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.
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