On Dec. 13, 2023, the San Francisco Superior Court of California, in American Catalog Mailers Association v. Franchise Tax Board, issued a ruling in favor of the plaintiff’s motion for summary adjudication that certain guidelines issued by the Franchise Tax Board (FTB) constituted “underground regulations” in violation of the California Administrative Procedure Act (APA).

Background

The plaintiff, American Catalog Mailers Association (ACMA), a nonprofit trade association representing various online and remote-selling merchants, filed a complaint against the FTB challenging the legality of Technical Advice Memorandum No. 2022-01 (TAM) and FTB Publication 1050. ACMA argued these guidelines contravened Public Law 86-272 and the U.S. Constitution and were issued without adherence to the APA.
 
Superior Court’s Analysis and Decision

The court analyzed whether the TAM and Publication 1050 fell within the purview of “regulations” under the APA. A two-pronged test was applied to assess: (1) whether the rule is of general application, and (2) whether it implements, interprets, or makes specific the law enforced or administered by the agency.
 

The court found that both the TAM and Publication 1050 are generally applicable rules. They provided guidelines for a class of businesses engaging in interstate commerce and addressed how these entities should comply with P.L. 86-272 in the context of internet sales.
 

Next the court concluded the TAM and Publication 1050 interpreted the FTB’s application of P.L. 86-272 to out-of-state businesses. They were not mere audit guides or optional tools but constituted rules declaring how certain cases would be decided, thus fitting squarely within the definition of a regulation under the APA.

Since neither the TAM nor Publication 1050 underwent the mandatory procedural requirements of the APA, including public notice and comment, the court invalidated both documents as underground regulations.

Implications and Looking Ahead

While the ruling checks the FTB’s regular practice of issuing internal guidance that is often utilized in the same manner as a duly adopted regulation, the court did not decide the substantive issue of whether the FTB’s viewpoint of P.L. 86-272 contradicts federal law. Since ACMA itself was not subject to an assessment under P.L. 86-272, it may lack standing to compel the court to rule on the substantive issue. If the FTB appeals the ruling to the California Court of Appeal and the appellate court affirms the trial court’s decision, many of the rulings, publications, and other published advice issued by the FTB may be in jeopardy.