Do your prospects do enterprise in California? You must know the tax implications higher

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  Do your customers do business in California?  You should know the tax implications better

For non-California residents, finding that they are “doing business” without a physical presence in California can trigger registration, reporting, and tax obligations. Therefore, companies with contact or connection with California, even if they are mild or distant connections, should carefully examine whether they are subject to California legal requirements.

While California law requires non-California companies to qualify (that is, obtain a Certificate of Authority) as a prerequisite for doing business in the state, there is no clear definition of what it means to “do business”. Different California agencies view “doing business” differently, based primarily on the type of business they do, and it is important for companies to consider several regulatory considerations.

What Qualifies as a “Doing Business” in California?

The two most important relevant sources of law are California’s corporate entity laws under the California Corporations Code and the tax laws under the California Revenue and Taxation Code.

California Corporations Code

The Corporations Code describes doing business as “entering into repeated and consecutive transactions of your business in [the] State, except for interstate or foreign trade. “

Although it does not state what activities constitute a business, the law contains a “non-exclusive” list of activities that do not constitute a business in California, including (a) maintaining, defending, or settling any act or lawsuit, or administrative or arbitration; (b) make sales through independent contractors; (c) Settlement of “interstate” trade (ie between or between states); and (d) conduct an isolated transaction that was completed within a 30-day period rather than a series of repeated transactions of the same nature. The law also states that merely acting as a shareholder, member, manager, or limited partner in a California corporation, limited liability company, or limited partnership (or similar non-California corporation that does domestic business) is not a “business”.

However, other forms of even indirect contact with California could trigger a business qualification requirement. For example, an online company doing ongoing transactions in California would need to qualify and pay taxes to take advantage of the benefits of doing business in California.

Registration with the California Secretary of State

A non-California company doing “business” in California must register in California by filing a statement and designation from the Foreign Corporation (or a Form LLC 5 if it is a limited company). The company must have a good reputation at its place of organization at the time of submission. After registration, a statement of information must be submitted to the California Secretary of State within 90 days, and annually (or every two years in the case of a limited company) thereafter. Failure to do so runs the risk of penalization, suspension or loss of qualifications for the company.

Registration with the California Attorney General (for charity)

In addition to qualifying with the Secretary of State, companies that “do business” in California and hold property for charity must register with the California Attorney General within 30 days of receiving their first charitable asset and renew their registration annually thereafter.

California Revenue and Taxation Code

Under California tax laws, the concept of doing business can be broader and more technical than the corporate law approach described above. For tax reasons, the tax code defines “business activity” as “active processing of transactions for the purpose of financial or financial gain or gain”. The tax code also provides that a company be considered “doing business” if it has its commercial seat in California (that is, has a principal place of business in California from which the business is operated) or if it has sales, ownership, or payroll of the company’s in California exceed the following amounts (as of the date of this writing):

  • California sales: lower sales of $ 610,395 and 25 percent of total company sales;
  • California real estate: less than $ 61,040 and 25 percent of the company’s total real estate; or
  • California Payroll: the lesser of $ 61,040 and 25 percent of total pay.

taxation

Any company that “does business” under California tax laws or has registered with the California Secretary of State under the corporate regime described above must file an annual franchise tax return and pay a minimum annual tax rate (currently) of $ 800 and commonly known as ” Franchise Tax “means” for the privilege of doing business in California “even if the company is operating at a loss. Failure to meet these requirements could result in interest and penalties, including a $ 2,000 annual fine for failing to submit applications in certain circumstances.

Different rules apply with respect to California sales tax. A retailer who sells in California must register, collect, and remit California sales tax if their combined California sales exceed $ 500,000 this year or prior year. This applies regardless of whether the retailer has a physical presence in California or is below the California franchise tax thresholds described above.

Tax-exempt companies

Certain businesses can apply for California franchise and income tax exemption. While most nonprofits are tax-exempt, such exemptions are not automatic, and companies seeking tax-exempt status must apply for and receive an exempt letter from the California Franchise Tax Board (FTB), even if it has already been received Federal tax exemption. California tax exemption status can be obtained by submitting an FTB 3500 Form (Exemption Request) or an FTB 3500A (Submission of Exemption Request) form (applicable to companies that have received federal tax exemption under Section 501 (c) of the Internal Revenue Code) can be obtained. (3), (c) (4), (c) (5), (c) (6), (c) (7) or (c) (19)) to the FTB.

Punish

California has government law that fines non-Californian companies and anyone acting on behalf of non-Californian companies who have failed to meet qualification or tax requirements. For example, a person doing “domestic” business in California on behalf of a non-California corporation that is not qualified to conduct business in California may be guilty of a misdemeanor and fined up to $ 600 be regardless of the title or position of the individual. A company doing business in California without properly registering (i.e., qualifying) will be fined $ 20 for every day (up to $ 1,000) that unauthorized domestic business is conducted and will be denied access to state courts to maintain a lawsuit or to continue any domestic business conducted in the state. In other words, and most importantly, an unqualified company cannot enforce contracts it entered into in the state of California, and its non-qualification can be used as a defense against a lawsuit by the unqualified company in California. From an operational and risky point of view, this can have particularly serious consequences.

In the absence of a straightforward legal definition of “doing business,” it is important for companies and corporations to carefully review their California ties, even if they are indirect, whether they are based on employees, sales, real estate, or other commercial activities based activities. Failure to do this can be costly both from a penalty non-compliance standpoint and operationally in order to legally enforce contracts.