Nexus in California

• August 30, 2021
• Carey M. Heyman, CPA

Investing in the fifth largest GDP in the world is usually a sound investment strategy. But dodging one of the most aggressive taxing authorities is probably not.

The State of California’s Office of Tax Appeals recently published their decision on whether certain appellants established nexus in California under Revenue & Taxation Code (R&TC) section 23101 and, were therefore, subject to the state’s annual $800 limited liability company (LLC) tax. The State of California requires an LLC doing business in the state to pay an annual $800 LLC tax for the privilege of doing business in the state. A taxpayer is deemed to be doing business in California if it is “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” and if it satisfies certain bright-line nexus thresholds consisting of payroll, property or sales amounts. In order to receive a refund of the appellants’ annual $800 LLC tax, the appellants needed to prove that they were not doing business in California.

The quick facts: The appellants are LLCs organized in the State of Louisiana. The appellants were not registered to do business with the California Secretary of State and argued that they were not doing business in California under R&TC Section 23101(a). The appellants based their refund claims on the decision reached in Swart Enterprises, Inc. versus the California Franchise Tax Board. The appellants did not dispute that the investment properties were located in California or argue that some or all of the investment properties reported balance sheets that were located outside of California.

According to the State of California’s Office of Tax Appeals, the appellants did not meet one or more of the facts of the Swart Enterprises, Inc. versus California Franchise Tax Board decision, specifically that the appellants’ respective distributive share of the real and tangible property exceeded the bright-line property threshold found in R&TC Section 23101(b)(3). According to R&TC Section 23101(b)(3), an LLC is doing business in California if the value of its real and tangible personal property in California exceeds the lesser of $50,000 or 25% of the taxpayer’s total real property and tangible personal property. Real and tangible personal property is valued at its original cost or the property’s basis for federal income tax purposes. Should the original cost of property be unascertainable, the property is valued at its fair market value as of the acquisition date.

To paraphrase Liam Neeson’s character from the 2008 thriller “Taken,” the State of California has a very particular set of skills and they will find you. You have been warned!

Source: State of California’s Office of Tax Appeals (OTA), OTA Case Numbers 18083638, 19014240

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