Teleworking and the “Stay at Home” order
About the “Stay at Home” Executive Order (N-33-20)
On March 19, 2020, California Governor Gavin Newson issued Executive Order N-33-20 in response to the COVID-19 pandemic. The current state public health directives require all residents to stay at home in order to prevent the spread of the virus. As a result, many individuals living in California who ordinarily did not telework from their homes began to do so. In some instances, the individuals living in California that were now teleworking from their homes might be employed by corporations that previously had no connections with California.
The following FAQs provide guidance as to the possible California franchise tax implications to corporations that previously had no connections with California but now have an employee indefinitely teleworking from California due to the Governor's Executive Order. The responses to the FAQs are applicable until the Governor's Executive Order is no longer in effect.
Will California treat a corporation that had no previous connections with California as doing business if it has an employee who is currently teleworking in California due to Executive Order N-33-20?
No. 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. 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).
For California franchise tax purposes, what is doing business?
For California franchise tax purposes, corporations are required to file a tax return and are subject to the minimum franchise tax if they are doing business in California. "Doing business" means that a corporation has sufficient connections to California so that the corporation has availed itself of the benefits provided by the state that it can be fairly subject to the taxing authority of the state. Visit Doing business in California for more information.
What activities might result in a corporation being considered as doing business in California?
Generally, a corporation will be considered as doing business in California if the corporation has actively engaged in any transaction for the purpose of financial or pecuniary gain or profit. Accordingly, the corporation's connections to California do not need to be extensive in order for it to be considered as doing business for California franchise tax purposes. If the minimum thresholds for sales, property and payroll attributed to California are exceeded, a corporation will be considered as doing business in California.
For California franchise tax purposes, what is Public Law 86-272?
Public Law (PL) 86-272 states that if an out-of-state corporation sells tangible personal property in a jurisdiction and its employees' only activity in that jurisdiction pertains to the solicitation of sales, the out-of-state corporation will not be subject to tax on the income it generates in the jurisdiction. In Wisconsin Dept. of Revenue v. Wm. Wrigley Jr. Co., (1992) 505 U.S. 214, the United States Supreme Court held that even if an out-of-state corporation engaged in activities that exceeded the solicitation of sales, as long as they were de minimis, the out-of-state corporation will continue to not be subject to tax on the income it generates in the jurisdiction. Visit Public Law 86-272 for more information.
Will California treat an out-of-state corporation as exceeding the protections of PL 86-272 for California franchise tax purposes if it has an employee who is currently teleworking in California due to Executive Order No. 33-N-20?
No. 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.