Let’s say you have a business entity, Widgets, Inc. It’s a Nevada corporation; the corporation is located in Las Vegas. The business has no operations in California but it is a corporation with one owner who resides in California. However, the owner is not involved with day-to-day business; a manager in Las Vegas runs the business. The only officer of the corporation is a Nevadan, too. Does the corporation owe California taxes?
The Franchise Tax Board has said yes for years. Any business entity which is owned by a Californian is subject to California taxation. Earlier this month a court in Los Angeles said no.
As reported in Forbes, the facts weren’t in dispute, and mirror what I wrote above. Since all the evidence showed the company was in Nevada, run by Nevadans, Nevada was the commercial domicile of the company, not California. The company won.
Now, let’s get to the dark side of the case. The article in Forbes doesn’t mention the years in dispute. Unfortunately, the actual ruling does not appear to be available on the Internet. But I did find a predecessor ruling from the Board of Equalization that’s available. Let’s go through the hoops that Daniel V (the corporation in question) went through. From reading the BOE decision, I found that the years in dispute were 1997 and 1998.
Sometime after 1997 and 1998, the Franchise Tax Board sent notices to the company. The company then fought the notices through the FTB’s appeal process. (The dates on this aren’t available.) After losing at the FTB, the company paid some (probably most) of the taxes and penalties, and filed an appeal to the Board of Equalization. (The Board of Equalization hears appeals from the FTB.) The company lost in May 2008, paid the remaining taxes, penalties, and interest, and asked for a rehearing (that’s what I linked to above). That rehearing happened later (probably in late 2008), and the company lost again (the decision was likely not rendered until 2011). The entity then sued in Superior Court (March of 2011). The case was heard in November 2012. The company won…for now. I fully expect the FTB to appeal the decision (though there are reasons not to).
Consider also the FTB’s mentality. This case did go through the FTB appeals process, and the company lost. As far as the FTB is concerned, any business that can be loosely tied to California owes California taxes…period. The facts of this case definitely make one wonder about how the company lost at both the FTB and BOE. But I digress….
I expect an appeal because the FTB’s litigation strategy has been to appeal almost every case, whether they’re in the right or the wrong (see Gilbert Hyatt). Part of this is the FTB’s litigation strategy: To exhaust individuals thinking of suing the agency. It takes a lot of time and money to sue the FTB.
One reason not to appeal is because this case only stands as precedent for the one company involved. If the FTB appeals and loses, then this case is binding upon the FTB (to all businesses with a similar set of facts).
Finally, consider how long this case has festered. It’s been ten years (at least) and it’s likely still not done. It does take a lot of money to fight the FTB.
