A California trial court granted summary adjudication in the American Catalog Mailers Association’s (ACMA) action against the Franchise Tax Board (FTB), invalidating FTB guidance that says certain online activities exceed the protections of Public Law 86-272 for state income tax purposes. This follows the court’s denial of ACMA’s first motion for summary adjudication, which we discussed in detail in an earlier blog post, where the court found ACMA did not carry its burden to show FTB Technical Advice Memorandum (TAM) 2022-01 and amendments to FTB Publication 1050 are facially invalid because they contradict PL 86-272.
In its second motion for summary adjudication, ACMA argued TAM 2022-01 and Publication 1050 are invalid because they are regulations and the FTB did not adopt them in compliance with the Administrative Procedure Act (APA). The court agreed with ACMA, holding that TAM 2022-01 and Publication 1050 are void because they are regulations subject to the APA because: (1) they are generally applicable rules and (2) they interpret the FTB’s application of PL 86-272 to out-of-state businesses.
The FTB, on the other hand, contended ACMA’s second motion for summary adjudication was improper because it raised the same issue as ACMA’s first motion for summary adjudication. The court rejected this argument, holding ACMA’s two motions for summary adjudication did not involve the same issue, as the first motion was a facial challenge to the constitutionality of TAM 2022-01 and Publication 1050, while the second motion related to whether they were invalid underground regulations.
On the merits, the FTB conceded that TAM 2022-01 and Publication 1050 were not enacted in compliance with the APA’s requirements. The FTB further conceded that TAM 2022-01 and Publication 1050 are not regulations subject to the APA because they are not binding rules. Rather, they are merely guidance which is “not binding in administrative or court proceedings” and which FTB auditors are not bound to follow. The court also rejected this argument, holding that there is no requirement that an agency rule be binding for the APA to apply.
While the FTB statistically appeals most trial court losses, it remains to be seen whether it will appeal this loss. The outcome of such appeal could have far-reaching implications, calling into question the legal viability of other TAMs and Publications, as well as the FTB’s ability and willingness to issue them in the future.
American Catalog Mailers Association v. Franchise Tax Board, Case No. CGC-22-601363.