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California Issues Tax Guidance on COVID-19 Teleworking

Posted on Sep. 16, 2020

The California Franchise Tax Board has issued guidance clarifying how employees teleworking in the state as a result of the COVID-19 pandemic will affect a company’s state tax obligations.

Gov. Gavin Newsom (D) on March 19 issued a stay-at-home order (Executive Order N-33-20) in response to the pandemic, and “as a result, many individuals living in California who ordinarily did not telework from their homes began to do so,” including employees of corporations “that previously had no connections with California,” the FTB said.

Under California law, corporations must file a return and pay the minimum franchise tax if they are “doing business” in the state, including if they have “actively engaged in any transaction for the purpose of financial or pecuniary gain or profit” in California. According to the guidance, issued September 11, “If the minimum thresholds for sales, property and payroll attributed to California are exceeded, a corporation will be considered as doing business in California.”

However, “California will not treat an out-of-state corporation whose only connection to California is the presence of an employee who is currently teleworking in California due to Executive Order N-33-20 as being actively engaged in a transaction for the purposes of financial or pecuniary gain or profit,” according to the guidance. “Also, California will not include the compensation attributable to an employee who is currently teleworking due to Executive Order N-33-20 in the minimum payroll threshold set forth in California Revenue & Taxation Code section 23101(b)(2)(4).”

The guidance also addresses the specific issue of P.L. 86-272, the federal law that exempts out-of-state businesses from a state's income tax if they limit their business in the state to solicitation of sales of tangible personal property that’s shipped into the state. According to the FTB, “California will treat the presence of an employee who is currently teleworking in California due to the Governor's Executive Order as engaging in de minimis activities for purposes of P.L. 86-272 protection.”

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