To Tax or Not Reviewing Business' Virtual Connections to CA.

• Author: Davis, Conrad
• Position: CaliforniaTax

The Multistate Tax Commission finalized a revised interpretation of P.L. 86-272 August 2022 in which "virtual connections" were considered based on Wayfair v US. California adopted the interpretation February 2022 and issued Technical Advice Memorandum TAM 2022-1.

The general analysis asks: Are there business activities taking place in California, and do those activities exceed the protection of PL 86-272 making the business subject to California income or franchise tax?

The Supreme Court of the United States (SCOTUS) in South Dakota v. Wayfair, concluded that a virtual seller "may be present in a State in a meaningful way without that presence being physical in the traditional sense." The SCOTUS was not interpreting PL 86-272 in Wayfair but California considered the Court's analysis as relevant to determine if a seller is engaged in business activities where, for purposes of PL 86-272, its customers are located.

PL 86-272 provides protection from a state imposing a net income tax on the income derived within the state if the only business activity within the state consists of the solicitation of sales of tangible personal property (TPP).

A seller of TPP using the internet is protected by PL 86-272 but needs to use a similar analysis as sellers of TPP using traditional methods. Internet sales are shielded from taxation if the only activity in the customer's state is the solicitation of orders and those orders are sent outside the state for approval and shipped from outside that state.

Questions & Conclusions

This is a high-level summary of the questions and conclusions from the TAM. Refer to the TAM for the specific language. The issue in each fact pattern is whether the business has exceeded the protections of PL 86-272.

* A has an employee who telecommutes from within California performing business management and accounting tasks.

* B regularly provides post-sale assistance to California customers via either e-chat or email that customers initiate by clicking on an icon on the business's website.

* C solicits and receives online applications for its branded credit card via its website from California customers.

* D has a website that invites viewers in California to apply for non-sales positions.

* E places internet cookies on the devices of California customers. These cookies gather customer search information.

* F remotely fixes or upgrades products purchased by California customers by transmitting code or other electronic instructions.

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