In a non-precedential, summary decision released May 3, 2012, the California State Board of Equalization (the Board) held that a foreign corporation with only one employee in California was “doing business” in the state and thus was subject to California’s corporation franchise tax. Appeal of Warwick McKinley, Inc., Cal. Bd. of Equal., Jan. 11, 2012 (released May 3, 2012). While California recently expanded its statutory definition of “doing business” in California Revenue and Taxation Code (CRTC) section 23101(b) to include a factor presence nexus test, the Board in Appeal of Warwick McKinley, Inc. focused on CRTC section 23101(a), which defines “doing business” to mean “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.”
The taxpayer, a Massachusetts-based marketing and consulting services provider, neither maintained an office in California nor provided services for any California-based clients, but employed an individual who worked from her home in Venice, California. Appealing an adverse determination by the California Franchise Tax Board, the taxpayer contended that its lone California employee worked from a qualifying home office and engaged in activities that were protected under P.L. 86-272. The taxpayer further contended that this home office was not “publicly attributed” to the company and therefore did not create nexus for the taxpayer in California under current constitutional constraints.
The Board was precluded from determining whether a state statute was unconstitutional or unenforceable by virtue of federal law and noted that the taxpayer provided services rather than solicited sales of tangible personal property (rendering P.L. 86-272 inapplicable). Turning to whether the taxpayer was “doing business” in California, the Board found there was no dispute that the taxpayer engaged in transactions for a corporate business purpose through its California-based representative. Further, the Board noted that through its employee in California, the taxpayer received substantial benefit and protection from the state that allowed it to enhance its business. This, the Board reasoned, was enough to support a finding of substantial nexus and the imposition of California’s corporation franchise tax pursuant to CRTC section 23151.