Interactive websites are routine and states are looking for ways to capitalize on activities taking place online. California’s efforts to do so are headed to court, and other states are watching closely.
California’s P.L. 86-272 guidance is headed to court. American Catalog Mailers Association (ACMA) filed suit in Superior Court on Aug. 19, 2022, challenging California’s interpretation of P.L. 86-272. The suit aims to invalidate the Technical Advice Memorandum (TAM) 2022-01 and Franchise Tax Board (FTB) Guidance 1050, which interpret state protections of P.L. 86-272 related to internet-based activities. What’s notable is how closely the guidance follows the ecommerce restatement issued by the Multistate Tax Commission (MTC) in August 2021. (Read MTC Guts Federal Protections for Remote Sellers).
Per California guidance, certain internet-based activities, which include many functions and services routinely found on websites, invalidate the protections of P.L. 86-272. This includes the use of cookies, email or chat functions related to sales and accepting online applications for employment to name a few. ACMA lawsuit 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 Takeaway
This challenge will be closely watched due to the broad list of internet-based activities that are now void under California guidance, which virtually guts the protections of P.L. 86-272. Should the Court find in favor of the plaintiff, the MTC restatement may find itself on unsteady ground, and other states such as New York (and other states considering similar guidance) may backpedal on proposed regulations adopting the MTC restatement on P.L. 86-272.
Should the court deny plaintiff claims, taxpayers can expect New Jersey, Oregon and many other states to move forward with regulations adopting the MTC’s rules. Interactive websites are routine and states are looking for ways to capitalize on activities taking place online.
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