Does a Delaware Company have to pay California taxes?

It is very common for companies to organize in one state and do business in other states. For example, a business that primarily operates in California may choose to organize as a corporation or limited liability company (LLC) in Delaware. Wherever the company decides to organize, it is required to register in any state where it carries on business. What constitutes carrying on business will vary from state to state. Generally, carrying on business refers to some non-incidental activity aimed at generating revenue, acquiring or selling assets. It generally entails having an employee or agent act on behalf of the company in interacting with individuals within that state. This concept is important as well for determining when an individual carrying on business in a state is subject to taxation in that state.

In this article, we discuss the rules surrounding state taxation of businesses operating or carrying on business in that state.

When and What Type of Activity Can a State Tax?

Income Taxes - As discussed above, a state will generally charge income taxes to a business generating revenue (or profits) in its state. Generally, the activity generating the profits must be derived from activity carried on within the state. It is possible that a company is headquartered in state A but carries on its revenue-producing operations in state B. In this scenario, the company will definitely have to pay income taxes on the revenue that is generating in state B. If the company can allocate any of the revenue-producing activity to state A will depend on whether the income was derived from the state A activity of solely from the state B activity. So, to determine whether you are subject to pay income taxes in a state, look to see if you derived any income from your operations in that state. This does not include simply shipping something to another state. If you conducted the sales transaction online and received payment through the mail, you are taxed in your homes state (where you generated the revenue). If you have established operations in another state and undertake a revenue-producing transaction in that state, you will owe income taxes in that state.

What are Sales Taxes?

Sales taxes are taxes charged by either state or local jurisdictions. The tax is generally a percentage of the value of the item sold. It must be paid by customers and collected by retailers. The retailer will then report and deposit the sales tax with the taxing authority at the end of each month. An important point to make about this state sales tax regime is that businesses have traditionally not been considered to be carrying on business in a state simply by shipping items to a state (or selling items in that state via the internet). A landmark case decided by the US Supreme Court, known as Quill v. North Dakota (1992), held that the state did not have authority to require individuals to collect sales taxes within that state. If, however, the company generating revenue from sales in a state has a substantial presence within the state, then the state was free to assess sales taxes for the sale of goods within its state. A substantial presence generally consisted of a business location, sales agents, recurring business-related meetings, etc.

What is Use Tax?

Use tax applies when a business buys personal or business property in one state for use in another. The rule applies when the state in which the property is used has a sales tax. If the property was purchased in a state with a lower sales tax than the state in which the property is used, that state of use will charge a “use tax” on the property. This amount will equal the state sales tax rate minus any sales tax paid in the state of purchase. This rule is designed to keep individuals from going to lower sales tax states to purchase personal or business property.

What are Property Taxes?

A business with real or personal property within a state may be subject to local property taxes. Under state law, most localities have the ability to tax both real and personal property. This means that a business owning its physical location or holding equipment or inventory in a location will be obligated to pay property tax on the value of the property.

As described above, there are numerous situations where a company organized in Delaware could be liable to pay income, sales, use, and property taxes.