Article
California is first state to apply revised PL 86-272 guidance
Feb. 23, 2022 · Authored by Phil Horwitz, Glenn Walsh
In 2021, the Multistate Tax Commission (MTC) adopted revised guidance to its interpretation of the application of Public Law (PL) 86-272 in the context of the online and digital economy. In February 2022, California issued a Technical Advice Memorandum (TAM) aligned with the MTC’s guidance.
An overview of the TAM and its application to taxpayers conducting business in California is discussed in this tax alert.
Guidance narrows limits
PL 86-272 protects a business from state income tax if its only activity there is soliciting orders for tangible personal property (TPP) — if the orders are reviewed and approved out of state and the property is shipped from out of state.
The MTC’s guidance states that a business whose customer is using the business' website in the customer’s home state is an activity of the business in the customer’s state. The MTC’s guidance then goes on to describe the protections of PL 86-272 in this context.
Generally, the MTC’s guidance concludes that most activities performed remotely over the Internet, such as chat and email, could exceed the protections of PL 86-272, which could vitiate the business' protection under it, unless those activities directly serve a sales purpose such as the solicitation of an order of TPP.
Critically, the MTC’s guidance appears to significantly limit the application of PL 86-272.
California adds to guidance
California’s TAM 2022-01 signals its adoption of the MTC’s revised guidance on the applicability of PL 86-272 to businesses that conduct business in the state. By adopting this guidance, California requires both in-state and out-of-state businesses to analyze their website activities when assessing their tax filing profile.
What exceeds the protections?
California’s Franchise Tax Board (FTB) has not provided a comprehensive list of activities that exceed the protections of PL 86-272. It has, however, advised that the following activities exceed those protections:
- A non-sales employee telecommuting from within California
- Post-sale assistance to California customers via email or chat initiated from the business' website
- Solicitation from California applicants of online applications for a branded credit card via the business' website — not a bank’s — if that business will ultimately receive fees and interest from the card
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.