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California updates P.L. 86-272 guidance due to “technological advancements”
February 2022
In brief
The California Franchise Tax Board (FTB) recently issued a Technical Advice Memorandum (TAM) addressing whether the protections of P.L. 86-272 apply to certain fact patterns “common in the current economy due to technological advancements” for purposes of California income and franchise tax. The FTB’s guidance comes six months after the Multistate Tax Commission (MTC) adopted a revised statement of information on the application of P.L. 86-272, taking the position that such protections generally are lost when a business interacts with a customer via the business’s website or app.
The takeaway: California is the first state to provide significant P.L. 86-272 guidance following the MTC’s updated guidelines. Other states may follow and adopt similar guidance that would limit protections of P.L. 86-272 in situations relating to virtual connections with a corporate taxpayer. Corporate taxpayers relying on P.L. 86-272 protections should consider whether the activities described in the TAM and the MTC’s revised policy could have an impact on whether they might be deemed subject to tax in other states and the resulting application of apportionment “throwback” and “Joyce”/”Finnigan” rules.
In detail
Overview
MTC’s revised policy
On August 4, 2021, the MTC adopted a revised policy statement addressing activities conducted via the internet. The MTC provides that “as a general rule, when a business interacts with a customer via the business's website or app, the business engages in a business activity within the customer’s state.” However, the MTC recognizes that “when a business presents static text or photos on its website, that presentation does not in itself constitute a business activity within those states where the business’s customers are located.”
The MTC cited the US Supreme Court’s finding in South Dakota v. Wayfair, Inc. that an internet seller “may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.” While the Court was not interpreting P.L. 86-272, the MTC considers the Court’s analysis to be “relevant to the question of whether a seller is engaged in business activities in states where its customers are located for purposes of the statute.”
FTB’s Technical Advice Memorandum
The TAM sets forth conclusions whether the activities presented in 12 factual scenarios (described below) are deemed to exceed the protections of P.L. 86-272. The TAM does not mention the MTC’s revised policy as the impetus for changes, rather, the TAM cites the Wayfair decision. The TAM acknowledges that, although the Court was not interpreting P.L. 86-272, “California considers the Court’s analysis as to virtual contacts to be relevant to the question of whether a seller is engaged in business activities in states where its customers are located for purposes of” P.L. 86-272.
The TAM states that whether a seller of tangible personal property via the Internet is shielded from taxation by P.L. 86-272 requires the same general analysis as for sellers of tangible personal property by other means. Thus, under the TAM, an Internet seller is shielded from taxation in the customer's state if the only business activity it engages in within that state is the solicitation of orders for sales of tangible personal property, which orders are sent outside that state for approval or rejection, and, if approved, are shipped from a point outside of that state.
Examples of disqualifying activities in the TAM
Telecommuting employees
Unless the activities of an employee telecommuting from California on a regular basis constitute solicitation of orders for sales of tangible personal property or are entirely ancillary to solicitation, an employee telecommuting from within California would cause the employer to lose P.L. 86-272 protection. In this TAM, the business activities of business management and accounting tasks are treated as non-sales activities and, therefore, the protection of P.L. 86-272 is considered lost.
Electronic post-sale assistance
A company regularly provides post-sale assistance to California customers via either electronic chat or email that customers initiate by clicking on an icon on the business's website. For example, the business regularly advises customers on how to use products after they have been delivered.
Under the TAM, this company loses the protection of P.L. 86-272 because the activity does not constitute, and is not entirely ancillary to, the in-state solicitation of orders for sales of tangible personal property. There is business activity in California because the company is providing live chat and email through the website available to customers through computers or other electronic devices located in California. This post-sales activity is not solicitation or ancillary to solicitation as the sale already has taken place
Soliciting branded credit cards
A company solicits and receives on-line applications for its branded credit card via the business's website from California customers. The issued cards will generate interest income and fees for the business.
The company loses P.L. 86-272 protection under the TAM because the activity exceeds solicitation inasmuch as offering to provide credit to customers is considered an activity outside of seeking to make orders of tangible personal property in California. In addition, funds loaned through the credit cards would not be limited to purchases of tangible personal property and may not be limited to purchases from the company.
