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Doing Business in California

Doing Business in California

California defines "doing business" as actively engaging in any transaction for the purpose of financial or pecuniary gain or profit. For taxable years beginning on or after January 1, 2011, the definition of doing business under R&TC Section 23101 is expanded. For those years, a taxpayer will be considered to be doing business in California if any of the following conditions is satisfied:

  • The taxpayer is actively engaging in any transaction in California for the purpose of financial or pecuniary gain or profit.
  • The taxpayer is organized or commercially domiciled in California.
  • Sales, as defined in subdivision (f) of R&TC Section 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.
  • 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 Section 25120, exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the taxpayer.

Furthermore, in determining the amount of the taxpayer’s sales, property, and payroll for doing business purposes, the taxpayer’s pro rata share of sales, property and payroll from partnerships, LLCs treated as partnerships, and S corporations are included.  

Example 1: Corporation A, an out-of-state seller of tangible goods, has no property or payroll in California. During tax year 2011, Corporation A has $1,000,000 of sales in California. Corporation A will have a filing requirement for tax year 2011 and will be subject to the $800 minimum tax, assuming its activities in the state do not exceed Public Law 86-272.   

Example 2: Corporation B 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 $50,000, $80,000, and $2,000,000 in property, payroll, and sales in California, respectively. For the purpose of determining whether Corporation B is doing business in this state, it will compute its pro rata shares of Partnership X's California property, payroll, and sales as follows:

Pro rata partnership property = $15,000 ($50,000 x 30%)
Pro rata partnership payroll = $24,000 ($80,000 x 30%)
Pro rata partnership sales = $600,000 ($2,000,000 x 30%)

Corporation B is doing business in this state because it has over $500,000 in California sales through its pro rata share from Partnership X. 

Example 3: Corporation C, 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 C has no property or payroll in California. Although Corporation C's California sales are less than the $500,000 threshold, Corporation C's California sales are 40 percent of its total sales which exceeds 25 percent of the corporation's total sales ($400,000 ÷ 1,000,000 = 40 percent.) Therefore, for tax year 2011, Corporation C is considered doing business in this state, and will be subject to either the franchise tax (assuming Corporation C is not protected by Public Law 86-272) or to the $800 minimum tax, whichever is greater.

For more information on the application of the new doing business definition in California, go to ftb.ca.gov, and search for 2011 corp law changes.

Back to March 2011 Tax News