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California Franchise Tax Board Loses Bid to Keep Multistate Tax Commission Nexus Guidance

Nouvelles fiscales févr. 21, 2024

California Franchise Tax Board Loses Bid to Keep Multistate Tax Commission Nexus Guidance

As reported previously, the American Catalog Mailers Association (ACMA) filed a complaint1 in San Francisco Superior Court of California on August 19, 2022, seeking to have declared invalid the California Franchise Tax Board’s (FTB’s) published guidance on internet activities that establish taxability. The court denied the ACMA’s motion for summary judgment on August 24, 2023, stating that the California FTB’s pronouncements do not, on their face, contradict Public Law (P.L.) 86-272. While the court denied summary judgment, the case was heard, and the court issued its ruling2 on December 13, 2023.

The California FTB had issued Technical Advice Memorandum (TAM) 2022-01, detailing whether the P.L. 86-272 protections apply to common fact patterns in the current economy based on technological advancements for purposes of California income and franchise tax. P.L. 86-272 protects out-of-state businesses from income and franchise tax when their only activity in the state is solicitation of sales of tangible personal property. FTB revised its Publication 1050 in 2022 to eliminate certain protections available under P.L. 86-272.

The taxpayer was granted summary judgment on December 13, 2023, as the court agreed with ACMA that the TAM and Publication 1050 were not optional tools for California FTB auditors but rather rules declaring how certain cases would be decided by the agency. This determination classifies both documents within the definition of a regulation under the Administrative Procedures Act (APA) and subjects them to the APA. The court deemed the FTB TAM and Publication 1051 void, as invalid “underground regulations,” as the California FTB did not follow the APA procedural requirements for either document.

On February 13, 2024, the FTB requested that the judge in the case, Judge Ethan P. Schulman, reconsider his order voiding the agency’s guidance on P.L. 86-272. In rejecting the attempt to narrow his order invalidating the FTB guidance, the judge said that the FTB’s arguments were “feckless” and its motion “verges on frivolous.”3 The California FTB’s arguments—that the guidance isn’t voided because the court didn’t rule that the California FTB was incorrect, and that the ACMA isn’t the prevailing party—did not warrant extended discussion, according to the judge. The ACMA did not seek to declare the publications wrong, only that they were invalid. As such, the ACMA prevailed for purposes of recovering costs and was awarded legal fees of approximately $333K.

Gina Rodriquez, a Principal in Ryan’s Advocacy Services practice, commented: “At this point, we don’t know whether the FTB will appeal the superior court decision. If the FTB appeals, an adverse appellate court decision could have a sweeping impact on other FTB guidance, and guidance from the CDTFA and other state agencies. That must be weighing heavy on the FTB in deciding whether to appeal. Alternatively, the FTB could lay low and wait for the MTC guidance to be released, which is expected to be substantially similar to the FTB’s TAM 2022-01. With the MTC as a shield, the FTB could then move forward with a statute or regulatory change.”

In addition, Josh Booth, a Principal in Ryan’s State Income and Franchise Tax practice, responded to the California FTB’s removal of the TAM from the FTB website by stating that taxpayers have even less guidance as to how to treat throwback. He questioned: “Also, what will the FTB do with the refund claims where throwback is in line with TAM 2022-01? Will the FTB reverse its position reflected in the TAM and deny the refund claims?”

In reaching out to the FTB for a response as to how taxpayers with throwback refund claims should proceed, the following response was received from the Taxpayers’ Rights Advocate Office:

“The litigation is still pending and FTB does not comment on pending litigation. However, in line with its mission, FTB will continue to help taxpayers file timely and accurate returns and pay the correct amount to fund services important to Californians. As such, FTB will continue to apply Public Law 86-272 based on the individual facts and circumstances of each taxpayer.”

If you have concerns as to whether your internet practices have established nexus in California, or any other state, the experts at Ryan are here to assist you in interpreting your practices and the laws and protections surrounding your activities. We will keep you posted on any further developments on this issue. Please contact us for further assistance.

American Catalog Mailers Association v. Franchise Tax Board, Superior Court of California, San Francisco County, Case No. CGC-22-601363 (December 13, 2023).

2 Ibid.

3 American Catalog Mailers Association v. Franchise Tax Board, Superior Court of California, San Francisco County, Case No. CGC-22-601363 (order February 13, 2024).


Josh Booth

Gina Rodriquez


Mark L. Nachbar

Mary Bernard

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