The California Franchise Tax Board or FTB is responsible for collecting many of the business taxes in California including the Bank and Corporation Franchise Tax on net corporate income. The State of California employs the “unitary method” to determine the amount of business or corporate income your company must attribute to its activities in California and the resulting Bank and Corporation Franchise Tax that is owed. You are required to report the total income of all associated business entities regardless of whether it was earned here in California. Your California business tax is then apportioned based upon a complex formula.
Basically, there is a percentage of your corporate property, payroll and sales associated with your California business operations and activities as well as the revenues these generate. The percentages for California versus your worldwide operations is calculated. The percentages of each calculation are added together, with “double the weight” given to the sales percentage, and then the percentage value is divided by four. The experienced California tax attorneys and accountants at Allen Barron work to minimize your exposure, and develop systems and documentation to inform your business decisions while ultimately providing the substantiation for a minimized corporate tax profile. Those with income outside of the State of California may choose to make a “water’s edge” election which can reduce the tax implications of the unitary calculation. This election should only be made after careful analysis and recommendation by the experienced tax attorneys and accountants at Allen Barron.
Additional Business Taxes in California – Sales and Use Tax
Additional business taxes in California include the Sales tax and/or Use tax which is administered by the California Board of Equalization or BOE. The State of California has its own sales tax, and individual counties and/or cities may add their own sales tax on top of the State of California’s rate. You must collect and properly account for, report and submit California sales tax for all gross receipts from the sale of tangible personal property that is not exempted by law. It is the retailer or business entity’s responsibility to collect, account for and submit the tax but the purchasers responsibility to pay it. If you fail to collect it from the purchaser you will become responsible for its payment.
Use tax is to be paid on items which are purchased with the intent that they will be used in the State of California. This area of California tax law is very complicated and may apply in place of sales tax, such as in the example of many internet related transactions. The use tax is to be reported and paid by your California business or corporation at the rate which is applicable in the jurisdiction of its use less any tax which is paid in another state.
The failure to accurately calculate, collect, report and pay California sales and use taxes can quickly result in draconian penalties, interest and other financial implications. This can result in the revocation of your privileges to conduct business in the State of California.
There are many other forms of payroll associated taxes that would be included in any conversation regarding business taxes in California including but not limited to workers’ compensation, unemployment, disability and property taxes. In addition, taxation of raw goods, inventory and other aspects of business operations will be imposed by the California Employment Development Department or EDD.
If you intend to conduct business or have a California business or corporation you need the experienced advice, counsel and services of Allen Barron. We provide a single-source for California corporate legal, accounting, tax and business advisory services from our Headquarters here in San Diego. We invite you to contact us for a free consultation at 866-631-3470.