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Giving Taxpayers the Business on the FTB's Application of the Factor-Presence Nexus Provision

The Franchise Tax Board (FTB) recently issued guidance on California’s updated “doing business” provision for California corporate income tax purposes. FTB Notice 2011-06 (Oct. 12, 2011)

November 3, 2011

The Franchise Tax Board (FTB) recently issued guidance on California’s updated “doing business” provision for California corporate income tax purposes. FTB Notice 2011-06 (Oct. 12, 2011).  This guidance clarifies recent amendments that specify when the Chief Counsel may issue a ruling regarding whether a taxpayer is doing business in the state. 

Effective January 1, 2011, Senate Bill 858 amended Cal. Rev. & Tax Code § 23101 to add a “factor-presence” nexus provision.  Specifically, California law now provides that a taxpayer is doing business in the state if the taxpayer meets any of the following conditions:

  1. The taxpayer has more than $500,000 of sales in the state or the taxpayer’s sales in the state exceed 25% of the taxpayer’s total sales;
  2. The taxpayer has more than $50,000 of property in the state or the taxpayer’s property in the state exceeds 25% of the taxpayer’s total property; or
  3. The taxpayer has more than $50,000 in compensation in the state or the taxpayer’s compensation in the state exceeds 25% of the taxpayer’s total compensation. 

However, Cal. Rev. & Tax Code § 23101(a) continues to provide that doing business in the state means “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.”

FTB Notice 2011-06 makes clear that even if a taxpayer does not meet any of the factor-presence threshold tests, it may still impose income tax if a company is “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.”  Fortunately, the FTB will continue to provide Chief Counsel Rulings regarding whether a taxpayer is actively engaging in transactions for financial or pecuniary gain or profit, but it will not provide rulings on whether a taxpayer’s specific facts trigger the factor-presence nexus threshold because the answers would depend principally on factual issues and would not require legal interpretation. 

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