Tax Obligations of Out-of-state Corporations Doing Business in California
To conduct business in California, a “foreign” corporation (one incorporated in another state) must register with the state of California, file CA tax returns, and pay CA taxes.
The California Tax Code defines “doing business” in California as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” within the state. Even though it is a legal term of art, it’s usually obvious when an out of state corporation is “doing business” in California. For example, operating a business physically located in CA counts as “doing business” within the state. However, foreign corporations may be required to comply with California State tax requirements even when the corporation has no physical presence in the state.
Since January 1, 2011, California Revenue and Taxation Code § 23101(b) has stated that a taxpayer is doing business in California for a taxable year when any of the following conditions were satisfied:
- The taxpayer’s sales in California exceed the lesser of $500,000 or 25% of the taxpayer’s total sales in the taxable year.
- The real property and tangible personal property of the taxpayer in this state exceed the lesser of $50,000 or 25% of the taxpayer’s total real property and tangible personal property combined.
- The amount the taxpayer paid in California for compensation in a taxable year exceeds the lesser of $50,000 or 25% of the total compensation paid by the taxpayer.
These threshold dollar amounts are subject to change over time. The Franchise Tax Board (“FTB”) is required to revise the dollar amounts annually based on increases in the California Consumer Price Index.
Per the FTB, the 2020 the threshold dollar amounts are:
- Sales: $610,395
- Property : $61,040
- Payroll : $61,040
It should be noted that even when a foreign business entity’s activity is below the dollar threshold, the corporation may still be considered doing business here if it exceeds the percentage amounts.
All corporations formed in California are considered to be “doing business” for tax purposes even if the corporation only conducts business out of state. Accordingly, CA corporations must pay taxes in California (in addition to any taxes payable in other jurisdictions).