California FTB Issues Guidance on PL 86-272 for Certain Online Activities

On February 14, 2022,  California became the first state to update its interpretation of PL 86-272 to include internet-based activities, when the California Franchise Tax Board (FTB) issued Technical Advice Memorandum 2022-01 (the TAM) to provide guidance on whether the protections of PL 86-272 “apply to various fact patterns that are common in the current economy due to technological advancements for purposes of California income and franchise tax.”

The FTB’s guidance may prove beneficial for in-state companies that ship products from California by lowering throwback sales; conversely, it may prove unfavorable for out-of-state companies engaged in internet-based activities with California customers.


Originally enacted in 1959 by the federal government to address a state’s ability to impose net income taxes on taxpayers engaged in interstate commerce, PL 86-272 protects an out-of-state person from a state’s net income tax if the only activity in the state by or on behalf of that person is the solicitation of orders for sales of tangible personal property that are approved and shipped or delivered from outside the state. As a federal law regulating interstate commerce, the protections of PL 86-272 apply in every state.
Since it was enacted, state and local taxing jurisdictions, various organizations (including the MTC) and the courts have interpreted how the protections of PL 86-272 apply to certain fact patterns. The MTC initially issued its PL 86-272 statement in 1986. Since then, the MTC has issued four revisions, with the most recent revision, dated August 4, 2021, addressing activities conducted via the internet.
In 2018, the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. removed the physical presence component for purposes of meeting the substantial nexus requirement under the “dormant” Commerce Clause for a state to impose a tax, declaring it “unsound and incorrect.” The MTC’s 2021 revision to its PL 86-272 statement interpreting the federal law relied on Wayfair for “Activities Conducted Via the Internet.” Even though Wayfair did not address PL 86-272, the MTC relied heavily on dicta in Wayfair stating that “a business may be present in a State in a meaningful way without [that presence] being physical in the traditional sense of the term.”
California’s FTB joined the MTC’s view that an out-of-state person may have activity within a state considered unprotected under PL 86-272 due to internet-based activities with in-state customers or potential customers.

FTB’s Technical Advice Memorandum

The TAM does not explicitly adopt the MTC’s revised statement; however, California followed the MTC’s lead and updated its interpretation of PL 86-272 to include internet-based activities. The FTB reasoned that “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.”
By doing so, California effectively adopted the MTC’s interpretation concerning PL 86-272 protected and unprotected “activities conducted via the internet.” The TAM presents 12 different fact patterns of internet-based activities that are mostly identical to those used in the MTC’s 2021 revised statement and reaches similar conclusions. The sellers in these fact patterns (1) are commercially domiciled businesses outside of California, (2) make sales to California customers, and (3) have no activities in California other than those mentioned in the fact patterns.
The FTB considers nine of the fact patterns as activity that exceeds the solicitation of orders or activity that is not entirely ancillary to solicitation and, thus, are not protected by PL 86-272.  Three other fact patterns describe activities the FTB views as protected activities.

Internet-Based Activities Not Protected by PL 86-272

Under the TAM, the following activities in California are not protected under P.L. 86-272:

  • Having an employee who telecommutes on a regular basis within California performing non-sales activities.
  • Regularly providing post-sale assistance to California customers via either electronic chat or email, which customers initiate by clicking on an icon on the business’s website.  For example, the business regularly advises customers on how to use products after they have been delivered.
  • Soliciting and receiving online applications for a branded credit card via the business’s website from California customers.
  • Inviting website viewers in California to apply for non-sales positions.
  • Placing internet "cookies" onto the computers or other electronic devices of California customers. The “cookies” 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.
  • Remotely fixing or upgrading products previously purchased by California customers by transmitting code or other electronic instructions to those products via the internet.
  • Offering and selling extended warranty plans on the business’s website to California customers who purchase its products.
  • Contracting with a marketplace facilitator that facilitates the sale of the business's products on the facilitator's online marketplace. The marketplace facilitator maintains inventory, including some of the business's products, at fulfillment centers in various states where the business's customers are located.
  • Contracting with California customers to stream videos and music to electronic devices for a charge.

Internet-Based Activities Protected by PL 86-272

The TAM lists three activities that are protected under PL 86-272:

  •  Providing post-sale assistance to California customers by posting a list of static “frequently asked questions” with answers on the business's website.
  • Placing Internet "cookies" onto the computers or other devices of California customers.  These cookies gather customer information that is used only for purposes entirely ancillary to the solicitation of orders for tangible personal property, such as remembering items that customers have placed in their shopping cart during a current web session, storing personal information customers have provided to avoid the need for the customers to re-input the information when they return to seller’s website and reminding customers of what products they have considered during previous sessions.
  • Offering for sale only items of tangible personal property on the business’s website. The website enables customers to search for items, read product descriptions, select items for purchase, choose among delivery options and pay for items.

Effective Date of TAM 2022-01

The FTB did not include an effective date for the TAM. This leaves open the possibility that the FTB may look to apply the TAM to all years with unexpired statute of limitations, or, to open years commencing with the tax year of the June 2018 Wayfair decision.

California Throwback Sales

Like a number of other states, California applies a “throwback rule” that requires the inclusion of sales of tangible personal property in the numerator of the California sales factor when the tangible personal property is shipped from a location in California to a destination state in which the taxpayer is not taxable. The FTB acknowledges that California sellers engaged in internet-based activities in other states considered unprotected by PL 86-272 under the TAM will not be subject to California’s sales factor throwback rule.