The American Catalog Mailers Association (ACMA), which describes itself as the nation’s leading industry trade association advocating for catalog, online, direct mail, and other remote-selling merchants and their suppliers, has filed suit against the California Franchise Tax Board (FTB) in the San Francisco County Superior Court of California.
ACMA’s complaint seeks a judicial declaration that the FTB’s 2022 publicly-issued guidance related to Public Law 86-272 (PL 86-272) – specifically, Technical Advice Memorandum (TAM) 2022-01 and FTB Publication 1050 – are invalid because (1) they contradict PL 86-272 and the U.S. Constitution; and (2) the FTB did not properly follow the California Administrative Procedure Act’s required rulemaking process before publishing such guidance. In the alternative, ACMA seeks a judicial declaration that the FTB’s new guidance applies on a prospective basis only. ACMA also seeks attorney’s fees and costs of suit for bringing the action to enforce an important right affecting the public interest.
PL 86-272 is a federal law enacted in 1959 that prohibits states from imposing a net income tax on income derived within the state by an interstate business if the business’s in-state business activities are limited to the solicitation of orders for sales of tangible personal property. Since 2018, when the U.S. Supreme Court overruled longstanding precedent in South Dakota v. Wayfair (Wayfair) that an interstate business can have taxable nexus without physical presence, PL 86-272 has been aggressively under attack by states as one of the only remaining state tax imposition protections for such interstate businesses.
In August 2021, the Multistate Tax Commission (MTC) issued updated guidance on what it views as the proper interpretation and scope of the protection afforded by PL 86-272 following Wayfair, including lists of activities “conducted via the Internet” the MTC maintains are or are not shielded from taxation by PL 86-272. Shortly thereafter, California became the first state to adopt the MTC’s new guidance, and issued similar state guidance via TAM 2022-01 and an updated version of FTB Publication 1050. According to the FTB’s guidance, the following activities do not fall within the protection of PL 86-272:
- A business has a website that invites viewers in California to apply for non-sales positions with the business, and enables viewers to fill out and submit an online application as well as upload a cover letter and resume;
- A business regularly provides post-sale assistance to California customers via either electronic chat or email that customers initiate by clicking on an icon on the business’s website;
- A business places Internet “cookies” onto the computers or other electronic devices of California customers, which “cookies” gather customer search information that will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale;
- A business solicits and receives online applications for its branded credit card via the business’s website from California customers, and the issued card will generate interest income and fees for the business;
- A business remotely fixes or upgrades products previously purchased by California customers by transmitting code or other electronic instructions to those products via the Internet;
- A business offers and sells extended warranty plans via its website to California customers who purchase the business’s products;
- A business contracts with a marketplace facilitator that facilitates the sale of the business’s products on the facilitator’s online marketplace, and the marketplace facilitator maintains inventory, including some of the business’s products, at fulfillment centers in various states where the business’s customers are located;
- A business contracts with California customers to stream videos and music to electronic devices for a charge; and
- A business’s employee telecommutes on a regular basis from within California, performing business activities that do not solely consist of soliciting orders for sales of tangible personal property or that are otherwise entirely ancillary to such solicitation.
ACMA’s complaint alleges the FTB’s guidance purports to adopt – without following applicable rulemaking procedures – a radical new interpretation of a 63-year old federal law that directly contradicts the plain language of the federal law, and in doing so violates the rights of ACMA members and other remote retailers.
On October 10, 2022, the FTB filed to dismiss the action on grounds the court lacks subject-matter jurisdiction, ACMA lacks standing, and ACMA’s causes of action are not ripe. The court is set to hear argument by the parties in November.
Other states are following suit. For example, the Oregon Department of Revenue commenced a regulatory project in August that, like California, was aimed at adopting the MTC’s new guidance. After only two public stakeholder meetings on the topic and significant pushback from the taxpayer community, the Department decided to put the project on hold.
The authors anticipate continued challenges by the business community to state attempts to limit the protections of PL 86-272, and time will tell whether and to what extent these challenges prove successful. In the meantime, businesses relying on PL 86-272 for protection from state taxation should closely evaluate their activities to determine how they stack up against any new state guidance on PL 86-272 post-Wayfair, and in turn determine whether and how to most effectively challenge such guidance.
 15 USC 318; see also https://www.govinfo.gov/content/pkg/STATUTE-73/pdf/STATUTE-73-Pg555.pdf.
 South Dakota v. Wayfair, Inc. (2018) 138 S.Ct. 2080.
 Statement of Information Concerning Practices of Multistate Tax Commission and Supporting States Under Public Law 86-272, Fourth revision adopted by the MTC Aug. 4, 2021, https://www.mtc.gov/getattachment/Uniformity/Project-Teams/P-L-86-272-Statement-of-Information-Work-Group/Statement-on-PL-86-272-FINAL-for-adoption-(V2).pdf.aspx?lang=en-US.
 FTB TAM 2022-01 (Feb. 14, 2022), https://www.ftb.ca.gov/tax-pros/law/technical-advice-memorandums/2022-01.pdf.
 FTB Publication 1050 (REV 05-2022), https://www.ftb.ca.gov/forms/misc/1050.pdf.