The California Franchise Tax Board released a technical advice memorandum regarding the relationship to internet activities and the Interstate Income Act, better known as P.L. 86-272. (AP Photo/Jeff Chiu)
Echoing language from P.L. 86-272, the MTC's updated guidance said soliciting orders for tangible personal property is the same whether it is done over the internet or by another method. In addition, a business can "present static text or photos on its website," without that counting as business activity, and thus subject to taxation, in states where customers are located, the MTC said.
In the technical advice memorandum, the franchise tax board does not specifically mention the MTC updated guidance. It does mention the U.S. Supreme Court's landmark decision in South Dakota v. Wayfair
, which gave states the power to require remote sellers to collect and remit sales and use tax."Although the United States Supreme Court was not interpreting P.L. 86-272 in Wayfair, California considers the court's analysis as to virtual contacts to be relevant to the question of whether a seller is engaged in business activities in states where its customers are located for the purposes of P.L. 86-272," the franchise tax board said.
The franchise tax board memo agreed with the MTC that internet sellers, like noninternet sellers, are shielded from taxation if the only business activity in the state is the solicitation of sales of tangible personal property. But like the MTC guidance, it added in various internet activities in which the seller would not be protected by P.L. 86-272.
For example, the franchise tax board said, concerning the placement of internet "cookies," which are identifying pieces of data on the browser of a customer, anything used only for soliciting orders of tangible personal property is shielded from taxation. But in another instance, placing cookies on the computers or devices of California customers would defeat the protections of P.L. 86-272 if the cookies gather certain customer search information. There is no protection if the search information "will be used to adjust production schedules and inventory amounts, develop new products or identify new items to offer for sale," the franchise tax board said. Both examples are similar to the updated MTC guidance.
Practitioners who reviewed the guidance told Law360 that they expected it to be forthcoming and said it largely mirrors the MTC's updated guidance. Nevertheless, they had questions and concerns.
Shail Shah, tax partner at Reed Smith LLP, said he found the distinction between when placement of cookies defeats P.L. 86-272 protection to be "arbitrary." He said that is only the beginning of his concerns.
"It's unfortunate that [the franchise tax board] thinks that through an administrative notice that they can somehow gut federal law," Shah said. "There are numerous cases throughout the nation that have interpreted 86-272 more broadly, and I think taxpayers should continue to push applicable precedent and fight against California's attempt to weaken the protections of federal law."
Another point that businesses should be aware of in the franchise tax board's memorandum is that it specifies a loss of protection when a nonsales-related employee telecommutes from a residence in California, something common in the age of COVID-19, another practitioner told Law360.
"Other states are likely to follow suit [in interpreting the MTC's guidance], with perhaps some slightly different modifications, resulting in more nonuniformity among the states," said Michael Cataldo, shareholder at Cataldo Tax Law PC.
Cataldo, a former tax counsel at the franchise tax board, also noted that the memorandum does not mention whether its new guidance on internet activities will be applied retroactively.
"If so, taxpayers will need to examine its impact on all open years," Cataldo said.
In response to requests for comment from Law360, the franchise tax board on Tuesday issued a statement from its legal division through a spokeswoman.
"Technical Advice Memorandum (TAM) 2022-1 discusses the application of Public Law 86-272 to certain fact patterns for purposes of California income and franchise tax," the franchise tax board said. "The FTB believes the analysis provided in the TAM is a fair and accurate application of Public Law 86-272 to the fact patterns contain[ed] in the TAM."
--Additional reporting by Emlyn Cameron. Editing by Neil Cohen.
Update: This story has been updated with a comment from the FTB.
For a reprint of this article, please contact reprints@law360.com.
