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    SALT ALERT: California Expands Income Tax Nexus Web to Catch Remote Companies

    By Brian Strahle

    At this stage of our online and remote world, most businesses that sell over the Internet are engaging in one or several of the nine activities California asserts will create income tax nexus. The path of activities that an online or remote company could engage in and still not create nexus is very limited. Consequently, California’s expansion of nexus (or limitation of the protections of P.L. 86-272) will cause a large population of companies to have income tax nexus in California.

    Additionally, it is expected that other states will adopt similar rules as P.L. 86-272 is being viewed as outdated based on our digital and remote economy (and the fact that it was enacted in 1959).


    On February 14, 2022, the California Franchise Tax Board (FTB) issued Technical Advice Memorandum (TAM) 2022-01. The TAM outlines 12 fact patterns and explains whether the activities in each fact pattern would exceed the protections of P.L. 86-272. The FTB asserts that the businesses in 9 of the 12 fact patterns would exceed the protections of P.L. 86-272. At the conclusion of the TAM, the FTB states, “to determine whether a seller of tangible personal property via the Internet is shielded from taxation by P.L. 86-272 requires the same general analysis as sellers of tangible personal property by other means. Thus, an Internet seller is shielded from taxation in the customer’s states if the only business activity it engages in within that state is the solicitation of orders for sales of tangible personal property, which orders are sent outside that state for approval or rejection, and if approved, are shipped from a point outside of that state.”

    Background: P.L. 86-272 is a federal law enacted in 1959 that prohibits a state from imposing an income tax on a business if the only activities within the state conducted by or on behalf of the business consist of the solicitation of orders for sales of tangible personal property.

    The 9 fact patterns that California asserts would EXCEED the protections of P.L. 86-272 are:

    1. Telecommuting employees within California performing business management and accounting tasks.
    2. Providing post-sale assistance to California customers via electronic chat or email that customers initiate by clicking on an icon on the business’s website.
    3. Soliciting and receiving online applications for branded credit cards via the business’s website from California customers.
    4. A website that invites viewers in California to apply for non-sales positions with the business. The website enables viewers to fill out and submit an electronic application and to upload a cover letter and resume.
    5. Placing Internet “cookies” onto the computers or other electronic devices of California customers that gathers customer search information and is used to adjust production schedules, inventory amounts, develop new products or identify new items to offer for sale.
    6. Remotely fixing or upgrading products previously purchased by California customers by transmitting code or other electronic instructions to those products via the Internet.
    7. Offering and selling extended warranty plans via a website to California customers who purchase the business’s products.
    8. Contracting with a marketplace facilitator that facilitates the sale of business 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.
    9. Contracting with California customers to stream videos and music to electronic devices for a charge.

    The 3 fact patterns that California asserts would NOT EXCEED the protections of P.L. 86-272 are:

    1. Providing post-sale assistance to California customers by posting a list of static Frequently Asked Questions (“FAQs”) with answers on the business’s website.
    2. Placing Internet “cookies” onto the computers or other electronic devices of California customers to solely gather information for purposes entirely ancillary to the solicitation of orders (i.e., remembering items in a shopping cart, storing personal information of customers to avoid the need to re-input the information, to remind customers what products they have considered during previous sessions).
    3. Offering for sale only items of tangible personal property on a website. The website only enables customers to search for items, read product descriptions, select items for purchase, choose among delivery options and pay for items.


    Please contact Brian Strahle at brian.strahle@frazierdeeter.com to discuss how this will impact your company and how we can help you comply or mitigate the impact.


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