Significant and Current Tax Developments in California and Texas
The California Franchise Tax Board has made significant tax developments to its existing rules for taxpayers doing business in multiple jurisdictions.
1) The revised nexus threshold values for taxable years beginning on and after January 1, 2019, are as follows:
– Taxpayer’s in-state sales exceed the lesser of $601,967 (from $583,867 in 2018) or
25% of total sales;
– Taxpayer’s real and tangible personal property in California exceeds the lesser of
$60,197 (from $58,387 in 2018) or 25% of total real and tangible personal property; and
– Taxpayer’s in-state compensation exceeds the lesser of $60,197 (from $58,387 in
2018) or 25% of the total compensation paid.
2) Disregarded limited partnerships (DLP) are not required to pay an annual $800
minimum tax or file a California partnership return, per the issuing of the Legal Ruling
2019 02 on November 20, 2019, by The California Franchise Tax Board.
In the past, The FTB believed it was mandatory for disregarded limited partnerships operating as entities to file and pay tax under California Revenue and Taxation Code Section 17935.
However, some DLP’s challenged California FTB’s authority, referencing CRTC Section 23038, stating, “If the separate existence of an eligible business entity is disregarded for federal tax purposes, the separate existence of that business entity shall be disregarded.”
Eventually, the FTB reasoned with DLP’s by issuing Notice 2019-06, which allows a taxpayer they are an adequately disregarded entity and claim refunds for federal income tax purposes. To yield their California filing or paying requirement, entities must complete and submit certified documents.
These documents include the certificate of a limited partnership agreement to show its ownership and federal returns for specific tax years and a declaration signed by identifying the limited partnerships’ general partner or authorized persons under local law.
3) Foreign LLC, “doing business.”
Since an LLC can be formed in one state and do business in another, CPAs must evaluate whether clients are doing business in California and are subject to the LLC tax.
For further reading, the court ruling between Washington-based Jali LLC and Delaware-formed Bullseye Capital Real Property Opportunity Fund LLC doing business in California is a leading example.1
Nexus in Texas
The Texas Comptroller of Public Accounts also has established its economic nexus standards. In December 2019, Texas’s state allowed non-Texas “foreign taxable entities” without a physical presence to create and have nexus. These entities are subject to franchise tax if the entity’s gross receipts from doing business exceed $500,000 or more.2
Per 34 TAC Section 3.586(c), entities must pass criteria for determining the date when they are allowed to do business in Texas. The requirements include the date in which the entity has physical nexus, the date and year in which the entity obtains Texas use tax permit, and the first day of federal income tax account period.3