November 18, 2022
Contact: Paul Miller, 800-509-9514


SAN FRANCISCO — On November 17th, the ACMA cleared a major hurdle in its complaint in the Superior Court in San Francisco that a previously-issued California Franchise Tax Board (FTB) regulation in the form of a technical advisory memorandum wrongly and substantially expanded the reach of income taxes on out-of-state merchants with no physical presence in the Golden State. The Superior Court of California County of San Francisco overruled the FTB’s demurrer to ACMA’s complaint for declaratory relief.

(A demurrer is essentially a motion to dismiss the complaint without a decision on the merits. FTB filed the demurrer shortly after the ACMA filed its complaint. With the Court’s overruling of the demurrer, the case moves on for an adjudication on the merits.)

“This is a significant and positive development in our case,” said ACMA CEO Hamilton Davison. “Although we still have aways to go, we now have a clear path to obtain a decision on the merits.”

At the core of the ACMA complaint, the FTB promulgated a Technical Advisory Memorandum (TAM) on February 14th to address the scope of the exemption from a state’s income tax provided under a federal statute, Public Law 86-272. The federal statute provides that a state may not impose its state income tax on an out-of-state company that engages in no activities in the state other than the solicitation of the sale of tangible personal property.

What This Means to ACMA Members
The TAM states that a business located outside of California that does not step foot in California is not exempt by Public Law 86-272 from the California income tax if it places Internet “cookies” onto the computers or other electronic devices of California customers to gather customer search information to be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale.

The TAM also provides that a company loses the protection of the federal statute if it regularly provides post-sale assistance to California customers via ether electronic chat or email that customers initiate by clicking on an icon on the business’s website. The TAM as applied meant that the FTB would require virtually every ACMA member that did not engage in any activities in California to pay the California income tax, which is at one of the highest rates in the country.

Initially, the ACMA wrote to the FTB to request that it withdraw the TAM because the use of cookies and email are not in-state activities to cause ACMA members to lose the benefit of Public Law 86-272. The FTB never responded to the ACMA’s letter but instead issued a publication on its website that codified the TAM.

The ACMA then authorized Brann & Isaacson to file the suit on behalf of its members against the FTB for a declaration that the TAM and the publication are invalid.

Declaratory Judgment
Although many in the tax community lauded the ACMA suit, there were some who alleged that the issue could be litigated in an administrative (and not court proceeding) only once specific taxpayers have been assessed and paid the assessment. We thought it was unfair and not based on the applicable law for a state tax agency to take an unprecedented view of a federal statute, and the only remedy for an online retailer was to wait to be assessed, pay the assessment and then seek a refund through a long administrative process before the very agency that promulgated the TAM.

FTB’s Demurrer Overruled Quickly
The demurrer filed by the FTB similarly asserted that ACMA members could litigate the case only once assessed and through an administrative claim for refund process after paying the assessment. After a flurry of briefs, the Superior Court judge held a hearing for both parties to present their positions. Within two hours of the hearing, the judge issued the order and decision rejecting each of the arguments advanced by the FTB.


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