Yes, New York had "medicated paper" in 1857-58, but this wasn't successful. The words "toilet paper" appear first in the 1870s, when toilet paper (as we know it) became popular. It's kind of scraping the bottom (so to speak) for New York to take credit for this, in my opinion.
(Oxford English Dictionary)
toilet paper, soft paper prepared: (a) for shaving, hair-curling, etc.
1884 Stationers' & Booksellers' Jrnl. 31 Mar. 3/1 An attractively put-up packet of *toilet paper.
15 February 2004, New York Times, City (section 14), FYI by Michael Pollak, pg. 2:
Q. I read that toilet paper was invented in New York City. Is that true?
A. The consensus is that toilet paper was first commercially produced about 1857 by Joseph C. Gayetty, who sold flat sheets of ''Gayetty's medicated paper for the water closet,'' for the fairly expensive price of 1,000 sheets for a dollar out of his shop at 41 Ann Street in Lower Manhattan. His name, J.C. Gayetty, was watermarked on each sheet.
But not until the brothers E. Irvin and Clarence Scott produced a roll of perforated paper in Philadelphia and founded the Scott Paper Company in 1879 did the idea catch on.
27 November 1858, New York Times, pg. 8 advertisement:
All persons who neglect to make systematic use of GAYETTY's Medicated Paper for the water-closet are doing themselves injustice. It is proven, beyond doubt, to be the finest and purest paper ever made from Manila hemp, and four grand medicines incorporated with the pulp render it a sure cure and preventive of piles. Its sale is already immense. Druggists everywhere dispose of it. 1,000 sheets for $1; 500 sheets 50 cents. Retailed and wholesaled at the depot, No. 41 Ann-street. Also sent by express upon receipt of price.
N. B. - The name of J. C. Gayetty is water-marked in every sheet.
27 April 1879, New York Times, pg. 8:
Package of Toilet Paper, 7c
241, 243, and 245 6TH-AV.
BETWEEN 15TH AND 16TH STS
27 August 2004, Associated Press Newswires:
Retirement home residents celebrate "birthday" or toilet paper
Joseph Gayetty of New York is credited with inventing toilet paper in 1857 made of just flat sheets, but the invention failed, according to several Web sites about the paper's history. Walter Alcock of Great Britain later developed toilet paper on a roll.
But it was in 1867, that brothers Thomas, Edward and Clarence Scott of Philadelphia were successful at marketing small rolls of perforated paper, the Web sites say. It was the beginning of the Scott Paper Co.