Wayfair Strikes Again…Out of State Retailers Beware

According to a recently issued controversial Technical Advice Memorandum (“TAM”) issued by the Franchise Tax Board (“FTB”) the United States Supreme Court decision in South Dakota v. Wayfair, Inc., may have gutted the “mere solicitation” taxpayer protection under Public Law 86-272 (“PL 86-272”).

On February 14, 2022, the FTB issued TAM 2022-01, walking through many different fact patterns to examine whether the businesses described have exceeded the protections of PL 86-272.

The general question presented was whether the business exceeded the protections of PL 86-272, where the business makes sales to California customers, is commercially domiciled outside of California, and has no other activities in the state.

The general analysis of whether an out-of-state taxpayer’s activities cause it to exceed PL 86-272’s protection involves asking two questions:

Are there business activities taking place in California, and do those activities exceed the protection of PL 86-272 such that the business becomes subject to California income or franchise tax?

The first nine fact patterns in the legal ruling disqualify the described business from the protections of PL 86-272 because the activities depicted do “not constitute, and [are] not entirely ancillary to, the in-state solicitation of orders for sales of tangible personal property.”  Those fact patterns included:

• A business with an employee who regularly telecommutes from within California “performing business management and accounting tasks.”
• A business that “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.”
• A business that “solicits and receives on-line applications from its branded credit card via the business’s website from California customers.”
• A business that “has a website that invites viewers in California to apply for non-sales positions with Business D.”
• A business that places Internet “cookies” that “gather customer search information that will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale” on computers or electronic devices of California customers.
• A business that “remotely fixes or upgrades products previously purchased by California customers by transmitting code or other electronic instructions to those products via the Internet.”
• A business that “offers and sells extended warranty plans via its website to California customers who purchase the business’s products.”
• A business that “contracts with a marketplace facilitator that facilities the sale of business’s products on the facilitator’s on-line marketplace” which “maintains inventory, including some of the business’s products, at fulfillment centers in various states where the business’s customers are located.”
• A business that “contracts with California customers to stream videos and music to electronic devices for a charge.”

The tenth, eleventh, and twelfth fact pattern all describe businesses that are still under the protection of PL 86-272 and not subject to California taxation.

The tenth fact pattern involves a business that “provides post-sale assistance to California customers by posting a list of static Frequently Asked Questions (‘FAQs’) with answers on the business’s website.”  In this case, the FTB explains that the business remains protected by PL 86-272 because “viewing of static FAQs through the internet does not provide the requisite interaction between the California customer” and the business to constitute a business activity within California, comparing this activity to “reading a pamphlet on a product.”

The eleventh fact pattern again describes a business that places internet “cookies” onto California customers’ computers or other electronic devices.  However, the “cookies” in this fact pattern differ from that above because they are limited to gathering “customer information that is only used for purposes entirely ancillary to the solicitation of orders for tangible personal property. . . .”  This business remains protected by PL 86-272 because the described activities constitute sales of tangible personal property or are “entirely ancillary to the in-state solicitation of orders for sales of tangible personal property.”

The twelfth and final fact pattern provided in TAM 2022-01 is for a business that offers for sale only items of tangible personal property on its website and does not engage in any other in-state business activities.  Since this business’s activities are limited to either soliciting orders for sales of tangible personal property or entirely ancillary to that solicitation, the business remains protected by PL 86-272.

To summarize its new guidance regarding the protections of PL 86-272, the FTB’s TAM states that whether PL 86-272 shields sellers of tangible personal property via the internet, or other means, requires the same analysis.  “Thus, 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.”

The analysis for TAM 2022-01 also points to the recent United States Supreme Court decision in South Dakota v. Wayfair Inc. to rationalize the new guidance.  The TAM states, “Although the United States Supreme Court was not interpreting PL 86-272 in Wayfair, 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 PL 86-272.”

Under this newly issued guidance, many out-of-state taxpayers who believed PL 86-272 shielded them from California taxation may have to reconsider whether their contacts with the state expose them to California franchise or income tax.