100% CA S Corp owner moves permanently to Nevada in 2022. In 2023 S corp pays him $100k salary and has $60K remaining S Corp profit. Does taxpayer need to file a CA Non-resident return?

Franchise Tax Board Pub 1031. Have you read it?

For 2022 - Part Year Resident.

For 2023 - Individual filing status depends on the S Corp. Research is needed because the CA laws might require a CA return. It is complicated, as this case shows.

FTB uncovers Illinois corporation’s California-source revenues

Out of sight doesn’t mean out of mind.

By Sandy Weiner, J.D.

An Illinois S corporation was found liable for over $16,000 in penalties and interest for failing to file a California return for the 2018 tax year. (Appeal of Warehouse Systems, Inc., 2023-OTA-429)

The taxpayer argued that the penalties should be abated for reasonable cause because the taxpayer’s prior accounting firm had been acquired, and the previous CPA who had prepared the taxpayer’s returns had left the firm without providing all of the taxpayer’s relevant tax information to the new CPA.

Unfortunately, as is the case with most reasonable cause abatement OTA decisions we see, the OTA found that there was no reasonable cause because:

• A taxpayer has a nondelegable duty to file a return; and
• The taxpayer failed to establish that it had provided sufficient information to the current tax professional for him to provide a substantive opinion as to whether the taxpayer had an actual California filing requirement.

Important takeaways

Although this case may sound like the “same old, same old,” there are some key takeaways that are important for tax professionals to pay close attention to.

California tax agencies share information: The FTB “discovered” the taxpayer because of information shared from the CDTFA, which showed that the taxpayer had $11 million in California revenues. If a taxpayer files returns with the CDTFA and/or the EDD, the FTB will find out that the taxpayer has California business activities and will be asking for a California franchise or income tax return. Remember, there is no statute of limitations if a taxpayer fails to file a return. (R&TC §19087)

P.L. 86-272 protections do not mean a taxpayer isn’t required have to file a return: Although the decision does not go into a lot of detail as to what business the taxpayer was involved in, it appears that the taxpayer sold tangible personal property and therefore believed that it did not have a filing requirement in California. As we’ve discussed previously, P.L. 86-272 is a federal law that provides immunity from a state’s income tax to out-of-state businesses if the business’s only connection is the sale or solicitation of tangible personal property.

However, P.L. 86-272 does not provide protection from California’s $800 minimum franchise tax because the minimum franchise tax is not based on a taxpayer’s net income. This means that even if the taxpayer doesn’t have to pay tax on the income from the sale of its tangible personal property, it must still file a California franchise tax return and pay the $800 minimum tax (see “Out-of-state entities beware” in the May 2022 issue of Spidell’s California Taxletter®).

Also, P.L. 86-272 only provides immunity if the taxpayer’s activities are limited to sales and solicitation and certain incidental activities. If the taxpayer conducts any other activities, it may lose its immunity from a state’s taxation. In this case, it appears as though the taxpayer also was engaged in installation activities, which would be subject to state taxation. In addition, tax professionals should review the FTB’s latest attempts to drastically curtail the P.L. 86-272 protections, especially for online retailers (see “FTB dramatically limits P.L. 86-272 protections” in the March 2022 issue of Spidell’s California Taxletter®).