Challenging California’s Underground Regulations: Exploring the ACMA’s Advocacy Efforts Part 1

Hosts & Guests

Meredith Smith, State and Local Tax Senior Manager

Paul Miller, Vice President & Deputy Director of the ACMA

David Swetnam-Burland, Partner at Brann & Isaacson

What You Will Discover:

In this episode of the SALTovation podcast, Meredith interviews Paul Miller, Vice President & Deputy Director of the ACMA, and David Swetnam-Burland, Partner at Brann & Isaacson. Both discuss the changes in tax regulations that have taken place after the Wayfair decision, the ACMA’s mission, and the legal challenges that businesses face today. They also talk about the efforts being made to address the complications that arose after the Wayfair ruling, which led to a significant shift in sales and use tax obligations for remote sellers.

Listen to the SALTovation podcast here: https://saltovation.captivate.fm/listen.

Topics Discussed in this Episode:

  • The ACMA has extended its advocacy from catalog mailers to encompass a broader range of remote marketers, responding to the industry’s digital transformation.
  • Wayfair ruling’s aftermath has led ACMA to push for federal legislation that simplifies sales tax collection, addressing the complexities of state-by-state compliance.
  • The legal challenge against California’s interpretation of Public Law 86-272
  • California’s Technical Advice Memorandum and Publication, which may affect future state tax policy.
  • The intricacies of sales and income tax laws post-Wayfair pose significant burdens on businesses, especially smaller entities, and ongoing advocacy and legal efforts are crucial in addressing these challenges.

    Quotables:

      • “The ACMA’s original mandate was to keep postage rates in checked for catalogs, and we’ve done so quite effectively throughout to the present day. We evolved over the years, and in the early two thousand and ten s, I guess we call it, we picked up on the growing efforts to overturn the 1992 standard in quill versus North Dakota, which upheld that catalog, and other direct marketing companies were not required to collect sales or use taxes from customers residing in states in which those companies have no physical presence.” -Paul Miller [01:54]
      • “As much as the states might like to change the policy in this area, we don’t believe, and the ACMA doesn’t believe, that a public guidance document or a state tax regulation from a state level is a way to do that. This is a federal statute under the supremacy clause. It provides a clear rule for and I think one thing the states tend not to appreciate is the ACMA and our client base are businesses of all sizes.” -David Swetnam-Burland [08:35]

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    Transcript

    [00:00:00] Meredith: Welcome to SALTovation. The SALTovation Show is a podcast series featuring the leading voices in salt, where we talk about the issues and strategies to help you make sense of state and local tax. Today we are diving into one of the top 10 issues we at SALTovation are tracking in 2024. The Expanding Income Tax Exposure under Public Law 86 272.

    [00:00:23] Meredith: PL 86 272 is a federal law that gives taxpayers protection from certain state income tax obligations. However, recent developments at the state level, particularly resulting from the guidelines issued by the Multi State Tax Commission, MTC, has sparked significant challenges and court battles. Putting this federal protection in jeopardy, California, New Jersey, and New York have considered or have adopted the MTC statement on PL 86272 leading to the widely publicized case we will talk about today.

    [00:00:52] Meredith: The first court challenge to these state interpretations of PL 86272. Came in California from the American catalog mailers association, ACMA, an industry association that advocates for catalog and remote marketers on December 15th, 2023, the ACMA won a key ruling on procedural grounds here today to talk about this challenge, what the ruling means and what we can expect going forward is Paul Miller, vice president and deputy director of the ACMA and David sweet number land.

    [00:01:24] Meredith: an attorney in the ACMA suit at Brand and Isaacson. Enjoy. All right. Well, thank you, Paul. Thank you, David, so much for being on the SALTovation podcast. It's great to have you here today. It's

    [00:01:37] David Swetnam-Burland: our pleasure.

    [00:01:39] Meredith: So, um, I want to start, Paul, can you summarize your background? And how kind of that has contributed to your current role at ACMA?

    [00:01:50] Paul Miller: Uh, sure. Back, background is probably a, uh, the word back is good here because, uh, I kind of backed into this industry a long time ago. I, I was a, uh, journalist by trade and I ended up with a publication that's no longer around called Catalog Age, which was a Basically the Bible of the catalog industry, um, back in the eighties and nineties and early two thousands when it was quite a vibrant industry and it remains a vibrant one, but it is, uh, basically, uh, gotten as changed quite a bit since the internet came along and mobile shopping and whatnot.

