To Tax or Not to Tax

Reviewing Business’ Virtual Connections to CA

Conrad Davis, CPA
To Tax or Not to Tax

Originally published by CalCPA in the July issue of California CPA (

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. 
  • G offers and sells extended warranty plans via its website to California customers.
  • H contracts with a facilitator that facilitates the sale of the business’s products on the facilitator’s online marketplace. The marketplace facilitator maintains inventory at fulfillment centers in states where the business’s customers are located. 
  • I contracts with California customers to stream videos and music to electronic devices.
  • J provides post-sale assistance to California customers by posting a list of static FAQs. 
  • K places internet “cookies” onto the computers or other devices of California customers. These cookies gather customer information that is only used for purposes entirely ancillary to the solicitation of orders for TPP. The cookies perform no other function. 
  • L offers for sale only items of TPP on its website. The website enables customers to search for items, read product descriptions, select items for purchase, choose among delivery options and pay.


  • For A, unless the activities of the employee telecommuting from California constitute solicitation of orders for sales of TPP or are entirely ancillary, these activities would cause loss of protection of PL 86-272.
  • The activities of B, C, D, E, F H & I disqualify the businesses from PL 86-272 immunity.
  • The activity of G exceeds solicitation of orders of TPP and disqualifies it from PL 86-272 immunity.
  • The activities of J, K & L do not disqualify them from PL 86-272.

General Issues

The conclusions have several themes:

  • The activity exceeds mere solicitation as it involves human resources, product support and similar activity, which are not entirely ancillary to the sale of TPP.
  • PL 86-272 immunity only applies to sales of TPP. Sales of digital content and other services are not sales of TPP and thus are not activities within the protection of PL 86-272.
  • When the interaction with the website is entirely ancillary to the in-state solicitation of orders for sales of TPP, then those activities are within the protection of PL 86-272


Based the TAM, out of state businesses with virtual connections in California could be doing business in California and are not protected from a net income tax under P.L 86-272. As this is a reinterpretation of P.L. 86-272, it could be applied retroactively as well as prospectively. Note that this article does not address the “throwback” rules which are similarly affected. Conrad Davis, CPA/CFF, CFE is a partner at Crowe LLP.

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Conrad Davis
Conrad M. Davis