Website accessed by California customers
A company has a website that invites California viewers to apply for non-sales positions. The website enables viewers to fill out and submit an electronic application, and also to upload a cover letter and resume.
Under the TAM, the company loses P.L. 86-272 protection because this business activity is deemed to exceed solicitation as it involves human resource outreach to fill jobs that are not limited to sales.
Placing certain “cookies” on California customer computers
A company places Internet cookies onto computers of California customers. These cookies gather customer search information used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale.
The company loses P.L. 86-272 protection under the TAM because the activity exceeds solicitation as gathering information for purposes of adjusting production schedules and inventory amounts, developing new products, or identifying new items to offer for sale are not considered activities related to facilitating a sale of tangible personal property.
Electronic transmissions to fix prior sales
A company remotely fixes or upgrades products previously purchased by California customers by transmitting code or other electronic instructions to those products via the Internet.
Under the TAM, the company loses P.L. 86-272 protections because the business activity is deemed to exceed solicitation as providing repairs or upgrades to previously sold products are not activities related to facilitating the request for orders for sales of tangible personal property, but rather are post-sales activities.
Website offers extended warranties
A company offers and sells extended warranty plans via its website to California customers who purchase the business' products.
The company loses P.L. 86-272 protections under the TAM because sales of extended warranties are not viewed as sales of tangible personal property but rather as sales of intangible property and therefore are not activities within the protection of P.L. 86-272.
Marketplace facilitator activities
A company contracts with a marketplace facilitator that facilitates the sale of the company’s products on the facilitator's on-line marketplace. The marketplace facilitator maintains inventory, including some of the company’s products, at fulfillment centers in California and other states where the company’s customers are located.
Under the TAM, the company loses P.L. 86-272 protections because it is maintaining inventory in California. This activity exceeds solicitation of orders for sales of tangible personal property as it amounts to consignment of stock of goods to another person, including an independent contractor, for purposes of sale.
Streaming videos and music to California customers
A company contracts with California customers to stream videos and music to electronic devices for a charge.
The company loses P.L. 86-272 protections under the TAM because streaming does not constitute the sale of tangible personal property for purposes of P.L. 86-272. The company has business activities in California by offering streaming services for sale to California customers. This activity exceeds solicitation of orders of tangible personal property and defeats the company’s P.L. 86-272 immunity.
Examples of non-disqualifying activities in the TAM
Website FAQ page
A company provides post-sale assistance to California customers by posting a list of static FAQs with answers on the company’s website.
According to the TAM, the company does not lose P.L. 86-272 protections because the FAQ page does not constitute a business activity within California. Viewing of static FAQs through the internet does not provide the requisite interaction between the California customer and the company; it is similar to reading a pamphlet on a product.
Placing certain “cookies” on California computers
A company places Internet cookies onto computers of California customers. These cookies gather customer information that is used only for purposes entirely ancillary to the solicitation of orders for tangible personal property, such as:
- to remember items that customers have placed in their shopping cart during a current web session,
- to store personal information customers have provided to avoid the need for the customers to re-input the information when they return to the seller's website,
- and to remind customers what products they have considered during previous sessions.
The cookies perform no other function, and these are the only types of cookies delivered by the business to its customers' computers or other electronic devices.
The company does not lose P.L 86-272 protections under the TAM because the activity is entirely ancillary to the in-state solicitation of orders for sales of tangible personal property. Business activity exists in California because the company downloads cookies onto computers located in California. However, since these business activities are considered entirely ancillary to solicitation, the company remains protected by PL 86-272.
Maintaining a website
A company offers for sale only items of tangible personal property on its website. The website enables customers to search for items, read product descriptions, select items for purchase, choose among delivery options, and pay for items. The business does not engage in any other in-state business activities.
Under the TAM, the company does not lose P.L. 86-272 protections because the in-state activities either constitute solicitation of orders for sales of tangible personal property or are entirely ancillary to such solicitation. This activity is in California due to the interaction between the website, including the download of cookies, and the customer's computer or other electronic device located in California. However, this business activity does not exceed solicitation of orders for tangible personal property and therefore the company is considered to remain protected by P.L. 86-272.
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