    [00:02:28] Paul Miller: So, um, I had a pretty lengthy career as an editor, uh, with that magazine and with another magazine in that field as well until, um, The late 2000s and, uh, in 2010, I was recruited to join the ACMA, the American Catalog Mailers Association, which was founded in 2007 after years of catalog mailers not having a seat at the table when it came to the setting of postal rates.

    [00:02:59] Paul Miller: As a result, catalog mailers were steadily receiving, uh, much greater postage increases than other types of mailers each time the rates would get changed. The ACMA's original mandate was to keep postage rates and checks for catalogs. And we've done so quite effectively throughout to the present day. We, uh, evolved over the years and, uh, in the early 20, 20 teens, I guess we call it.

    [00:03:28] Paul Miller: Um, we picked up on the growing efforts to overturn the 1992 standard and Quill versus North Dakota, which upheld that catalog and other direct marketing companies were not required to collect sales or use taxes. from customers residing in states in which those companies have no physical presence. Um, we were working with other organizations and different industries that also represented remote marketers and For several years, we successfully held off in the undoing of the quill standard until the Supreme Court's ruling in Wayfair versus South Dakota in 2018.

    [00:04:10] Paul Miller: Since that time, we've shifted gears somewhat, working closely with Congress to gain a federal law that simplifies the collection of such taxes. We, because, uh, the Supreme Court's Wayfair ruling left it to the states to collect, however, which way they felt from over 12, 000 different taxing jurisdictions around the country with differing tax rules and tax holidays and product and service definitions and so forth.

    [00:04:41] Paul Miller: And it's, it's a huge undertaking for any company, especially some of the smaller members we have that are. From like, single digit million in sales to on up to hundreds of millions in sales of billion dollar companies. It's You have to hire someone to be on hand all the time to handle this stuff because one wrong move and you get nasty grams from different states saying, uh, threatening, uh, you know, different kinds of fines, penalties, whatnot, if you don't do it right.

    [00:05:14] Paul Miller: And it's all the while it's not so much that are we? Our members are happy to collect the taxes. The problem is in the the actual act of collecting them, collecting the right amounts. educating their customers who haven't a clue. You know, I'm someone in, say, Montana who's collecting at one rate and someone here in New York is collecting another and someone in Washington and so forth.

    [00:05:41] Paul Miller: Um, to get that that information out is cumbersome as well. So we aim to change it to streamline that. So, um, to get a federal bill put forward and it's It's been a long, cumbersome process. We've been working closely with David here and his firm and, um, working with Congress to try to get a federal law enacted that will make it a lot easier for our members to do it.

    [00:06:08] Paul Miller: So that's pretty much us in a nutshell. The only thing I'll add is that we are actually on the verge of having a slight rebranding of our organization's name from American Catalog Mailers Association to American Commerce Marketing Association. Um, primarily it's cosmetic, but the real purpose is to because we are now not just advocating for companies that only mail printed catalogs.

    [00:06:37] Paul Miller: We're also advocating for e commerce merchants, direct mailers, companies that may just send out postcard mailings and send you to their website, even mobile phone marketers for the lack of better way to put it. But companies that Come after you on your phones and play, make offers and whatnot. So, um, we are, we haven't necessarily gotten that much bigger, but we we're trying to get bigger, obviously, but we are trying to broaden our offerings.

    [00:07:06] Paul Miller: Um, and so this new name reflects it, although we're really gonna retain the same, um, acronym, which we've gotten to be pretty well known by, uh, just a CMA.

    [00:07:18] Meredith: Yeah. So A CMA has kind of been very much kind of. Maybe increase their public recognition based on kind of being the first to challenge Public Law 86 272 and really appreciate the kind of simplification that you're doing from the sales tax side.

    [00:07:38] Meredith: But ACMA has requested or requested a motion for summary judgment. regarding kind of California's technical advice memo, their TAM 2201, which is over two years old now at this point, which is crazy to think about. And their 1050 publication kind of, which outlines the kind of protections afforded under public law 86 272.

    [00:08:00] Meredith: What factors influenced kind of that decision to, or pursue that kind of decision to kind of challenge the FTB on what they were doing.

