The State of California Franchise Tax Board (FTB) states that a company doing business in California is subject to state tax laws, and a company is considered to be doing business in California if it meets any of the following standards:
- Engaging in any transaction for the purpose of financial gain within California
- Being organized or commercially domiciled within California
- California sales exceeding (either the threshold amount or 25% of total sales) $637,252, real and tangible personal property exceeding (either the threshold amount or 25% of total property) $63,726, or payroll compensation exceeding (either the threshold amount or 25% of total payroll) $63,726
Public Law 86-272, 15 U.S. Code §§ 381-384, applies to many businesses outside the state and restricts states from imposing net income taxes on income derived within its borders from interstate commerce if the only business activity of a company within the state consists of the solicitation of orders for sales of tangible personal property, which orders are to be sent outside the state for acceptance or rejection, and, upon acceptance, are filled for shipment or delivery from points outside the state. A business must have a nexus with a state for the state to tax it, and Public Law 86-272 protects some sellers from having income tax nexus.
Remote Sellers in California
Physical presence in California is no longer a singular threshold for tax nexus as all remote sellers are now subject to falling under the remote seller tax nexus when they sell to customers in other states. Economic contacts involve retailers having significant sales or transactions for delivery into states, and virtual contacts can involve targeted advertising and instant access to consumers through the internet.
Several states have their own definitions and impose sales taxes on certain digital products. Software as a service (SaaS), which allows users to connect to and use cloud-based apps over the internet, does not involve a uniform definition of products or services, although multiple states impose sales taxes on SaaS.
Another common problem can be that there are no uniform rules in sourcing or determining the proper jurisdiction for which taxes could be assessed on transactions. User location will need to be taken into consideration, but there can be multiple points of use and mobile use can be a complicating factor.
It is also important to remember that many states are now incorporating nexus standards for income and other business tax purposes, adopting bright-line rules such as a factor, presence, and/or economic nexus standards for corporate income taxes. Many states’ economic nexus laws are so broad that remote sellers who meet economic nexus standards for sales taxes can easily be interpreted to have met the same state’s broad economic nexus standard for corporate income taxes.
Registering with the California Secretary of State
A company may want to register with the Secretary of State when they are doing business within the state. The Secretary of State can assist with sales tax issues.
A company will need to register a business with the Secretary of State before it can work with the state department of revenue or taxation. When a company does not believe it will have a tax nexus in a state, there will be no need to register with the Secretary of State or Department of Revenue.
Contact Our Mountain View Startup & Small Business Attorney
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