California Revises Income Tax on Internet Activities

The California Franchise Tax Board, which overseas income and franchise tax for the state, released a five-page memo that revised how internet activities are taxed under the Interstate Income Act, PB-86-272. Previously, certain internet activities were protected under federal law but now California businesses may be deemed subject to California income taxes for these types of activities.

The protection afforded companies to limit business income tax filings is changing rapidly.  Public Law 86-272 provides that a state can’t impose an income tax if the only activity within the state is the solicitation of sales of tangible personal property.  The Multistate Tax Commission (MTC) provided examples as to what activities are protected as solicitation of sales and what activities go beyond solicitation. Examples of protected activities include soliciting orders for sales of tangible personal property by advertising, carrying samples and promotional materials for display or distribution without charge and providing automobiles to sales personal amongst other activities.  This past summer, the MTC updated their list of protected and unprotected activities and included business’s interactions with their customers through their website.

The updated MTC guidance is providing states additional opportunity to deny Public Law 86-272 protection. California was quick to jump on this with regards to their Technical Advice Memorandum 2022-01. It is expected that many other states will view these new unprotected activities offered by the MTC to expand their state’s tax base.

If you have any questions contact Jason Skrinak, CPA.