    [00:08:10] David Swetnam-Burland: Yeah, thanks Meredith. I can, I can take this one. Um, this is David Sweatman Berlin from Brandon Isaacson. Um, just a by way of background of of our firm, we've been working hand in hand with the ACMA for Probably decades now.

    [00:08:23] David Swetnam-Burland: I think it's safe to say. Um, and like them, we've grown up with the industry from representing catalog merchants, starting with the LL bean to the present, where the catalog is considered by many to be an artifact of the past, although not by many of our clients. So, which is a long way for me to say that we were there, uh, step by step in litigating it.

    [00:08:46] David Swetnam-Burland: Wayfair to the Supreme Court. My late colleague, George Isaacson, argued that case on behalf of the respondents, um, unsuccessfully, regrettably, from our perspective. But Public Law 86 272 appears to us to be the next front in this conflict between the aggressive state tax agencies who are looking for ways to entice, bully, prompt, choose your verb, um, out of state retailers in particular into registering and remitting.

    [00:09:17] David Swetnam-Burland: State income tax. This litigation in California stems out of the 2021 Multistate Tax Commission report that recommended from, from our perspective, essentially gutting Public Law 86 272 by redefining what it is to do a business activity in a state to include activities that include. Most definitely don't happen in that state, such as responding to an email inquiry on a website or using marketing cookies to track, um, customer behavior in certain ways, as much as the states might like to change the policy in this area.

    [00:09:55] David Swetnam-Burland: Um, we don't believe, and the ACMA doesn't believe, that a public guidance document or a state tax regulation from a state level is necessary. Is the way to do that. This is a federal statute under the supremacy clause. It provides a clear rule for, and I think one thing the States tend not to appreciate is the ACMA and our client base are businesses of all sizes and what.

    [00:10:20] David Swetnam-Burland: Amazon might be able to seem to do with the snap of a finger, a relatively small boutique business in Maine or some other state, um, that opens a website with a retail outlet, um, isn't able to do. And public law 86 272 is a pretty bright line rule. If the only activities your business has in the state relate to soliciting the sale of goods for purchases completed outside the state, um, you don't have, you shouldn't have to worry about that state's income tax.

    [00:10:48] David Swetnam-Burland: And now the presence of cookies. Or live chat shouldn't change that calculation. And so that's why we, that's why we launched this litigation. And we were delighted to have the ACMA support in doing that.

    [00:11:00] Meredith: Well, on behalf of all income tax practitioners out there, thank you for, thank you for ACMA for stepping up and, you know, David, your firm for taking that, taking on that challenge.

    [00:11:12] Meredith: Could you just walk us through the procedures and it's ruling and kind of where it stands? right now?

    [00:11:20] David Swetnam-Burland: For sure. Absolutely. In the California case recently came to an end, at least at the trial court level. Um, we filed suit in August of 2022 with basically a three part argument to say that the TAM, Technical Advice Memorandum 2020 201 and Publication 1050 revised and In 2022 were invalid for two reasons.

    [00:11:45] David Swetnam-Burland: Uh, first on the substance of it, they contradicted public law 86 272 directly. And therefore under the supremacy clause, federal law prevails in that case. Secondarily, that these were. That these were underground, what California law calls underground regulations. That is the FTB issued a documents that purported to be general rule to apply broadly to retailers across the country, but did so without using the proper administrative process through the APA, uh, the administrative procedure act, which among, among other things requires notice and comment rulemaking.

    [00:12:23] David Swetnam-Burland: I will note, and this, we can put a pin in this for later that New York. did proceed through the appropriate channels to publish a regulation that we still believe is contradicts the federal law, but at least they followed that process and ACMA was able to to comment, um, in that process. And then our third argument, um, in California was simply that if they're, if they were going to announce this rule, they couldn't make it retroactive because no business could plan, could have planned ahead for, What we believe is a sudden change in the, in the rules of the road, the court was sympathetic to our arguments on the first point, but ultimately decided that that was going to be an issue that had to be resolved at trial.

    [00:13:05] David Swetnam-Burland: And so that was the first step we, um, he would not grant summary judgment, which is not to say the FTV was successful, but we hadn't met our burden of proof on that issue. But he made very clear his view that this was a regular, that these were regulations that were promulgated improperly, not according to the APA process.

    [00:13:23] David Swetnam-Burland: And so when we asked for a judgment on that basis, he granted it.

