On August 19, 2022, the American Catalog Mailers Association (ACMA) filed a complaint1 in Superior Court of California seeking to have published guidance on protected internet activities declared invalid.
Earlier this year, California issued Technical Advice Memorandum (TAM) 2022-01, which detailed whether the protections of Public Law 86-2722 apply to common fact patterns in the current economy based on technological advancements for purposes of California income and franchise tax. This TAM basically adopted the positions presented by the Multistate Tax Commission (MTC) in its August 2021 statement that reinterpreted the federal law providing protections for interstate retailers from state taxation since 1959. The federal law currently prohibits states from imposing income taxes on out-of-state businesses whose only activity in the state is soliciting sales of tangible personal property. The intention of both the MTC and the TAM is to describe updated scenarios of a seller’s customer engagement that will either preserve or defeat the protections provided in PL 86-272.
E-commerce businesses could be subject to the corporate income tax at 8.84%, the alternative minimum tax at 6.65%, or the franchise tax at 1.6%, depending on their business structure. The ACMA contends that the state is exceeding its authority by effectively overruling a federal statute, which can only be amended by Congress. They also assert that website activities on a website hosted outside of California do not constitute activities within California so as to preclude the protection afforded by PL 86-272.
California broadened the definition of “business activity” to include interactions with customers through websites. Activities such as offering remote repairs and product updates, providing electronic customer service chat functions, and monitoring customers’ preferences through “cookies” placed on their computers would all result in the loss of protection of PL 86-272.
FTB Publication 1050, Application and Interpretation of Public Law 86-272, has also been updated to reflect these changes in position of the California Franchise Tax Board. As the recent guidance is being applied retroactively, it can be expected to surface in ongoing audits open under the four-year statute of limitations. California is not the only state to pursue conforming to the MTC statement on PL 86-272. Colorado, Illinois, New Jersey, New York, Oregon, and Utah have all indicated an interest in implementing similar changes.
Please reach out to a Ryan tax professional to review your potential exposure to these recent and potential changes.
1 American Catalog Mailers Association v. Franchise Tax Board, Superior Court of California, San Francisco County.
215 U.S.C. Sections 381-384.
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