Back in April, Herman Bouma, an attorney with Buchanan Ingersoll & Rooney PC in Washington, DC, penned this prediction:
May 2, 2011. This just in: Concerned about the shipment of California jobs to Texas, the California State Legislature today passed legislation imposing current, worldwide income taxation on every corporate group headed by a California corporation, thus subjecting such a group to current taxation on its income earned worldwide, including in Texas. The Governor indicated he will sign the legislation, stating, “It is high time we repeal the tax breaks and loopholes for shipping California jobs to Texas.”
May 2, 2016. This just in: Recently released statistics indicate that the number of corporate groups headed by California corporations has dropped precipitously over the last five years. The statistics also indicate that those California-headed corporate groups still remaining are having a difficult time competing with other corporate groups. Members of the California State Legislature expressed surprise at the findings.
May 2, 2017. This just in: Dazed but undaunted, the California State Legislature today passed legislation imposing current, worldwide taxation on every corporation in the world and instructing the Governor to take over the world in order to ensure compliance. The Governor indicated he will sign the legislation and expressed every confidence in the ability of the California Highway Patrol to carry out its new mission.
This is, of course, false…except that as Phil Hodgen noted, its true about trusts.
Let’s say there exists a trust. The assets are outside of California. All of the beneficiaries live outside of California and have never traveled to California in their lives. The only connection with California is that the trustee is based here.
Result 1: California says the trust must pay California income tax on its income. (Consequently, the beneficiaries end up paying the California income tax even though they don’t live here). This is seen as completely logical in Sacramento–as immutable as the Law of Gravity.
Result 2: California banks and trust companies cannot compete for this business. Instead they open trust companies in Nevada and Delaware. (Consequently, banking and trust company jobs are created in Nevada and Delaware). This produces utter bewilderment in Sacramento.
It’s also true about business entities which are registered to do business in California, especially LLCs. Assume Acme LLC is a Delaware LLC; its managing member, Joe Smith, is a California resident but none of the business of the LLC is conducted in California. All of the business is conducted in Delaware (there are no California employees, offices, or any other ties that would give nexus to California). Tough; just having the managing member be a Californian is enough to give nexus to California for the LLC.
California also passed the “economic nexus” bill last year. Under this law, if 25% of an entity’s sales are to California, there is economic nexus to California and an entity is supposed to file a California tax return even if it has no employees, plant, or materials in California. (Good luck on enforcing this, or on the constitutionality of it, but the law is on the books.)
Mr. Bouma’s prediction was meant in jest about the way California has gone. The trouble is, some of his prediction is already true.
