Page 655 - TaxAdviser_2022

STATE & LOCAL TAXES

whether business activities are taking
If a state formally — or even informally — place in California and, if so, whether
those activities exceed the bounds of
adopts the MTC’s statement, activities that P.L. 86-272 protection, causing the
a business may have believed were business to be subject to net income
protected by P.L. 86-272 may suddenly taxation. While the TAM considers the
same internet activities as the MTC’s
subject the business to a state’s statement, it provides more detailed
income tax, perhaps retroactively. explanations supporting its conclusions.
Similar to the MTC’s statement, the
TAM clarifies that the determination
of whether a seller of tangible personal
property over the internet is protected
for purposes entirely ancillary to the conducted by businesses over the in- by P.L. 86-272 requires the same
solicitation of orders for tangible ternet that are not protected by P.L. general analysis as sellers of tangible
personal property; and 86-272. As a result, internet sellers have personal property by other means. Also,
■ The business offers for sale a substantial interest in whether states the TAM appears to follow the MTC’s
only items of tangible personal decide to follow the MTC’s statement. statement by explaining that even
property on a website that enables If a state formally — or even informally though the U.S. Supreme Court was
customers to search for items, read — adopts the MTC’s statement, activi- not interpreting P.L. 86-272 in Wayfair,
product descriptions, select items ties that a business may have believed “California considers the Court’s analy-
for purchase, choose among delivery were protected by P.L. 86-272 may sis as to virtual contacts to be relevant
options, and pay for the items, but suddenly subject the business to a state’s to the question of whether a seller is
the business does not engage in any income tax, perhaps retroactively. engaged in business activities in states
of the nonprotected activities listed where its customers are located for pur-
above. California’s administrative poses of P.L. 86-272.”
In considering the MTC’s published guidance California’s guidance attempts to
guidance, businesses conducting internet California was the first state to issue provide clarification to out-of-state
transactions should carefully review guidance that reflects the MTC’s re- businesses to determine whether their
the examples discussed above. A slight vised statement. On Feb. 14, 2022, the internet activities subject them to
change in the business’s online activities California Franchise Tax Board (FTB) California’s income tax. As a result of
may alter whether the business is subject released administrative guidance, Tech- this guidance, some internet-based
to income tax in the customer’s state. nical Advice Memorandum (TAM) businesses that previously thought their
For example, placing cookies onto the 2022-01, to explain its position on how activities were protected by P.L. 86-272
computers or other electronic devices P.L. 86-272 protection applies in the may suddenly learn that the FTB may
of in-state customers may or may not modern economy for companies with not agree with their historical posi-
be protected by P.L. 86-272, depending internet transactions. While the TAM tion. Since the TAM does not contain
on the type of information that is ulti- does not actually refer to or mention any effective date or limiting principle
mately obtained. The use of cookies is a the MTC in any way, the TAM gener- regarding how it may be applied by
protected activity if the information is ally is consistent with the positions set the FTB in auditing prior years, the
only used for purposes entirely ancillary forth in the MTC’s statement. The FTB conceivably may apply the TAM
to the solicitation of orders for tangible release of the TAM in this manner may retroactively to tax years open under
personal property, but it is not a pro- call into question whether California the California statute of limitation.
tected activity if the information is used formally is a “supporting state” of the Furthermore, the TAM does not ad-
to advance the business’s sales activities MTC’s statement, due to the lack of dress the FTB’s existing P.L. 86-272
in the state. any explicit reference to the MTC. guidance provided in FTB Publication
States are not bound by the MTC’s The California guidance addresses 1050, Application and Interpretation of
interpretation and are responsible for in- the same 11 internet activities outlined Public Law 86-272, which correlated to
dividually adopting the principles of the in the MTC’s statement and reaches the prior version of the MTC’s state-
revised statement. The MTC’s examples the same conclusions. The TAM ana- ment interpreting P.L. 86-272. There-
list many types of activities commonly lyzes each fact pattern by determining fore, clarifying guidance addressing the

46 December 2022 The Tax Adviser