On February 14, 2022, the California Franchise Tax Board issued extremely aggressive income tax guidance that appears to create a substantial risk to any non-California seller who elects to use the eBay
Vault. In Technical Advice Memorandum 2022-01 (TAM 2022-01), FTB announced it is limiting the protection of Public Law 86-272 for internet retailers who sell products to California customers. Public Law 86-272 (PL 86-272) is a 63-year-old federal law prohibiting the states from imposing net income
taxes on sellers of tangible property when the activities of the seller are limited merely to solicitation. Many internet retailers have claimed exemption from California's income tax because their online presence has previously been deemed to be mere solicitation. As a reminder, California has among the highest income taxes in the world, with a top marginal tax rate of 13.4% and a proposal to raise it to 16.8%.
The FTB's new guidance limits PL 86-272 protection for online retailers. The TAM expands the list of "unprotected activities" to include many common aspects of internet retail sites, such as:
• Providing post-sale assistance regarding products via electronic chat or e-mail customers initiate by clicking on an icon on the website
• Placing of certain "cookies" onto the computers or other electronic devices of California customers
• Transmitting code to a California customer to upgrade or repair previously purchased products
• Selling extended warranties over the internet site
• Maintaining the taxpayer's inventory at the warehouse of a marketplace facilitator
(such as Amazon
• Selling digital video and streaming services
Many of these activities are integral to the operation of a retail internet site. In light of this guidance, taxpayers should review TAM 2022-1 to consider impacts to their California PL 86-272 positions. California's guidance closely follows the Multistate Tax Commission's updated guidance regarding internet selling, which was issued last August. Many additional states can be expected to adopt similar guidance going forward. Internet retail businesses should closely monitor this activity across the states and continue to review PL 86-272 positions.
In case it is not clear from the foregoing, this policy position means that California may seek to confiscate new INCOME
tax remittances from non-California internet sellers, not more SALES tax. To avoid this draconian result, internet retail stamp sellers may wish to immediately review how their servers interact with customers and reconsider any plans to use the Vault. It would not be inappropriate to implement location-based checking of IP addresses and block all access of computers with IPs that resolve to California locations, to avoid having the seller's server set cookies on those machines.
Sellers may also wish to scrupulously ensure that California FTB cannot establish personal jurisdiction (for purposes of a tax enforcement lawsuit) over the seller. That is, the new guidance says one thing, but FTB also has to find a valid way to haul the seller into the California courts, or impose a valid lien. Sellers who annually attend WESTPEX, for example, with no other contact with the state, may have sufficient "minimum contacts" with California to permit a California court to exercise "long-arm" jurisdiction over the seller.