Court Refuses to Dismiss Suit Over FTB’s Taxation of Out-of-State Merchants Based on E-Mails With California Customers

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The American Catalog Mailers Association’s (ACMA) suit challenging the Franchise Tax Board’s use of a technical advice memorandum (TAM) to expand the definition of “doing business” in California deserves a trial, the San Francisco County Superior Court ruled November 29.

The FTB had asked the court to dismiss the ACMA’s complaint, which challenges the FTB’s February 2022 TAM claiming businesses that provide “post-sale assistance to California customers via electronic chat or email” and businesses that place “Internet ‘cookies’ onto computers or other electronic devices of California customers” are considered to be conducting business in California.

This expansive view usurps the protections of the federal Public Law 86-272, the ACMA argued. The law in question was enacted through the Interstate Income Tax Act of 1959, which exempts out-of-state companies from state taxes on net income “so long as the company does not engage in activities within the state beyond the solicitation of orders for sales of tangible personal property.”

The ACMA argued that the FTB is incorrect in its reasoning that a business is engaging in activities within California just by interacting with a California resident, even if all of the Internet servers and websites are hosted entirely out of the state. The association pointed out that the development of the Internet has not altered the language of PL 86-272, which is the federal standard for interstate commerce.

The suit also alleges that the FTB’s regulations on this issue were adopted without the adequate procedures under the Administrative Procedure Act.