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PDtax
PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 1887
Experience:  32 years tax experience, including four years at a Big 4 firm.
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I am filling my California 568 Form and I dont know what it

Customer Question

I am filling my California 568 Form and I dont know what it means by California Income. My total Income for taxable year 2012 was over 3,000,000 USD. and my company is registered in California. Our company sells services, Such as Internet bandwidth but only to companies out of California. However my Bank is located in California and all the funds have been deposited in my California Bank account. Since all of my 3,000,000 USD income came from companies located out of California, Then I should put Total California Income: $0

Submitted: 1 year ago.
Category: Tax
Expert:  PDtax replied 1 year ago.

Customer:

Welcome to the site. I will be helping you today.

Customer:

going to Q & A for analysis...

Expert:  PDtax replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Customer: replied 1 year ago.

I did not receive any answer from you. Can you please let me know.

Customer: replied 1 year ago.

Can we initiate the Chat again?

Expert:  PDtax replied 1 year ago.
Good morning Reza,

This is a California state economic nexus question. That is, where should you pay state income tax on the income your LLC earns? And, are you selling intangible or tangible products (the state tax rules are different for each)?

I found a good description of the complexity of your question from an article published by The American Institute of Certified Public Accountants, http://www.aicpa.org/publications/taxadviser/2013/may/pages/clinic_may2013-story-11.aspx. I will reproduce a brief excerpt from that article:

"Starting with tax years beginning on or after Jan. 1, 2011, California adopted the doctrine of economic nexus, in part based on sales activities. In adopting the economic nexus concept, the California definition of “doing business” was expanded to provide bright-line nexus tests. These tests include property, payroll, and sales tests described under Cal. Rev. & Tax. Code Section 23101(b). Specifically, the sales nexus test under Section 23101(b)(2) provides that a taxpayer is considered to be doing business in the state if it has California sales that exceed the lesser of $500,000 or 25% of the taxpayer’s total sales. This dollar amount may be adjusted annually for inflation and for 2012 was $509,500.

For taxpayers in the business of selling tangible personal property, sales can be assigned to California based on one of three criteria: the ultimate destination of the purchaser, the aforementioned throwback rule, or the more obscure “double throwback” rule. Throwback can be avoided if the taxpayer is subject to tax in the state of destination. The ability of a state to impose a net income tax on a taxpayer is limited by federal constitutional provisions, mainly the Commerce Clause and the Due Process Clause. Both of these clauses require that nexus must exist between a taxpayer and a state for the state to impose a tax. Once constitutional nexus had been established, the ability to impose a net income tax was further limited by Congress through the enactment of P.L. 86-272, which provides that certain activities engaged in by businesses associated with the solicitation and sale of tangible personal property in interstate commerce are protected from state taxation. In California, due to the California State Board of Equalization’s decision in Appeal of Dresser Industries, Inc., 82-SBE-307 (Cal. State Bd. of Equalization 6/29/82), the FTB applies federal constitutional standards to companies engaged in foreign commerce because the decision held that P.L. 86-272 does not apply to foreign commerce. Many tax practitioners have long held the view that the nexus threshold under P.L. 86-272 is stricter than that under the constitutional standards. Now, with California’s enactment of the new doing-business definition, it appears that the FTB believes a lower threshold exists for the imposition of an income tax in foreign commerce. In effect, a new California nexus standard has been established—one that differs from the standards under P.L. 86-272 and the U.S. Constitution."

What that boils down to is new California state tax law, and the application of nexus, which is a long-standing legal concept that created a taxable relationship if a business like yours had certain connections to a state.

Factors such as a salesperson visiting a state, having a branch office in a state, and many others could determine if taxable business was being done there. Tax credits would be available to avoid double taxation, but the tax concept was clear. States wanted their tax dollars for business that could be linked to their state.

In your case, you offer the following: "...my company is registered in California. Our company sells services, Such as Internet bandwidth but only to companies out of California. However my Bank is located in California and all the funds have been deposited in my California Bank account. Since all of my 3,000,000 USD income came from companies located out of California, (what is) Total California Income (?)"

These connections to the state link you there. The question is do they create California nexus?

Using the quoted material from the AICPA, if your sales are taxable in the state of delivery, you could escape California state taxation. Likewise, CA's new law regarding nexus draws a clear minimum threshold for taxability in California at $500,000 or more in sales in the state.

You may be able to escape California state taxation under both of these concepts.

This response is intended to be answer to your question, but without all the facts available about your business, I must caution you to do additional specific research as it pertains to your business. You will want to have written tax research from a tax opinion from a CPA or tax attorney to support the position you take. This answer is intended to be accurate, but can not substitute for a written tax opinion fully researching the state tax law and rendering an opinion to you on the taxes due. My answer to you can not be used as support in an audit.

Thanks for asking at Just Answer. Please ask any follow up you like, and I will assist. Positive feedback closes out your question. I'mCustomer
Customer: replied 1 year ago.

Thank you for your answer. My Total income for the year of 2012 has been 4,737,445 USD. I have filed both Federal and State income tax. My question is regarding California Form 568 (Limited Liability Company Return of income) n this form there is a clause saying that: " Use only amounts that are from sources derived from or attributable to California"


The type of service that I sell is not tangible and I sell my product to Companies out of California and even Telecommunications out of United States. None of my income has been to any California based company. However every company either In US or out of US have deposited the fund into my California Bank account.


If the income are not from the sources in California, Then Can i write in front of the question: Total California income: $0?




Expert:  PDtax replied 1 year ago.
Based on the information presented, and the review of the tax law, it appears you do not have California taxable sales.

Thanks again from Just Answer.
Customer: replied 1 year ago.

Thank you for your reply.


One last question: On my Federal 1040 Return schedule C form Part 1 it states that "Gross receipts or sales = 4,737,445 USD.


 


Now based on the information that I got from you, I need to put my total California Income on California Form 568 (Limited Liability Company Return of Income) a 0$?


 


Wouldn't they be surprised?


 


 

Expert:  PDtax replied 1 year ago.
In order for the California 568 report to be $0 California sales, you should have other state Schedule C or LLC reports that show taxable sales in other states that add up to 4,737,445. Explaining that, along with copies of all those other LLC or state schedule C schedules, will support your contention that there are $0 sales taxable in California under the throwback rule.

The last thing you want is for the BOE to be 'surprised'.
Customer: replied 1 year ago.

I sell to out of country companies as well. Also whatever I sell is an Internet services to COmpanies like Verizon and AT&T and Sprint. None of them are registered in California. I cannt get Schedule C from AT&T or for example British Telecom in Britain does not have Schedule c at all.


 


What do you suggest?

Expert:  PDtax replied 1 year ago.

In order to support the $0 California taxable sale position, you might consider presenting a reconciling schedule that shows your worldwide sales, and the tax jurisdictions you report in, to support your contention that you have $0 CA sales. Sales in foreign countries are generally exempted from state taxation, as they are agreed to be taxed in the country of origin. Each will be different, and should be reviewed as part of your overall tax strategies.

 

Your business is housed in an LLC. You did not mention if you were the sole owner, or where you are resident. Your state of residence may require treatment of your LLC income as income of that state. If you are a CA resident, the discussion of just the LLC sales may be moot, as California wants to tax residents on their worldwide income, subject to resident tax credits and perhaps foreign tax credits as applicable.

 

Your question about $0 taxable sales for the LLC may still be correct, but your CA resident income tax return would have to report all the income worldwide.

 

I know that goes beyond what your question was, but if you are the 100% owner of the LLC, that is a disregarded entity for many jurisdictions.

 

Thanks again from Just Answer.

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