Doing Business in California: The Franchise Tax Board Definition

Many people ask about incorporating or forming an LLC in a state other than California. California law changed a few years back, and made it more clear what it means to be “DOING BUSINESS IN CALIFORNIA.” The California Franchise Tax Board (FTB) has provided guidance on the subject, which can be found at . The following is a brief summary:

“For taxable years beginning on or after 1/1/2011, a taxpayer is doing business in California if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California or if any of the following conditions are satisfied:”
 The taxpayer is organized or commercially domiciled in California.
 Sales of the taxpayer in California, whether by the taxpayer or its agents or independent contractors, exceed an indexed amount, which in 2013 was $518,162, or 25 percent of the taxpayer’s total sales.
 Real and tangible personal property of the taxpayer in California exceed an indexed amount, which in 2013 was the lesser of $51,816 or 25 percent of the taxpayer’s total real and tangible personal property.
 The amount paid in California by the taxpayer for compensation exceeds an indexed amount, which in 2013 was the lesser of $51,816 or 25 percent of the total compensation paid by the taxpayer.

All of the above items include the taxpayer’s pro rata or distributive share of pass-through entities (partnerships, an LLC treated as a partnership, or an “S” corporation). Indexed amounts for 2014 are not yet available from the FTB.

The law affects out-of-state corporations, LLCs, and pass-through entities (partnerships, S corporations, LLCs treated as partnership) and their partners/shareholders/members that have property, payroll, or sales in this state. 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.

Keep in mind that there are two basic tests. An out-of-state taxpayer that has less than the threshold amounts of property, payroll, and sales in California may still be considered doing business in this state if the taxpayer “actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California.”

The FTB guidance contains several examples, some of which include the application of exemptions to the rules. This is an important change in the law, of which all businesses formed or operating in other states should be aware.

Please let us know if we can be of assistance in this or any other business-related legal matters. Matthew I. Berger Law Group, A Professional Corporation: (805) 456-1200.