    [00:13:26] Meredith: So then what do you think are next steps? Do we think California is going to go back, follow proper procedural rules to kind of You know, make it a right, like truly enacted into law, kind of like some of the other states you had mentioned, New York, I think New Jersey has just done the same thing, Minnesota might be trying to do the same thing or did, does, do, all of that.

    [00:13:54] Meredith: Do we think California is going to, or crystal ball, do you think California is going to do that? And then are there any challenges to kind of go back to the whole idea of this is federal law, you can't do it.

    [00:14:08] David Swetnam-Burland: Yeah, there's. Excellent question. And I don't have any insight into this other than my experience of litigating this case and based on my experience of litigating this case, and Paul can attest to this, um, the FTB has been extremely.

    [00:14:22] David Swetnam-Burland: aggressive in its position. So I, I have no intelligence about this, but I would anticipate an appeal to the California court of appeal of the judgment. Um, they had in particular, not just the ruling that this was an invalid underground regulation, but they had a very aggressive position on, um, a fairly technical legal issue of called standing basically, is the ACMA even allowed to do this kind of litigation?

    [00:14:49] David Swetnam-Burland: Judge Chilman was very clear that he agreed strongly with us that they are. But, um, I would say that the FTB devoted more resources to fighting us on that front than they did on the merits of the case. So that's where California is. Um, having said that, I do, I believe based on my informal research that the TAM has been withdrawn from the FTB's website.

    [00:15:11] David Swetnam-Burland: Um, if you look for it, you can't find it any longer. So it's possible that they will accept that. The judge ruled the way he did and, um, proceed to a rulemaking process. And, um, to that extent, while it would have been nice to get a clear statement on the law, um, we're prepared to, to move forward to challenge that if that's how they choose to go.

    [00:15:31] Meredith: Yeah. And something that, you know, you had mentioned earlier, and it kind of even goes back to just, you know, Paul's comments on Wayfair is just the underpinnings of just burden that Kind of the abolishment of Public Law 86 272 has on all taxpayers, um, particularly the small businesses, right? Because if you have, you know, a, call it a sales tax license in all 46 states, and you're no longer really afforded that protection to not file, per se, and have to pay income tax, just that burden alone, you know, call it.

    [00:16:15] Meredith: You know, to file an income tax return in 42 additional jurisdictions where there could be sales tax and income tax overlap, let's say a tax return preparer charges 1, 000 a return. If you're a pass through, you know, that's just kind of increased in addition to the sales tax, you know, kind of burdens and implementation filing those returns.

    [00:16:37] Meredith: That's an additional, you know, tens of thousands of dollars in annual compliance for a small business that, you know, just seems like. You, it's, it's not financially feasible, but then if you, you know, when you are trying to collect sales tax correctly, right, under the kind of Wayfair standards that, you know, you've put yourself out there to, you know, have to file those income tax returns.

    [00:17:04] Meredith: I imagine that that kind of position and that burden is something that ACMA takes really seriously.

    [00:17:12] David Swetnam-Burland: Yeah, absolutely. I mean, I can speak from the litigation side and Paul may have something to add on the advocacy side, but among the things that The franchise tax board attempted to do in this case was to get the ACMA to provide a list of its members that it was going to vet for its own purposes.

    [00:17:30] David Swetnam-Burland: It was, I'm not saying it was, it had improper purpose in seeking that, although the judge did rule that they weren't allowed to obtain that information in the context of this litigation. Um, but. The other position they took was that the only way to challenge the validity of one of their own regulations is through the pay to play process in California.

    [00:17:49] David Swetnam-Burland: So yeah, you're, if you choose not to register and you get audited and you get assessed and you get penalized, then you can go through their administrative process after paying tax that. In this scenario is, um, was improper to begin with, and only at the end of that process can you get to Superior Court and finally have a judge tell you that, well, actually, we didn't need to be here all along because the under the rule underlying this whole, the premise of this whole assessment was flawed.

    [00:18:17] David Swetnam-Burland: And that's the kind of mean. What Public Law 86 272 is supposed to do and, and did until recently is say, no, here are the rules of the road. If you follow them, federal law will protect you from that kind of aggressive, overly aggressive, in our view, conduct on behalf of the states.

    [00:18:37] Meredith: This podcast is for educational purposes only and is not intended nor should it be relied upon as legal advice.

    [00:18:43] Meredith: Tax, accounting, or investment advice. You should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented.