A California trial court denied summary judgment in the American Catalog Mailers Association's (ACMA) action that seeks to invalidate Franchise Tax Board (FTB) guidance that says certain online activities exceed the protections of Public Law 86-272 for state income tax purposes. However, the court signaled it may invalidate the FTB's guidance on the basis it constitutes underground regulations and violates California's Administrative Procedure Act.
ACMA's lawsuit seeks to overturn FTB Technical Advice Memorandum (TAM) 2022-01 and amendments to FTB Publication 1050 on the basis the administrative guidance contradicts PL 86-272 and the United States Constitution. For additional background and discussion regarding TAM 2022-01, Publication 1050, and PL 86-272, please see our previous post about this case.
ACMA's motion for summary judgment specifically challenged two scenarios presented in TAM 2022-01 that the FTB concluded would disqualify a business from PL 86-272 immunity: (1) when a business "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;" and (2) when a business "places Internet 'cookies' onto the computers or other electronic devices of California customers [to] 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." ACMA also challenged the general rule set forth in Publication 1050 that "when a business interacts with a customer via the business's website or app, the business engages in a business activity within the customer's state."
In reaching its decision to deny ACMA's motion, the court considered the following issues: (1) whether the anti-injunction rule in article XIII, section 32 of the California Constitution bars ACMA's claim; (2) whether ACMA has associational standing and standing to sue under Government Code section 11350; (3) whether there is a ripe controversy before the court; (4) whether TAM 2022-01 and Publication 1050 are regulations as to which ACMA could seek declaratory relief; and (5) whether ACMA carried its burden to show that TAM 2022-01 and Publication 1050 contradict PL 86-272 on their face.
As to the anti-injunction issue, the FTB argued that article XIII, section 32 of the California Constitution barred ACMA's claim because one of ACMA's members had a pending FTB tax assessment. The court rejected this argument, holding that this provision of the California Constitution does not bar the claim because none of ACMA's members, in fact, are under a pending assessment by the FTB.
The court then considered whether ACMA has associational standing and standing under Government Code section 11350. The court held that ACMA has associational standing to bring the action because: (1) one of its members has standing to sue in its own right; (2) the legal action fits within ACMA's purpose; and (3) the legal action does not require the participation of ACMA's individual members, as ACMA was seeking a judicial declaration that TAM 2022-01 and Publication 1050 are invalid, not seeking to enjoin the collection of tax against any individual member. As to standing under Government Code section 11350, the court held that ACMA has standing as an interested person because the business of one of its members is affected by TAM 2022-01 and Publication 1050. In reaching this holding, the court rejected the FTB's arguments that: (1) ACMA's members are not impacted by TAM 2022-01 and Publication 1050; (2) ACMA failed to show that more of its members have a direct interest to establish associational standing; and (3) ACMA's members lacked a concrete and actual beneficial interest to establish standing to seek declaratory relief because they do not have an active tax dispute with the FTB.
Next, the court considered whether the controversy was ripe. The FTB argued that the controversy was not ripe and would result in an advisory opinion because TAM 2022-01 and Publication 1050 have never been applied to ACMA's members. The court dismissed this argument, holding that ACMA's challenge to TAM 2022-01 and Publication 1050 is a facial challenge and the uncertainty of the FTB's application of PL 86-272 forces ACMA's members to either comply with TAM 2022-01 and Publication 1050 by filing California income tax returns or risk assessment and possible penalties for failure to file a California income tax return.
The court then considered whether TAM 2022-01 and Publication 1050 are regulations subject to the Administrative Procedure Act (APA). The FTB argued that TAM 2022-01 and Publication 1050 are not regulations subject to the APA because they are not a binding rule of general application; rather, they are informational resources for FTB auditors and taxpayers. The court dismissed the FTB's arguments, holding that TAM 2022-01 and Publication 1050 are generally applicable and interpret the FTB's application of PL 86-272 to out-of-state businesses, making them regulations subject to the APA. Notably, the FTB conceded in a declaration that TAM 2022-01 and Publication 1050 were not enacted as regulations in compliance with the APA and further stated that they are void. The court agreed with ACMA that TAM 2022-01 and Publication 1050 were regulations under the APA. Critically, however, ACMA did not move for summary adjudication of whether TAM 2022-01 and Publication 1050 are invalid because they are underground regulations adopted in violation of the APA. Therefore, while the court appeared inclined to declare them void as underground regulations, they have not yet been invalidated.
Finally, the court considered whether ACMA satisfied its burden to show that TAM 2022-01 and Publication 1050 contradict PL 86-272 on their face. Noting the parties' limited briefing and argument on this issue, the court held that ACMA failed to demonstrate how select statements within TAM 2022-01 and Publication 1050 could render them invalid in their entirety. Further, the court held that the use of generic hypotheticals in TAM 2022-01 and Publication 1050 raise factual issues that preclude summary judgment. The court also questioned the rationale of the hypotheticals in TAM 2022-01 and Publication 1050 and the FTB's ability to apply them practically in certain situations. In fact, the court went so far as to say that they "raise significant concerns as to the FTB's interpretation and application of PL 86-272." Nevertheless, the court held it could not conclude as a matter of law that the use of generic hypotheticals in TAM 2022-01 and Publication 1050 contradict PL 86-272 such that they are invalid on their face.
Ultimately, perhaps the most notable aspect of this decision denying ACMA's motion for summary judgment is the court's discussion of an issue on which it could not rule—whether TAM 2022-01 and Publication 1050 are underground regulations adopted in violation of the APA. The court's decision sends a strong message to ACMA to bring a motion for summary judgment of this issue, and we anticipate that such a motion will be one of the next steps in this litigation.
American Catalog Mailers Association v. Franchise Tax Board, Case No. CGC-22-601363.
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