California OTA May Clarify the Limits of Public Law 86-272 Protection for Out-of-State Sellers

Out-of-state businesses selling into California often assume that limited in-state activity will not expose them to California income or franchise tax. A recent California Office of Tax Appeals matter shows why that assumption can be risky.

The California Office of Tax Appeals lists Ken’s Foods, Inc., 2026-OTA-249P, as a June 2026 pending precedential opinion. The issue is whether the taxpayer’s California activities exceeded the protection of Public Law 86-272.

For businesses that sell tangible personal property into California, this is an important development. Public Law 86-272 can provide a narrow federal protection against state net income taxes when a company’s in-state activities are limited to protected solicitation. But the protection is not unlimited, and California tax authorities have continued to examine whether a company’s actual in-state activities go beyond solicitation.

Why Public Law 86-272 Matters

Public Law 86-272 is a federal statute that can limit a state’s ability to impose a net income tax on an out-of-state seller of tangible personal property. In general terms, the protection may apply where the company’s only in-state business activity is solicitation of orders, and those orders are approved and fulfilled from outside the state.

For many out-of-state businesses, Public Law 86-272 has historically been an important California tax defense. It can affect whether a business is required to file California income or franchise tax returns, whether FTB can assess tax, and whether prior-year exposure exists.

But the statute is narrow. It does not protect all business activity. It does not eliminate sales tax obligations. It does not necessarily protect service providers, software companies, or businesses selling intangible property. It also does not protect activities that go beyond solicitation.

That is where many disputes arise.

The Ken’s Foods Issue

The pending precedential OTA listing frames the issue as whether the taxpayer’s California activities exceeded Public Law 86-272 protection. Public reporting indicates that the case involved a taxpayer arguing that its California activities were limited enough to remain protected, while OTA focused on whether employee activities in California crossed the line into unprotected business activity.

For out-of-state sellers, the key takeaway is that California may look closely at what employees, representatives, contractors, and agents are actually doing in the state. The question is not simply whether the business has an office or inventory in California. It may also involve whether personnel are performing activities that support product development, customer support, market intelligence, product matching, quality control, account management, or other business functions beyond protected sales solicitation.

Because the opinion is listed as pending precedential, the matter may become more important than an ordinary taxpayer-specific dispute. A precedential OTA opinion can influence how similar California tax appeals are analyzed in the future.

Why This Is a Compliance Risk for Out-of-State Businesses

California is one of the most aggressive states in evaluating nexus, doing-business standards, and income tax filing obligations. Businesses that sell into California but do not file California income or franchise tax returns may face significant exposure if FTB later determines that Public Law 86-272 does not apply.

The risk can include tax, penalties, interest, and multiple open years. In some cases, the statute of limitations may remain open if no California return was filed. That can turn what appears to be a single-year issue into a multi-year controversy.

This issue is especially relevant for manufacturers, distributors, wholesalers, food and beverage companies, online sellers, consumer product companies, and businesses with sales representatives or account personnel who interact with California customers.

It is also relevant for businesses that have changed their operating model. A company may have once qualified for Public Law 86-272 protection but later lost that protection because employees began performing additional activities in California, the website became more interactive, customer support functions expanded, or representatives began gathering business intelligence or assisting with non-sales functions.

Public Law 86-272 Is Not a “Set It and Forget It” Defense

One of the most common mistakes is treating Public Law 86-272 as a permanent filing shield. The analysis should be revisited when a company hires California personnel, changes sales practices, launches new customer-support tools, adds online functions, changes distribution channels, uses contractors or agents, or begins gathering market or customer data from California.

The issue is fact-intensive. Small differences in how a business operates can change the result. A sales representative who merely solicits orders may be treated differently from personnel who resolve customer complaints, collect product samples, assist with product customization, participate in product development, or perform post-sale services.

For that reason, businesses should be cautious about making broad filing decisions without legal review. A company’s California footprint may look limited from a corporate chart, but the actual activities in the state may tell a different story.

Why the Pending Precedential Status Matters

OTA’s designation of the Ken’s Foods opinion as pending precedential is significant. If the opinion becomes precedential, taxpayers and FTB may cite it in later OTA proceedings involving similar issues. That could affect audit strategy, protest positioning, settlement discussions, and appeal briefing.

Out-of-state companies with California sales should pay attention now, particularly if they have relied on Public Law 86-272 to avoid California income or franchise tax filings.

The question is not whether the company sells into California. The question is whether the company’s California-connected activities remain within the statute’s narrow protection.

When to Seek Legal Review

Businesses should consider legal review if they sell tangible goods into California, have California customers, use employees or representatives in California, rely on Public Law 86-272, have not filed California income or franchise tax returns, received an FTB notice, or are considering voluntary disclosure.

The analysis should be handled carefully. The wrong response to FTB, an incomplete filing, or an unsupported nexus conclusion can create avoidable risk.

The Karam Firm, PLLC assists businesses with California tax controversy, FTB audits, nexus disputes, Public Law 86-272 issues, state tax filing exposure, voluntary disclosure strategy, penalty matters, and administrative appeals. If your business sells into California and has relied on Public Law 86-272, contact The Karam Firm to evaluate your exposure before FTB raises the issue.

Disclaimer

This article is for general informational purposes only and does not constitute legal, tax, accounting, or other professional advice. Reading this article does not create an attorney-client relationship with The Karam Firm, PLLC or any of its attorneys. Tax laws, California tax procedures, OTA practices, and Public Law 86-272 interpretations may change, and the application of those rules depends on the specific facts and circumstances of each taxpayer. Taxpayers should consult qualified counsel before responding to a tax notice, filing or not filing a California return, submitting a refund claim, entering voluntary disclosure, requesting penalty or interest abatement, or taking any tax position.