Public Law 86-272 Does Not Facially Preempt New York’s Internet-Solicitation Regulation (20 NYCRR 1-2.10)

1. Introduction

This appeal concerned the boundary between state corporate franchise taxation and the federal immunity created by the Interstate Income Tax Act of 1959—commonly known as Public Law 86-272 (15 USC §§ 381–384). The plaintiff, American Catalog Mailers Association, a membership organization representing merchants selling tangible goods via catalogs, telephone, and the Internet, brought a declaratory judgment action against the Department of Taxation and Finance and related respondents.

The central dispute was whether New York’s regulation, 20 NYCRR 1-2.10 (“Foreign corporations—Public Law 86-272”), is federally preempted because it addresses Internet-based activities (including “cookies,” online chat support, and website functions) in defining when a foreign corporation’s New York activities exceed protected “solicitation.”

Procedurally, Supreme Court issued a declaration that 20 NYCRR 1-2.10 is not preempted by Public Law 86-272, and also ruled for defendants on retroactivity issues. On plaintiff’s appeal, the Appellate Division, Third Department affirmed.

2. Summary of the Opinion

The Third Department held that 20 NYCRR 1-2.10 is not facially preempted by Public Law 86-272 under a conflict/“obstacle preemption” theory. Key holdings include:

• The challenge was solely facial, so the court reviewed only defects inherent in the regulation “as written,” not how it might be applied to particular taxpayers.
• Read as a whole, the regulation is properly understood as turning on a corporation’s activities “in New York State”, including Internet-based activities that constitute in-state business activity; it does not, on its face, tax out-of-state Internet activity untethered to New York.
• Public Law 86-272’s terms are framed functionally (solicitation versus non-solicitation), not by the medium used; the fact that the Internet did not exist in 1959 does not make Internet-based conduct incapable of being “within” a state for purposes of the statute.
• Because Congress’s significant objective was clarity, the regulation’s detailed Internet examples can be viewed as furthering—not frustrating—that objective by providing practical guidance.

3. Analysis

3.1 Precedents Cited

The opinion is structured around federal preemption doctrine, the purpose and judicial interpretation of Public Law 86-272, and the scope of review for facial challenges. The principal cited authorities influenced the court’s framing and ultimate rejection of facial preemption.

A. Preemption framework and standards

• Scaletta v Michels Power, Inc., 236 AD3d 1 (3d Dept 2025): Used for the tripartite taxonomy of preemption (express, field, conflict), anchoring the court’s selection of conflict/obstacle preemption as the relevant theory.
• Sutton 58 Assoc. LLC v Pilevsky, 36 NY3d 297 (2020): Quoted for the modern articulation of obstacle preemption—state law is preempted if it stands as an obstacle to Congress’s purposes and objectives.
• Doomes v Best Tr. Corp., 17 NY3d 594 (2011), quoting Williamson v Mazda Motor of America, Inc., 562 US 323 (2011): Supplied the key restraint—courts find obstacle preemption only if the state measure would frustrate a “significant objective” of federal law. This “significant objective” test became decisive when the court evaluated Congress’s purpose of “clarity” in Public Law 86-272.
• Balbuena v IDR Realty LLC, 6 NY3d 338 (2006); Wyeth v Levine, 555 US 555 (2009); Matter of Disney Enters., Inc. v Tax Appeals Trib. of State of N.Y., 10 NY3d 392 (2008): These cases reinforced the presumption against preemption, heightened where the state acts in a traditional area of power—here, taxation.
• Department of Taxation & Finance of N. Y. v Milhelm Attea & Bros., 512 US 61 (1994): Critical to the procedural posture. The court relied on Milhelm Attea for the rule that a facial challenge is confined to defects inhering in the regulation “as written,” excluding application-specific hypotheticals.
• Matter of Independent Ins. Agents & Brokers of N.Y., Inc. v New York State Dept. of Fin. Servs., 39 NY3d 56 (2022): Reinforced the “solely facial” lens applied by the court.

