Tax alert

Suit challenging California’s P.L. 86-272 guidance filed

Aug 25, 2022
State tax nexus State & local tax Retail

On Aug. 19, 2022, the first lawsuit challenging California’s interpretation of P.L. 86-272 was filed by the American Catalog Mailers Association (ACMA). The suit, filed in the Superior Court of California, seeks to declare “invalid” Technical Advice Memorandum (TAM) 2022-01 and Franchise Tax Board (FTB) Guidance 1050. Both pieces of guidance set forth the state’s interpretation of the protections of P.L. 86-272 as they relate to internet-based activities and closely follow the guidance issued by the Multistate Tax Commission (MTC) in August of 2021. For additional information on P.L. 86-272 and the revised MTC guidance generally, please read our article MTC adopts new P.L. 86-272 guidance: What you need to know

California TAM 2022-01 describes certain internet-based activities, such as placing cookies on customer computers, providing post-sale assistance through email or chat functions and accepting applications for employment online, among others, as activities that exceed the protections of P.L. 86-272. The list of unprotected activities in the TAM generally represent functionality and services associated with most modern websites and is widely applicable to taxpayers selling tangible products online. The ACMA suit asserts that the guidance is void under the Supremacy Clause of the U.S Constitution as a significant departure from prior interpretations of the protections afforded under federal law and is inconsistent with P.L. 86-272 itself. Further, ACMA asserts that the development and release of the new guidance did not comply with California’s Administrative Procedure Act, such as by providing notice and public comment. 


The ACMA suit represents the first challenge to the new interpretations of P.L. 86-272 originating with the MTC guidance released in 2021, but it is unlikely to be the last. The broad list of internet-based activities covered in the MTC guidance and the recent California TAM leaves a very narrow set of circumstances and taxpayers to which the protections of P.L. 86-272 would apply, effectively overriding the protections originally established by federal law. In addition to California, New York has proposed regulations that would adopt the MTC guidance on P.L. 86-272, and revenue officials in New Jersey and Oregon have recently indicated that they intend to issue formal regulations adopting the MTC’s rules. For further information on the draft regulations in New York, please see our alert New York takes steps to follow revised MTC P.L. 86-272 guidance

It is likely more states will adopt the MTC’s new interpretation of P.L. 86-272 in the future. Businesses and taxpayers should follow the California suit closely as it may influence tax policy and guidance adoption in other states. In an age where virtually all businesses have interactive websites, it is imperative to know which states are pursuing this approach to interpreting the protections of P.L. 86-272. Essentially, any internet activity beyond a static website – or one that merely allows for order taking – is likely to lose the protection of federal law. For more information on the MTC guidance and P.L. 86-272 protection in California or any other state, please consult your state and local tax adviser.

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