United States

California: Chief Counsel Ruling Addresses Throwback; Application of Public Law 86-272

Aug 15, 2016
From KPMG TaxWatch

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In a recent chief counsel ruling, the California Franchise Tax Board (FTB) addressed two questions from a taxpayer on doing business and Public Law 86-272. The first question was whether the taxpayer had to aggregate proceeds from sales of tangible personal property with its royalty receipts received to determine whether it was doing business in other states under California’s economic nexus standard. Under California law, a taxpayer is deemed to be doing business in California if its sales exceed the lesser of $529,562 or 25 percent of its total sales.  This standard also applies to determine, for California tax purposes, a taxpayer is considered taxable in another state. The FTB ruled that sales of tangible personal property and sales from other than tangible personal property (here royalties) must be aggregated to determine whether the taxpayer is doing business in a particular state. Under the facts presented, the taxpayer was considered to be doing business in all of the other states where its receipts exceeded the threshold amount. The second question was whether the taxpayer was required to throw back receipts from sales of tangible personal property to California because it was immune from taxation under Public Law 86-272 in the other states where it was deemed to be doing business. The FTB ruled that deriving royalty income from an unrelated party’s use of the taxpayer’s marks was not a protected activity under Public Law 86-272 and that the taxpayer’s active involvement with the use of the licensed marks was not a de minimis activity. Thus, the taxpayer was considered taxable in the other states and was not required to throw back receipts from sales of tangible personal property because it was not protected under Public Law 86-272 in those states. Please contact Scot Grierson at 949-885-5643 with questions on Chief Counsel Ruling No. 2016-3.

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.