B. Public Law 86-272’s purpose and scope

• Wisconsin Dept. of Revenue v William Wrigley, Jr., Co., 505 US 214 (1992): The foundational interpretive authority for Public Law 86-272. The court relied on Wrigley for:
  • the baseline description of Public Law 86-272 immunity (“only solicitation”);
  • the judicially recognized expansion to include activities “entirely ancillary” to solicitation and “de minimis” non-solicitation; and
  • the functional, activity-based analysis that the New York regulation purports to implement.
• Heublein, Inc. v South Carolina Tax Comm'n, 409 US 275 (1972): Cited for the historical point that Congress sought “clarity” and a “lower limit” on states’ net-income taxation of interstate sellers.
• Matter of Disney Enters., Inc. v Tax Appeals Trib. of State of N.Y., 10 NY3d 392 (2008): Used to describe Public Law 86-272’s “rather limited purpose” as setting a minimum standard, and to reinforce that the statute responds to multistate tax uncertainty for soliciting sellers.

C. Internet commerce context and state taxing power

• South Dakota v Wayfair, Inc., 585 US 162 (2018): While the Department relied on Wayfair as a conceptual justification for regulating Internet presence, the court treated Wayfair as background rather than controlling authority because it addressed sales/use tax and Commerce Clause nexus, not Public Law 86-272’s income-tax immunity. The court’s key move was to narrow the issue to whether the regulation obstructs Congress’s objectives in Public Law 86-272.
• Complete Auto Transit, Inc. v Brady, 430 US 274 (1977): Mentioned in passing in connection with “nexus,” illustrating the court’s awareness of constitutional limits distinct from Public Law 86-272; however, nexus questions were not the focus because the case was a facial preemption challenge.
• New York State Telecom. Assoc., Inc. v James, 101 F4th 135 (2d Cir 2024): Cited to reject the notion that technological change alone establishes conflict preemption; statutory terms may apply to modern circumstances when framed functionally.
• Bostock v Clayton County, 590 US 644 (2020): Invoked by plaintiff for “public meaning at enactment,” but the court found Public Law 86-272’s operative concepts were functional enough to encompass new modes of conducting solicitation and related in-state activities.

D. Interpretation of the regulation as a whole (textual coherence)

• Matter of Elcor Health Servs. v Novello, 295 AD2d 772 (3d Dept 2002), affd 100 NY2d 273 (2003); Grant v Cuomo, 130 AD2d 154 (1st Dept 1987), affd 73 NY2d 820 (1988): Cited for the interpretive principle that a regulation must be read as a whole. This supported the court’s rejection of plaintiff’s parsing of one clause (“via the Internet”) to claim the regulation severs immunity from geography.

E. Tax characterization and deference

• Matter of Wurlitzer Co. v State Tax Commn., 35 NY2d 100 (1974): Used to characterize the Article 9-A franchise tax as an excise tax, often based on net income.
• Matter of Gillette Co. v State Tax Commn., 56 AD2d 475 (3d Dept 1977), affd 45 NY2d 846 (1978); Matter of Disney Enters., Inc. v Tax Appeals Trib. of State of N.Y., 40 AD3d 49 (3d Dept 2007), affd 10 NY3d 392 (2008): Used to limit deference—the Department’s interpretation of a federal statute does not control; courts must decide the federal meaning.

3.2 Legal Reasoning

A. The court’s methodological pivot: facial review only

The court began by constraining the universe of arguments: because the plaintiff’s preemption attack was “solely facial,” the question was not whether the Department could apply the regulation to reach beyond Public Law 86-272 in particular audits. The only question was whether the regulation’s text necessarily frustrates Congress’s objectives or necessarily withdraws federal immunity where the statute requires it.

B. The key interpretive dispute: “via the Internet” and geography

Plaintiff argued that the regulation creates two independent triggers: (1) employee/representative activities “in New York State,” and (2) Internet activities “via the Internet” regardless of where they occur—thereby “severing immunity from geography.” The court rejected this by reading the regulation as a whole, emphasizing repeated limiting language that cabins the inquiry to activities “in New York State” (notably in 20 NYCRR 1-2.10 [a] and [f]).

The court nevertheless acknowledged a practical concern: if a seller “does not or cannot isolate its Internet activities occurring in this state,” administration might, in practice, drift toward taxing Internet activity “in general.” But that concern was characterized as an as-applied problem requiring a factual record, not a facial defect.

C. Applying a 1959 statute to Internet-era commerce

Plaintiff pressed an original-public-meaning argument that Internet interactions cannot qualify as in-state activity “within such State” under 15 USC § 381(a)(1). The court responded that Public Law 86-272 is drafted in functional terms—solicitation versus non-solicitation—and Congress’s concern included solicitation “even just through the mail” (as reflected in the legislative history excerpt quoted in the opinion). On that view, modern electronic solicitation can still be evaluated under the same functional standard.

