CA confusion

[Catherine]

One of my clients is a corporation that sells industry-specific software tools, all over this country and internationally. They just got a letter from a (former? --no orders in a couple years) customer located in CA, claiming that since they are a "nonresident of CA" this customer will have to start withholding CA income tax on all payments unless they (a) get a waiver (via Form 588), or (b ) prove (via Form 587) that they are paying CA income tax themselves.

Huh?!?!

My client has occasional sales in CA; but has NO nexus there, no sales people, and any income they make is subject to corporate income tax here in Massachusetts. Yet the instruction-listed waiver reasons don't seem to apply.

They are asking me for advice and I have NO idea what bee CA has up its bonnet on this one. Any info/advice? The CA FTB info the customer sent along has been useless. Yak-yak about "services" and "rent" and all manner of types of income but nothing about products (hard goods or "soft" like programs).

[Lee B]

California FTB is probably the most agressive state revenue agency in the country.

Be careful and make sure you have all your ducks lined up before you respond.

[Catherine]

I understand that CA FTB is very aggressive (and NY isn't far behind). However I cannot find, from the CA FTB materials provided, anything to determine WHAT they think they want to tax or HOW to prove one is not subject to that tax.

That's the help I'm looking for -- where to find whether these folks are subject to income tax in CA for the occasional sales they make there with NO nexus.

[kcjenkins]

Cat, remember that a few years back CA tried to tax as "CA Income" the retirement benefits paid to people who had moved out of CA after retirement, based on the idea that since the pension was earned while working in CA it was still CA income forever. Of course, they lost in each court it went to, BUT THEY TRIED. So it's not impossible that they could try to collect taxes on such sales, even tho once it got to court they would lose, since the 'nexus' rules are solid.

That said, I think the customer may just misunderstand those rules, so I'd suggest starting with a letter spelling out 'nexus' and why it does not exist in this case.

[BulldogTom]

Catherine,

Welcome to our wonderful state full of greedy ba$t@rds who think that any connection with CA subjects you to a tax.

The customer is wrong. There is no nexus (based on your statements above), as it stands right now. Future court decisions might change that.

I would tell the client to call the customer, tell them there is no income tax liability, and if they insist, then stop selling to them.

It appears from your comments that this is a customer, and your client is not on the FTB radar. That is good. Try to keep them that way.

Tom

Hollister, CA

[jasdlm]

There's a waiver exception for 'goods'. It seems to me that if your client is selling 'goods' (as opposed to services), you file form 587 and no withholding is required.

F Exceptions to Withholding

Withholding is not required when:

• The payment is for goods, get Form 587,

Nonresident Withholding Allocation

Worksheet.

587 provides a place for 'goods' and indicates it is exempt from withholding.

Does this work?

[Catherine]

Thanks to all for all the excellent information! Will let my client know and see how he wishes to proceed with his customer. They haven't bought anything from his company in several years (and took a lllooonnnggg time to pay when they did) so I doubt he's willing to put much effort into placating *them*.

Staying off the FTB radar is likely high on his to-do (to-don't?) list, though.

[kcjenkins]

I think jas is right on Form 587, btw.

[Lion EA]

I would not want my client's name on any CA form under those circumstances. I would not want CA going back in time to when he did have a CA customer. I would probably tell my client all the above comments from CA preparers and then suggest he tell his customer that he currently does not need a CA waiver and the next time he has a CA order he will fill out any appropriate forms at that time.

[Jack from Ohio]

Just suggest that the client not sell to him.

[Catherine]

I have passed on all the advice to my client. Thanks to everyone!

[BulldogTom]

Just an editorial. I will try to keep it as non-political as possible:

The reason we are in this situation in CA goes back to the 70's and 80's. The state of CA passed a lot of laws for environmental protection and worker protection that some business owners saw as anti-business. The state got a reputation as a high tax, high regulation state and many companies moved to other states, expecially those with no income tax (ie Nevada). However, they kept a presence in the state. CA saw that they were getting a triple whammy to their tax revenues; they were losing the income tax from the company, they were no longer collecting the sales tax for the products being sold, and they were not getting the income taxes from the high earners in the company that were claiming to be domiciled in the other state. So they got aggressive on the concept of nexus. They have been very aggressive in pursuing companies that are accessing "their" market of consumers, but paying no taxes to do so.

Famously, they have gone after high wealth individuals who move out of state just before selling their companies for huge profits. They have also gone after a lot of companies who they can attach any kind of nexus to the state so they can get some taxes out of them. The dot com bust, followed by the housing implosion in the state decimated the budget for the state, bringing the typical response from the state of becoming more agressive on collections from companies and individuals with higher incomes. They have also been at the forefront of trying to tax internet sales and attaching nexus to companies who sell in the state via the internet. See the agreements they made with Amazon to now collect and remit sale taxes in the state.

As they have gotten the bigger companies to comply with their demands, they have started working on the smaller companies. That is why you are seeing the aggressive steps to go after companies for sales taxes. If they can get a company to register for sales taxes, they can audit the sales, and from those sales records, find out if they can attach nexus for income taxes.

Very sophisicated approach the state of CA is using to get revenues from companies and individuals who don't vote.

Tom

Hollister, CA

[Carolbeck]

Just an editorial. I will try to keep it as non-political as possible:

The reason we are in this situation in CA goes back to the 70's and 80's. The state of CA passed a lot of laws for environmental protection and worker protection that some business owners saw as anti-business. The state got a reputation as a high tax, high regulation state and many companies moved to other states, expecially those with no income tax (ie Nevada). However, they kept a presence in the state. CA saw that they were getting a triple whammy to their tax revenues; they were losing the income tax from the company, they were no longer collecting the sales tax for the products being sold, and they were not getting the income taxes from the high earners in the company that were claiming to be domiciled in the other state. So they got aggressive on the concept of nexus. They have been very aggressive in pursuing companies that are accessing "their" market of consumers, but paying no taxes to do so.

Famously, they have gone after high wealth individuals who move out of state just before selling their companies for huge profits. They have also gone after a lot of companies who they can attach any kind of nexus to the state so they can get some taxes out of them. The dot com bust, followed by the housing implosion in the state decimated the budget for the state, bringing the typical response from the state of becoming more agressive on collections from companies and individuals with higher incomes. They have also been at the forefront of trying to tax internet sales and attaching nexus to companies who sell in the state via the internet. See the agreements they made with Amazon to now collect and remit sale taxes in the state.

As they have gotten the bigger companies to comply with their demands, they have started working on the smaller companies. That is why you are seeing the aggressive steps to go after companies for sales taxes. If they can get a company to register for sales taxes, they can audit the sales, and from those sales records, find out if they can attach nexus for income taxes.

Very sophisicated approach the state of CA is using to get revenues from companies and individuals who don't vote.

Tom

Hollister, CA

This sounds just like New York! One Step foot in and you have Nexus so we can tax the hell out you. Sales Tax is the first step they use to get their foot in the door for other taxes they can justify to balance the budget. Don't get me started on Property Taxes...