Taxable Talk

Let’s say your Florida-based company manufactures and sells widgets. You used to be located in California, but decided the Sunshine State was a better business location than the Bronze Golden State. You have no employees, property, or any other ties to California. You do sell to California, but those sales are all shipped from your plant in Florida. Your sales to California businesses totaled $287,012 (out of your $1 million in total sales) in 2011. As you open your mail you see a letter from California’s Franchise Tax Board (the income tax agency here in California) saying that you have economic nexus to California and you must file and pay California taxes. Could this happen?

Yes, it could. Under a law passed by California’s legislature, effective as of January 1, 2011, any business will be considered to have economic nexus to California if:

• It is organized or domiciled in California;
• Its sales exceed the lesser of $500,000 or 25% of total sales;
• Its payroll exceeds the lesser of $50,000 or 25% of its total compensation; or
• Its real and tangible personal property exceed the lesser of $50,000 or 25% of the entity’s total real and tangible personal property.

According to the law as passed the Florida company would have economic nexus with California, as more than 25% of its sales were to the state. Of course, it is highly unlikely that the FTB would be able to discover this, and very unlikely that a notice would ever find its way to that company.

There’s also the dubious legal nature of this. The US Constitution that only the federal government can regulate interstate commerce. The constitutionality of economic nexus is very debatable. Additionally, the ability of California to collect such a tax is doubtful.

(Do note that the other areas of economic nexus–employees within the state, property within the state, or being a California entity–almost certainly are legal and California has every right to tax such entities.)

Just another way that California leads the country….

Tags: Nexus

This entry was posted on Monday, March 28th, 2011 at 4:53 am and is filed under California. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.