An association representing remote-selling merchants is suing the Franchise Tax Board, alleging that the FTB is attempting to illegally expand its taxing authority via a technical advice memorandum (TAM) and related guidance publication that “directly contradict the plain language” of a federal law they purport to interpret.
The suit, filed August 19 in San Francisco County Superior Court by the American Catalog Mailers Association (ACMA), challenges TAM No. 2022-01 and FTB 1050, relating to when a remote seller is deemed to be conducting business in California.
“The TAM and FTB 1050, purport to adopt a new interpretation of a 63-year-old federal law, that directly contradicts the plain language of the federal law and in so doing violates the rights of ACMA members and other remote retailers,” the suit states. “For more than six decades, to the best of ACMA’s information and belief, neither the FTB, nor any other state or local agency has attempted to impose net income tax obligations on out-of-state merchants whose activities within the physical boundaries of the state do not exceed the solicitation of orders in interstate commerce. The publication of the TAM and FTB 1050 is an announcement by the FTB, without following the applicable rulemaking procedures required by the California Administrative Procedure Act …, of a new standard of general application that purports to limit radically the protections of existing federal law, and expand the taxing authority of the FTB beyond the limits that have existed for decades and that are imposed by federal law and the U.S. Constitution.”
The TAM was issued February 14 with the stated subject of “Determining whether the protections of 15 U.S.C. Section 381-384 … apply to fact patterns that are common in the current economy due to technological advancement for purposes of California income and franchise tax.”
The scenarios presented in the TAM include several described as constituting conducting business in California, including a business that “regularly provides post-sale assistance to California consumers via either electronic chat or email that customers initiate by clicking on an icon on the business’s website,” and using “cookies” that gather search information from California customers for various uses.
“Many of the 12 scenarios described in the TAM – such as having a clickable email address link on a website, or utilizing common website analytics to inform advertising or other business strategy through the use of cookies, … include basic elements of 21st century business but do not involve engaging in activities within the state if the website is not hosted on servers located in California,” the suit states.
The suit additionally states that the FTB’s refusal to vet the TAM with interested parties, coupled with indications from FTB representatives that they intend to apply the TAM’s reasoning retroactively to any open tax periods, show that court action is needed to protect taxpayers’ rights.
The ACMA, based in Washington, D.C., represents companies that sell merchandise to customers in all 50 states through catalogs or online.
The FTB does not comment on pending litigation.