appeals the matter again to the Court of Appeals of New York and then potentially to the U.S. Supreme Court, the court here did leave open the possibility that the regulation might operate to violate P.L. 86-272 based on a seller’s particular set of facts. Thus, it remains to be seen whether a seller will bring such a challenge.

It should be noted that in 2025, ACMA challenged New Jersey’s adoption of a similar regulation. A decision in New Jersey is pending. In addition, California’s adoption of an internet activities guidance was voided, not on the merits but on procedural grounds.⁴ The California guidance was deemed an “underground” regulation that was not adopted according to the state’s Administrative Procedure Act.

¹ American Catalog Mailers Association v. Department of Taxation and Finance, N.Y. Supreme Court, Appellate Division (Third), No. CV-25-0865 (May 7, 2026).

² Renamed the American Commerce Marketing Association.

³ American Catalog Mailers Association v. Department of Taxation and Finance, N.Y. Supreme Court (Albany), No. 903320-24 (April 28, 2025).

⁴ Am. Catalog Mailers Ass’n v. Cal. Franchise Tax Bd., Cal. Super. Ct., No. CGC‑22‑601363 (December 13, 2023).

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