*The following article was updated in March 2024*
Most business owners do not realize that when you do business in California, you have to deal with three separate tax agencies. If you were doing business in Wisconsin, for example, you would only be working with the Wisconsin Department of Revenue. If you were working with New Jersey, again, you would only be working with the New Jersey Department of Revenue. But California has three different state agencies: one for payroll tax, one for sales tax, and one for income tax. Each agency has its own set of rules, regulations, and audits.
The first agency is the Franchise Tax Board (FTB). The FTB has different audits they perform and different income issues that arise. One of the biggest issues the FTB is concerned about is Residency Audits. These are based on whether or not an individual is actually a California resident. Many people live in California and are afforded the benefits of living in the state, but perhaps want to relocate to a different state or have an existing relationship with state i.e. property, family, business interest. These individuals who move or have the intent to move to another state may still be residences of California. The main concern is revenue the state collects from its residents. It’s likely that when you filed a federal income tax return, you also filed a state tax return. When the information is provided to the federal government, sometimes there is a California address, perhaps on an interest statement, a mortgage statement, or a bank statement. This California address could potentially inform the state of California and a residency audit could be triggered if no California income tax return has been filed. When you go through a residency audit you must prove your residency through documentation, you must prove that you truly are no longer a resident of California, and this can sometimes prove to be quite difficult.
The second agency you will encounter is the EDD, the Employment Development Department which is primarily concerned with payroll taxes. Most companies have some sort of part-time or full-time employee that the state requires payroll tax to be paid. California generally encourages all workers to be on a payroll to ensure that they have access to worker’s compensation in case of loss of wages due to work-related injury as well as access to unemployment benefits in the event of job loss. Many individual workers prefer to be Independent Contractors primarily so they can take their own deduction on their own tax return. There is also a new case law that is really going to shift this Employee vs Independent Contractor requirement.
The third agency you will come in contact with is the Board of Equalization. This agency has recently changed its name to the California Department of Tax and Fee Administration,
the CDTFA. This agency’s main concern is sales tax. Most business owners know that when you sell any product in the State of California, you must charge sales tax and that tax must be paid over to the state. You, as the business owner, are collecting the funds, and are holding it in trust for the government. There is generally some confusion about sales tax: what needs to be charged, are there some items that are exempt? There is a new Supreme Court case, the Wayfair Case, that has shifted this requirement, and now if you are selling on the internet, you must collect and pay sales tax in all states. It’s not limited to the state where you reside or where you have a brick and mortar establishment. Sales tax audits can be very time consuming, they are based on many different factors and tests. There are different standards to determine whether or not you would be assessed and additional tax.
Hire Experienced Business & Tax Legal Practitioner
This is a brief introduction to the three California state agencies. Our business & tax legal practitioner at Allison Soares, Attorney at Law has experience dealing with all three agencies. Please call us or contact us for a free consultation.
