California Further Limits Application of P.L. 86-272 Protection To E-commerce

In Technical Advice Memorandum 2022-01 (TAM), California's Franchise Tax Board (FTB) examined the scope of P.L. 86-272's protections, especially in the context of online activities and remote work. This memorandum largely mirrors the Multistate Tax Commission (MTC)'s prior guidelines and concludes that various online activities can make a taxpayer ineligible for the protections under P.L. 86-272. Such disqualifying online activities include offering after-sales support via chat or email, accepting branded credit card applications, taking in job applications for non-sales roles, and installing cookies on users' devices.


For those of you who are not familiar with P.L. 86-272, it is a federal law preventing a state from imposing a net income tax on any person’s income derived within the state from interstate commerce if the only business activity performed in the state is the solicitation of orders of tangible personal property; such orders are sent outside the state for approval or rejection; and the orders, if approved, are filled by shipment or delivery from a point outside the state.


The TAM also stipulates that regular telecommuting from California would void these protections, unless the in-state activities are solely supportive of sales of tangible personal property. Businesses with websites or remote workers in California should critically evaluate how the TAM affects them, particularly if they currently depend on P.L. 86-272 protections or are subject to California's income tax apportionment throwback rule.


California is the pioneer state to enforce the MTC's definitions of protected and non-protected internet-based activities, applying its interpretation retroactively. States like New York, New Jersey, and Oregon are contemplating similar moves, although California's interpretation has already faced legal challenges from the American Catalog Mailers Association.


The future remains uncertain regarding how many states will adopt the MTC's updated guidelines and whether they'll enforce them retroactively or going forward. The evolving interpretation of P.L. 86-272 adds complexity for both states and taxpayers, limiting its original protective scope even further.  Taxpayers should engage in diligent review and planning to navigate these shifting tax obligations.


Link to TAM 2022-01  Technical Advice Memorandum 2022-01