California has adopted a new "doing business" standard beginning 1/1/2011 which will impact taxpayers, including corporations, pass-through entities and their owners. Owners of pass-through entities that did not have nexus before, may have nexus starting in 2011. Companies that are protected by P.L. 86-272, may be liable for the minimum tax.
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.
Who does the new law affect?
The new law affects out-of-state corporations and pass-through entities (partnerships, S corporations, LLCs treated as partnership) and their partners/shareholders/members that have property, payroll or sales in this state. Currently, they may not be considered to be doing business in this state, but may be considered doing business starting in tax year 2011 if they meet any of the thresholds listed above.
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.
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 it has general partners or members in this state. Likewise, partners and members are considered doing business in this state if the partnership or LLC is doing business in this state.
More companies, pass-through entities, and owners of pass-through entities will have nexus and filing obligations in California. Even if the taxpayer is protected by P.L. 86-272, the taxpayer may still owe California's minimum tax. Also, owners of multiple pass-through entities will have to combine their prorata share of each pass-through entity's property, payroll and sales. Therefore, more owners may exceed the filing threshold and have filing obligations.
California's site provides more information and examples regarding how the nexus thresholds can be exceeded and how these new rules impact owners of pass-through entities.