California Court Invalidates Unlawful Franchise Tax Board Regulations

On December 13, 2023, in a lawsuit brought by Brann & Isaacson on behalf of the American Catalog Mailers Association (ACMA) against the California Franchise Tax Board (FTB), San Francisco Superior Court Judge Ethan Schulman issued an order that two 2022 publications of the FTB are void as invalid “underground regulations,” indicating that he will enter judgment for the ACMA.

This marks the end of litigation filed by Martin I. Eisenstein, David Swetnam-Burland, and Nathaniel A. Bessey on behalf of the ACMA in August 2022, seeking a court ruling that the FTB’s Technical Advice Memorandum 2022–01 and FTB Publication 1050 are invalid. These FTB documents purported to instruct out-of-state retailers what online activities were and were not protected by federal law (Public Law 86–272), and to announce a new “general rule,” unsupported by the language of the federal statute, 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.” The court ruled that these documents, whatever their form, are regulations that should have been duly promulgated by the FTB and were not. Therefore, they cannot be used as a basis for proceeding against companies engaged in interstate commerce.            

“We are pleased,” Swetnam-Burland commented, “that the judge ignored the FTB’s procedural roadblocks and got to the heart of the matter—the FTB’s improper issuance of general rules in the guise of informal guidance. We are also pleased with the court’s total vindication of the ACMA’s right to seek and obtain a court ruling that this kind of agency overreach is unlawful.”