What if a corporation or a limited liability company (LLC) is formed in another state, like Delaware or Nevada, but does business in California? The out-of-state business entity (a “foreign” business entity) must register with the state, file tax returns, and (most important to the state) pay taxes to California.
Sometimes it is obvious when a foreign corporation or foreign LLC is doing business. California’s tax law defines “doing business” in the state as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” So, for instance, operating a business that is physically located in California is obviously doing business here. Note that the definition does not say “business.” It says “any transaction for the purpose of financial or pecuniary gain or profit,” although that is modified by the words “actively engaging.”
But the definition doesn’t stop there. California, being hungry for tax revenue, has enacted a statute that specifies other activities that will result in the foreign entity being deemed to be doing business in California even if it’s not operating a business here and even if the out-of-state (i.e., foreign) entity does not actively engage in in any transaction for financial gain.
Since January 1, 2011, based on California Revenue and Taxation Code § 23101(b), a taxpayer has been deemed to be doing business in California for a taxable year if any of the three conditions were satisfied: (1) the taxpayer had a specified percentage or amount of sales in California, (2) the taxpayer had a specified percentage or amount of property in California, or (3) the taxpayer paid a specified percentage or amount of compensation in California.
The percentages remain constant, but the Franchise Tax Board (FTB) is required to revise the dollar amounts annually based on increases in the California Consumer Price Index.
The FTB has spoken, and so for 2023 the threshold dollar amounts are set forth below. As noted above, the percentages remain constant; only the threshold dollar amounts change every year. As of 2023, a foreign (out-of-state) entity that meets any of the tests below is required to register with the state, file tax returns with California, and pay taxes to California.
- The taxpayer’s sales in California exceed the lesser of $711, 538 or 25% of the taxpayer’s total sales in the taxable year. Sales include sales by agents and independent contractors.
- The real property and tangible personal property of the taxpayer in this state exceed the lesser of $71,154 or 25% of the taxpayer’s total real property and tangible personal property combined. Property is valued at original cost.
- The amount the taxpayer paid in California for compensation in a taxable year exceeds the lesser of $71,154 or 25% of the total compensation paid by the taxpayer.
Remember, even though the foreign business entity’s activity is below the dollar amounts, it could still be deemed doing business here if it exceeds the percentage amounts.
What if a corporation or LLC is organized in California but only does business in one or more other state? That business entity, by virtue of being formed in California, is automatically doing business in California and must pay taxes in California (in addition to any taxes payable in other jurisdictions). So you could say that California gets you coming or going.
If you need help registering your entity with the state of California, feel free to call me or use the contact form to send an email.