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San Francisco Superior Court Found California Franchise Tax Board’s 2022 Guidance on P.L. 86-272 “void” and “invalid”

Feb 27, 2024

Summary of American Catalog Mailers Association v. Franchise Tax Board

On December 13, 2023, the California Superior Court, San Francisco County, decided that California’s tax authority, the Franchise Tax Board (“FTB”), had created “regulations” subject to procedural requirements of California’s “Administrative Procedures Act” when it published its Technical Advice Memorandum (“TAM”) 2022-01, in February 2022, and its Publication 1050 in May 2022.[1] The guidance involved the applicability of federal Public Law 86-272 (“P.L. 86-272”) generally treating a number of “internet activities” as activities that would cause taxpayers to lose P.L 86-272 protection and were therefore nexus-creating activities. The Court declared that such guidance should be considered “void” and “invalid,” since the requirements for enacting new regulations had not been followed by FTB prior to the publication of the guidance. Therefore, the Court ruled that “the TAM and Publication 1050 are, accordingly, declared void and without force or effect, and their guidance may not be relied upon.”


Federal law known as Public Law 86-272, enacted in 1959, protects taxpayers from being subject to net income taxes by a state provided that taxpayers’ only activities in such state are the solicitation of orders for tangible personal property, with such orders being approved outside the state, and with the sold property being shipped from outside the state. The law does not protect taxpayers performing services in states from being subject to tax, nor has it protected taxpayers who have licensed intangible property to licensees in states.

The Multistate Tax Commission (“MTC”) published a statement in August 2021 regarding its interpretation of how “internet activities” impact taxpayers’ protection from taxation under P.L. 86-272.

Following the MTC’s statement, the California FTB issued guidance similar to the MTC’s statement when it published its TAM 2022-01, in February 2022 and Publication 1050 in May 2022. In the TAM, the FTB listed fact patterns that mirrored those listed in the MTC’s guidance, where a taxpayer’s “internet activities” would result in the taxpayer not being protected from income taxation under federal Public Law 86-272.  While the list below does not constitute the complete list of activities mentioned in California’s now invalid guidance, some of the activities mentioned in FTB’s TAM that FTB asserted would result in loss of P.L. 86-272 protection, and which are common in today’s economy, were:

  • Placing internet “cookies” on the computers of California customers to track customers activity on websites.
  • Selling extended warranty plans on a website.
  • Regularly providing post-sale assistance to customers via a chat function or email function on a website.
  • Inviting viewers of the website to apply for jobs, upload resumes, and complete job applications through functions built into a website.

Importantly, the Court in American Catalog Mailers Association v. FTB did not find that the FTB’s interpretation was unconstitutional or “wrong.” It considered those complaints “moot” because FTB had not complied with the Administrative Procedures Act. Therefore, it is conceivable that FTB may still attempt to assert that taxpayers with activities mentioned in its (now invalid) guidance have exceeded activities protected under P.L. 86-272. However, FTB would be making such assertions without any published guidance clearly indicating to taxpayers that they have engaged in unprotected activities, and undoubtedly would face taxpayer challenges. Taxpayers should be mindful of the potential impact of their internet activities on P.L. 86-272 protections and should follow developments in other states closely (including New York and New Jersey, which have also issued guidance on this topic) for insight on this developing area of state income tax.

[1] American Catalog Mailers Association v. Franchise Tax Board, California Superior Court, CGC-22-601363

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John Clausen

John Clausen is a Tax Partner in the firm's State and Local Tax Group. With 30-years of experience in public accounting, John’s expertise focuses on state and local income taxation.

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