“Doing Business” in California

On March 4, 2011, the California Franchise Tax Board issued guidance on what constitutes “doing business” in state beginning January 1, 2011.

For taxable years beginning on or after 1/1/2011, a taxpayer is doing business in California if any of the following conditions are satisfied:

—The taxpayer is organized or commercially domiciled in California.

—The taxpayer if actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California or

—Sales of the taxpayer in California, including sales by the taxpayer’s agents and independent contractors, exceed the lesser of $500,000 or 25 percent of the taxpayer’s total sales.

—Real and tangible personal property of the taxpayer in California exceed the lesser of $50,000 or 25 percent of the taxpayer’s total real and tangible personal property.

—The amount paid in California by the taxpayer for compensation exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the taxpayer.

For the conditions above, the sales, property, and payroll of the taxpayer include the taxpayer’s pro rata or distributive share of pass-through entities (partnerships, LLCs treated as partnerships and “S” corporations).

The new law affects out-of-state corporations and pass-through entities and their partners/shareholders/members that have property, payroll or sales in this state. Currently, they may not be considered to be doing business in this state, but may be considered doing business starting in tax year 2011 if they meet any of the thresholds listed above.

An out-of-state taxpayer that is considered to be doing business in California will need to file the appropriate tax return and pay the appropriate tax and fees.   It should also register as a foreign corporation (or LLC or LP) with the Secretary of State of California.

Doing business in a state for tax purposes is not necessarily the same as doing business for purposes of a state court’s jurisdiction over a defendant named in a lawsuit, but it would certainly be an influential factor.


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