General Information on New Rules for Doing Business in California
Please select the appropriate topic below:
- New Law
- General Information & Application
- Public Law (PL) 86-272 and Nexus
- Partnerships. LLCs (treated as partnerships) and S Corporations
- Investment Partnerships and Qualifying Investment Securities
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, as defined in subdivision (e) or (f) of R&TC 25120, of the taxpayer in California, including sales by the taxpayer’s agents and independent contractors, exceed the lesser of $500,000  or 25 percent of the taxpayer's total sales. For purposes of R&TC Section 23101, sales in this state shall be determined using the rules for assigning sales under R&TC 25135, R&TC 25136(b) and the regulations thereunder, as modified by regulations under Section 25137.
- Real and tangible personal property of the taxpayer in California exceed the lesser of $50,000 or 25 percent of the taxpayer's total real and tangible personal property.
- The amount paid in California by the taxpayer for compensation, as defined in subdivision (c) of R&TC 25120, exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the taxpayer.
- For the conditions above, the sales, property, and payroll of the taxpayer include the taxpayer's pro rata or distributive share of pass-through entities. "Pass-through entities" means a partnership, an LLC treated as a partnership, or an "S" corporation.
Indexed. For taxable years beginning on or after 1/1/2012, the amounts are $509,500, $50,950 and $50,950, respectively. For taxable years beginning on or after 1/1/2013, the amounts are $518,162, $51,816 and $51,816, respectively.
Who does the new law affect?
What are the filing requirements in California for a taxpayer that is considered doing business in California for the first time?
General Information & Application
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.
Partnership A, an out-of-state partnership, has employees who work out of their homes in California. The employees sell and provide warranty work to California customers. Partnership A's property, payroll and sales in California fall below the threshold amounts. Is Partnership A considered to be doing business in California?
Corporation B, an out-of-state corporation, has $100,000 in total property, $200,000 in total payroll, $1,000,000 in total sales, of which $400,000 was sales to California customers. Corporation B has no property or payroll in California. Is Corporation B doing business in California?
Public Law ("PL") 86-272 and Nexus Issues
PL 86-272 still applies to sellers of tangible personal property. As a result, if a taxpayer's activities in California stay within the protections of PL 86-272, a taxpayer also remains protected from the imposition of those taxes that are computed based on net income, namely, the California franchise and income tax. Nevertheless, if a taxpayer is considered doing business in California either under R&TC Section 23101(a) or (b), it still has a filing requirement and will be subject to the minimum tax, because that tax is not computed based on net income and therefore is not subject to the protections of PL 86-272.
Corporation C, an out-of-state corporation, is a seller of tangible goods over the internet and qualifies for protection under PL 86-272. For taxable year 2011, Corporation C has $1,000,000 of sales but no property or payroll in California. Is Corporation C considered doing business in California?
Corporation D, an out-of-state corporation with no property or payroll in California, is a service provider that has sales of $2,000,000 to purchasers who receive the benefit of Corporation D’s services in California. Those services are from income-producing activity that is performed outside of California and Corporation D uses the four-factor formula (property, payroll and double-weighted sales) to apportion its income to California. As a result, none of Corporation D's income is apportioned to California. Is Corporation D considered doing business in California?
Partnerships, LLCs (Treated As Partnerships) and S-Corporations
In determining their property, payroll and sales in this state, the taxpayer must also include their pro rata share of amounts from partnerships, LLCs (treated as partnership) and S corporations. Partnerships and LLCs are considered doing business in this state if they have a general partner or member doing business on their behalf in this state. Likewise, general partners and members are considered doing business in this state if the partnership or LLC, respectively, is doing business in this state.
Corporation E, an out-of-state corporation, has no property or payroll but has $450,000 of sales to customers located in this state. Corporation E also has a 30 percent limited partnership interest in Limited Partnership X which is doing business in this state. For tax year 2011, Partnership X has $30,000, $50,000 and $200,000 in property, payroll and sales in California, respectively. Is Corporation E considered doing business in this state?
Flow - through Partnership Payroll = $15,000 ($50,000 x 30%)
Flow - through Partnership Sales = $60,000 ($200,000 x 30%)
Corporation F is a 50 percent general partner in a California Partnership. The Partnership has $800,000 of sales, $10,000 of property and $10,000 of payroll in California. Is Corporation F considered doing business in California?
Corporation G, an out-of-state corporation, owns multiple interests in several pass-through entities in this state. How should it compute the amounts of property, payroll and sales in this state?
Investment Partnerships and Qualifying Investment Securities
In applying the factor presence “doing business” test set forth in R&TC 23101(b), corporations that are entitled to exclude from their income distributive share amounts of gain or loss from the sale or exchange of qualifying investment securities pursuant to subsection (a) (1) of R&TC 23040.1 shall not take into account their pro rata shares of the sales, property and payroll attributable to such sales or exchanges in determining whether they are doing business under R&TC 23101(b). Furthermore, the exemption from doing business applicable to alien corporations that meet the requirements of R&TC 23040.1(c) remains in effect.
See R&TC Section 23151 for exceptions.
Send your questions or comments to the Implementation Team: