United States

California: BOE Issues Rulings on “Doing Business” In the Golden State

May 08, 2017
From KPMG TaxWatch

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The California State Board of Equalization recently issued two rulings addressing whether out-of-state taxpayers were “doing business” in California. In the first ruling, which addressed the 2010 tax year, a Wyoming-based business that provided repair services for heavy equipment in Wyoming asserted that it was not “doing business” in California simply because its corporate secretary resided in California and performed certain activities from her California residence. The corporation also maintained a California bank account. The Board disagreed. In its view, the taxpayer was doing business in California for the tax year at issue because its corporate secretary lived in California and engaged in bookkeeping, answering phone calls, sending financial information to the taxpayer’s accountant, and making deposits in the taxpayer’s California bank account. The Board declined to abate late filing and demand penalties and the statutorily imposed filing enforcement fee that applies when a taxpayer disregards the FTB’s formal demand that a taxpayer file a tax return.

The second ruling likewise addressed whether a taxpayer was “doing business” in California and whether the taxpayer was protected under Public Law 86-272.  The taxpayer corporation at issue filed a federal income tax return with a California address and indicated that it was in the business of “administrative services for the purchase and collection of credit card receivables.” The taxpayer did not file a California tax return although the taxpayer’s president and secretary/treasurer resided in and worked from California. Upon receipt of information from the IRS regarding the taxpayer’s California address, the FTB contacted the taxpayer regarding its failure to file a California return. Eventually, the FTB issued a Notice of Proposed Assessment, which the taxpayer protested on the basis that it was not doing business in California. In its protest letter, the taxpayer continued to describe its business as purchasing and collecting bad debts. After the FTB sent the taxpayer a Notice of Action affirming the assessment, the taxpayer filed two amended federal returns changing its address and changing its line of business to a health and wellness business. The taxpayer later argued that it was protected under Public Law 86-272 as it was selling tangible personal property (health and wellness related products) from its Nevada office. The Board did not find any of the taxpayer’s arguments persuasive. The taxpayer failed to prove that it had changed its line of business to a health and wellness business for the tax year at issue. Furthermore, even if the taxpayer was selling health-related tangible personal property from Nevada, the taxpayer’s president (a California resident) had presided over the annual stockholder and board of directors meetings and its secretary-treasurer (a California resident with a California home office) was responsible for all of the financial affairs of the company. There was no evidence that these activities, which were not within the scope of Public Law 86-272 protection, occurred outside of California. As such, the Board upheld the assessment and imposition of various penalties. Please contact Oksana Jaffe at 916-554-1119 with questions on these two Board decisions.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

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.