In two recently released decisions from 2015, the California State Board of Equalization (“SBE”) found that two different non-California corporations were doing business in California and therefore subject to the payment of franchise taxes, including the annual minimum franchise tax. In Appeal of Commercial Financial Services, Inc., the SBE found that a Delaware corporation was doing business in California. The primary basis for this finding was that the sole shareholder and President of the corporation resided in California and performed services for the corporation from his home. The corporation also used a California address on its federal income tax return.
In Appeal of Quad State Mobile Trackmasters, the SBE held that a Nevada corporation that was principally engaged in business in the State of Wyoming was also doing business in California and therefore subject to the California Franchise Tax. The business of the corporation was repairing heavy machinery, which it did in Wyoming. The corporation was owned by a husband and wife. The wife lived in California, served as the corporate secretary and performed certain services for the corporation. The corporation also used a California address on its federal income tax return. The SBE found these activities were sufficient to cause it to be doing business in California:
“Here, the evidence in the record supports the finding that appellant was ‘doing business’ in California in 2010. Appellant's corporate secretary lived in California and engaged in bookkeeping, answering phone calls, sending financial information to appellant's accountant, and making deposits in appellant's California bank account, all on behalf of appellant. As such, appellant was doing business in California.”
These cases clearly demonstrate that it does not take much activity within the State of California to cause a legal entity to be considered to be doing business within the state. The failure to register an entity as doing business and to pay the required Franchise taxes may lead to the imposition of penalties down the road. The safest course is to register and pay the required taxes if there is any possibility of an entity being considered doing business in California.