As previously reported, the American Catalog Mailers Association (ACMA) filed a complaint1 in Superior Court of California seeking declaratory judgement to have published guidance on internet activities that establish nexus declared invalid. The California Franchise Tax Board (FTB) had issued Technical Advice Memorandum (TAM) 2022-01 detailing whether the protections of Public Law (PL) 86-2722 apply to common fact patterns in the current economy based on technological advancements for purposes of California income and franchise tax. Publication 1050 was updated in 2022 to include changes to protections available under PL 86-272. PL 86-272 protects out-of-state businesses from income tax when their only activity in the state is solicitation of sales of tangible personal property.
The ACMA case seeks the following three counts:
- Declaratory judgment declaring TAM 2022-01 and FTB Publication 1050 invalid because they contradict PL 86-272.
- Declaratory judgment declaring the TAM and Publication 1050 invalid because the FTB failed to comply with the Administrative Procedure Act rulemaking process.
- Declaratory judgment under the Code of Civil Procedure § 1060 that the TAM and Publication 1050 are invalid or, in the alternative, limit the application of the TAM and Publication 1050 prospectively.
In its complaint, the ACMA specifically addressed the issues of post-sales assistance and internet cookies. The FTB had made distinctions between different fact patterns regarding placing internet cookies on computers to gather customer information for purposes of adjusting inventory and production schedules and cookies to facilitate solicitation. The court found that the FTB’s rationale was questionable with unexplained obstacles existing as to how the FTB could determine the purpose for which an out-of-state business used cookies and the location of the cookies on computers.
Although the court did not agree with several of the FTB’s positions, the petition was denied. In its denial of summary judgment, the court ruled that ACMA did not provide sufficient supporting facts for the court to conclude that the generic hypothetical examples in the TAM and Publication 1050 should cause them to be invalidated. Although the TAM and Publication 1050 raised significant concerns as to the application and interpretation of PL 86-272, the court could not conclude as a matter of law that they contradicted the law in a manner that would invalidate them.
The case awaits a full trial in the court, and Ryan will continue to monitor the case and any relevant developments. If you have any questions or concerns as to how TAM 2022-01 applies to your activities in California, please consult the Ryan tax professionals listed below.
1 American Catalog Mailers Association v. Franchise Tax Board, Superior Court of California, San Francisco County. Case No. CGC-22-601363.
2 15 U.S.C. Sections 381-384.
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