New York’s new regulation challenging PL 86-272 protections has the potential to significantly impact corporate taxpayers and may be a model other states follow. Here’s the SALTovation team’s summary in our continuing review of state tax regulations.

By the SALTovation Team at TaxOps

Key Takeaways:

  • New York’s new regulation could significantly impact corporate taxpayers by expanding the interpretation of PL 86-272 protections. 
  • The retroactive aspect of the regulation back to 2015 creates potential compliance challenges and undue burdens for businesses. 
  • There is a concern that other states may follow New York’s lead, which could result in widespread changes to state tax regulations affecting corporations. 

Continuing our review of state tax regulations, we specifically focus on New York’s recent changes to the interpretation of Public Law 86-272 (PL 86-272). The SALTovation team’s Meredith Smith and Stacey Roberts delved into this topic in a recent discussion, providing valuable insights into the implications of these changes. We review the conversation here, offering a detailed analysis of the significant themes and broader impacts of New York’s regulation on corporations. 

Procedural Journey and Its Implications 

Regulatory Process Nuances in California and New York 

In their discussion, Meredith and Stacey began by comparing the procedural aspects of the ACMA’s litigation in California and New York.  

“You know, just for everybody’s just to kind of go back in memory lane here for California, the ACMA actually won their case, but it was really based on a procedural kind of glitch,” Stacey noted. 

California’s case was overturned due to procedural errors, specifically not adhering to the correct regulatory process. New York, however, meticulously followed the procedure, passing the new regulation that incorporates activities outlined in the Multistate Tax Commission’s (MTC) expanded guidance on PL 86-272 almost verbatim. 

The implication here is twofold: 

  • Legislative Thoroughness: New York’s adherence to the procedural requirements makes their regulation sturdier against legal challenges. 
  • Corporate Impact: This thoroughness underscores the legislative intent to enforce these regulations stringently, impacting corporations with significant online activities. 

Retroactive Enforcement and Its Burdens 

A critical point discussed by Meredith and Stacey was New York’s decision to apply the regulation retroactively back to 2015. This aspect raises several concerns: 

“Something that you kind of were quick to point out is the retroactivity associated with that,” Meredith mentioned. “And in the complaint, what it going back to 2015 and kind of. Right. Initial reaction is like, okay, well, that’s out of statute. Right. But if you are a corporation never filing a return. Right.” 

Stacey added,  “Correct. And I think, you know, they also do mention Wayfair… because their system is pretty straightforward.” 

This decision to enforce the rule retroactively could create a significant compliance burden on corporations. Companies may need to revisit their activities and tax filings over the past several years, examining whether their online activities now render them liable under the updated interpretation of PL 86-272. Importantly, corporations that believed they were protected under the previous rules now face potential liability, making it a critical area for tax compliance and legal departments to address. 

Federal Law versus State Regulation

The Legal Battleground: PL 86-272’s Federal Protection

One of the central arguments posed by the ACMA centers around the federal nature of PL 86-272 and the limitations on a state’s ability to alter its scope without congressional action. 

Stacey highlighted: “The ACMA, they’re challenging this rule. A lot of their arguments are around the fact that public lie to 672 is a federal law and it would take Congress to make a change that’s as sweeping as this MTC guidance that New York and also New Jersey have put in their statutes and regs.” 

The crux of the argument is the federal protections offered by PL 86-272, which were designed to prevent states from burdening interstate commerce with state taxes if a company’s activities fall within specific limits. By expanding the interpretation through state regulations without federal endorsement, New York might be overstepping its authority. This argument could form the basis of a strong legal battle, potentially influencing future regulatory actions by other states. 

Discriminatory Impact on Corporations 

Another layer of complexity added by New York’s regulation is its specific application to corporations, which may result in discriminatory impacts and unequal treatment compared to passthrough entities. 

Meredith questioned, “Well, and I wonder if they’re going to make, you know, at some point like a discriminatory argument. Right. Because if you have Pl 86 272, the kind of expansion for corporations only, and you have old 86 272 because again, it’s a federal law…” 

The discriminatory potential arises from the differential treatment between corporations and passthrough entities. This variance in treatment may prompt corporations to challenge the regulation on grounds that it unfairly discriminates against them, as compared to other business structures that are not subject to the same expansive interpretations. 

The Broader Implications and Industry Response

Potential Domino Effect Across States

A significant concern shared by Meredith and Stacey is the likelihood of other states adopting similar regulations, which could create a complex and burdensome landscape for corporations operating online across multiple jurisdictions. 

“I think that’s our concern is that we do see the New Yorks, the Californias tend to be the ones that are out there in the front, front runners to kind of taking.” 

The worry here is that states often look to leaders like New York and California when designing their tax policies. Should other states follow suit, corporations could face an intricate web of compliance challenges, necessitating a comprehensive review and adjustment of their online activities and tax strategies at a multi-state level. 

The Role of ACMA and Collective Industry Action

Meredith concluded by emphasizing the role of ACMA in advocating for clarity and fairness in state tax regulations, urging businesses to support their efforts. 

“Thank you, ACMA. Our friends over there leading the charge, leading the charge for those listeners. If you want to join ACMA, ACMA, contribute to them, help the good fight for clarity.” 

The ACMA’s efforts are crucial in this ongoing battle, as collective industry action can amplify the push for fair and clear regulations. Their litigation and advocacy play a pivotal role in challenging potentially overreaching state regulations and ensuring that businesses have a balanced and equitable operating environment. 

The developments in New York’s tax regulation present a critical juncture for corporations, highlighting the need for vigilant compliance efforts and potential legal challenges. The retroactive nature and the specific corporate focus of these regulations could significantly impact how businesses operate online, necessitating a detailed review and strategic adjustments. The role of industry advocacy groups like ACMA becomes even more significant as businesses navigate these evolving legal landscapes. The insights from Meredith and Stacey underscore the importance of staying informed and proactive in adapting to these regulatory shifts. 

Listen to the podcast ACMA in New York at the SALTovation Show.

More Tax News