D. Clarity as Congress’s “significant objective” and the role of regulatory examples

The court treated “clarity” as a “significant objective” of Public Law 86-272. It then reasoned that the regulation’s detailed examples—especially those addressing common Internet features—advance clarity rather than obstruct it, by signaling when activities will be treated as solicitation, entirely ancillary, or de minimis.

E. What the court did not decide

The opinion repeatedly emphasized limits:

• No ruling on whether particular Internet-based functions are correctly categorized under Public Law 86-272.
• No ruling on whether the Department can prove in-state nexus for particular Internet features in particular cases.
• No reconsideration of broader constitutional nexus doctrine (e.g., Commerce Clause), beyond noting the issue is distinct from the facial preemption question presented.

3.3 Impact

The decision’s most immediate impact is institutional and procedural: it validates New York’s ability to promulgate detailed interpretive guidance under Public Law 86-272 addressing Internet-era selling practices, at least against a facial obstacle-preemption attack.

Substantively, the opinion signals several likely consequences for future disputes:

• Shift from facial challenges to as-applied litigation: Taxpayers contesting online activities (e.g., customer support tools, data-gathering cookies, post-sale interactions) will likely need to develop a factual record showing that the challenged conduct is solicitation, “entirely ancillary,” or “de minimis,” or that the Department’s characterization effectively reaches beyond in-state activity.
• Increased salience of “ancillary” and “de minimis” line-drawing: By treating the regulation’s examples as clarity-enhancing, the court indirectly encourages future cases to focus on how closely a digital activity supports solicitation, versus serving independent business functions (inventory management, product development, post-delivery customer service).
• Regulatory examples as practical benchmarks: Even though the court did not endorse every example’s correctness under federal law, its approval of examples as a clarity tool makes them harder to dismiss wholesale; future challenges may need to target specific applications.
• Continued separation of Wayfair-style nexus from 86-272 immunity: The opinion treats South Dakota v Wayfair, Inc. as context, not a rewrite of Public Law 86-272. That preserves a two-step framework in practice: (1) does the state have power to tax (nexus/Commerce Clause), and (2) even if so, does Public Law 86-272 remove that power because the in-state activity is limited to solicitation (and ancillary/de minimis conduct)?

4. Complex Concepts Simplified

• Public Law 86-272 (15 USC § 381): A federal rule that blocks a state from imposing a net-income-based tax when a company’s only in-state activity is soliciting orders for tangible personal property, where orders are approved and filled from outside the state.
• Franchise tax under Tax Law article 9-A: An excise tax for the privilege of doing business in corporate form in New York, often measured using net income.
• Conflict/obstacle preemption: Even if Congress did not expressly preempt state law, a state rule can be invalid if it makes it impossible to comply with federal law, or if it “stands as an obstacle” to Congress’s objectives.
• Facial challenge: A claim that a rule is invalid in all (or nearly all) of its applications based solely on its text; courts generally will not decide fact-dependent “what happened in my audit” questions in such a challenge.
• “Entirely ancillary” to solicitation: Under Wisconsin Dept. of Revenue v William Wrigley, Jr., Co., some non-solicitation acts can still be protected if they exist only to support solicitation and have no independent business purpose.
• De minimis activity: Small, trivial, or minimal non-solicitation conduct that is too insignificant to forfeit immunity.
• Internet “cookies” (as used in the regulation): Small files placed on a user’s device. Under the regulation’s examples, cookies used for independent business functions (like adjusting production schedules or developing products) may exceed protected solicitation, while cookies limited to shopping-cart memory and similar solicitation-support functions may be considered entirely ancillary.

5. Conclusion

American Catalog Mailers Assn. v Department of Taxation & Fin. establishes that New York’s Internet-focused interpretation of Public Law 86-272 in 20 NYCRR 1-2.10 survives a facial obstacle-preemption challenge. The Third Department read the regulation as tethered to in-state activity, treated Public Law 86-272 as functionally drafted enough to address Internet-era solicitation, and viewed the regulation’s detailed examples as serving Congress’s core objective of clarity.

The ruling does not decide the legality of any specific audit outcome; instead, it channels future disputes toward fact-intensive, as-applied litigation over whether particular digital features are solicitation, “entirely ancillary,” or “de minimis” within New York.