California court strikes down new P.L. 86-272 guidance

San Francisco Superior Court declares California's 86-272 guidance invalid

Jan 08, 2024
Income & franchise tax Business tax State & local tax

Executive Summary 

On Dec. 13, 2023, a California Superior court found P.L. 86-272 guidance documents Technical Advice Memorandum (TAM) 2022-01 and related Franchise Tax Board (FTB) Publication 1050 to be invalid “underground regulations.” American Catalog Mailers Association v. Franchise Tax Board, Case No. CGC-22-601363 (Cal. Superior Ct., San Francisco Cnty., Dec. 13, 2023). Both documents clarified the FTB’s interpretation of the protections of P.L. 86-272 for internet-based activities, which were intended to closely follow the revised guidance issued by the Multistate Tax Commission (MTC) in August of 2021. The court did not rule on the merits of the case, finding instead that TAM 2022-01 and Publication 1050 were invalid because they constituted regulations that were required to be adopted pursuant to the California Administrative Procedure Act (APA), which would have required notice and a period for public comment. 

California court strikes down new P.L. 86-272 guidance

P.L. 86-272 guidance invalidated 

In its suit, American Catalog Mailers Association (ACMA) initially sought summary judgment on the basis that TAM 2022-01 and FTB Publication 1050 violated the Supremacy Clause of the United States Constitution because it facially contradicted Public Law 86-272. The trial court denied this motion on the basis that ACMA had failed to satisfy the burden of proof that it was facially contradictory, and that certain hypothetical situations presented raised factual issues precluding summary judgment. However, the court in ruling on the motion signaled that the guidance issued could be regulations inconsistent with the compliance and procedure requirements of the California Administrative Procedure Act (APA). 

Shortly thereafter, the ACMA submitted a second motion for summary judgment arguing that the guidance violated the APA because they were regulations subject to certain procedural requirements which were not met.  The FTB conceded that TAM 2022-01 and FTB Publication 1050 were not implemented in compliance with the APA but contended they were not regulations as defined by the APA because they were neither formal nor binding. The trial court disagreed and granted the motion reasoning that the guidance constituted an “underground regulation” because it did not matter whether they were binding, but rather that they were applied broadly and uniformly and represented the policy of the FTB on this issue. Notably, for the second motion the trial court did not cover the merits of whether this guidance violated the Supremacy Clause and held the issue was moot because the guidance was improperly implemented.  

The MTC’s 2021 guidance provided that many internet 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, were deemed as activities exceeding the protections of Public Law 86-272. The FTB largely adopted the MTC’s guidance when issuing TAM 2022-01 and Publication 1050. Other states have taken steps toward adopting the MTC guidance regarding internet activities. New Jersey issued informal guidance (Technical Bulletin 108) in September and, as a component of broader corporate rules, New York adopted formal regulations in late December, with both states generally following the MTC guidance. Minnesota has considered regulations that would also adopt the MTC’s position. Other states have or are expected to consider the revised MTC guidance in 2024. For additional information on the guidance, please read our article, MTC adopts new P.L. 86-272 guidance: What you need to know. 


It is expected that the FTB will appeal the summary judgment as this outcome may affect other previously issued administrative guidance. Further, as summary judgment was ultimately granted on procedural grounds, the merits of the FTB’s position that certain online activities violate Public Law 86-272 remains uncertain. As such, taxpayers may continue to see the FTB applying this guidance in its interpretation of Public Law 86-272. Additionally, previously submitted refunds or protective claims on the basis of TAM 2022-01 or FTB Publication 1050 may remain in abeyance until an appeal is heard, or the substantive issued is ultimately ruled on. As more states continue to adopt similar guidance, taxpayers should monitor the developments of this issue as it may have significant impacts on the applicability of Public Law 86-272. Taxpayers with questions about the decision or other state adoption of the updated P.L. 86-272 guidance should speak to their tax advisers. 

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