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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – WHAT DOES “DOING BUSINESS IN CALIFORNIA” MEAN?

By Robert S. Schriebman
2020

Introduction

Can a business located outside of California be required to pay an annual minimum franchise tax of $800? Must it also file California income tax returns? Does the fact that the business never registered with the Secretary of State or filed income tax returns be made to pay this annual tax? The answer to all questions will be “yes.”

Propharma Sales, LLC (Propharma) never opened a business in California and never registered with the Secretary of State. In 2014 and 2015 it had one employee in Orange County. It filed EDD and IRS payroll tax returns. It used the employee’s Orange County address as its business address, but there was no business footprint. It never filed an income tax return and it never paid the minimum LLC required $800 annual franchise tax.

The EDD informed the FTB that Propharma had an employee in California. The FTB then demanded Propharma pay the minimum $800 tax and file income tax returns because it was doing business in California. Propharma took the FTB to the Office of Tax Appeals (OTA). In the Matter of the Appeals of Propharma Sales LLC, OTA Case No 18010699

The Appeal of Propharma Sales, LLC

What does “doing business in California” mean?

R&TC §17941 provides that every LLC doing business in California must pay a minimum annual $800 LLC tax for the privilege “doing business” in California as well as file income tax returns. A taxpayer is doing business in California if it is actively engaging in ANY transaction for the purpose of financial or pecuniary gain or profit. These activities do not necessarily need to result in actually making a profit. What is relevant is whether or not the activity was motivated by financial gain.

Propharma was doing business in California because it had a physical presence in this state. According to the Appeal of John H. Grace Co (80-SBE-115), as long as there appears to be some regular, systematic and substantial connection with, and physical presence within California, those activities are regarded as doing business. The corporation or LLC is required to pay the minimum $800 franchise tax and file income tax returns.

Propharma argued that its only connection was that it paid its only California employee through ADP, the well-known payroll tax compliance company. Therefore, Propharma argued it had no substantial connection to this state. The OTA shot down the argument. Propharma’s outsourcing of payroll duties does not change the employer-employee relationship. The California employee was under Propharma’s direct control and operating under its direction.

Conclusion

This case demonstrates that even with the slightest involvement within the state a foreign business can be deemed to be operating and doing business in California. It must pay the minimum $800 annual franchise tax and file California returns where it must report its California based income in relation to its earnings worldwide. I doubt if we will see any example of a business entity with lesser minimum contact. If you have a worker in California, you better get out your check book because the FTB is waiting for your money.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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