Franchise Tax Creates Additional Tax Liability for Floridians
Does your company have physical franchise operations outside the state of Florida? If so, then you may be interested in learning about the key changes several states, like Oklahoma and California, are making in their franchise tax programs. As a result, it is possible that your company will be required to pay new or additional franchise taxes in these states.
Key Point: As states modify their franchise tax regulations to address revenue shortfall issues, the changes may create new or additional tax liabilities for your company!
Oklahoma’s Business Activity Tax
The State of Oklahoma has temporarily replaced its Franchise Tax with a Business Activity Tax (BAT) for tax years beginning after 2009, and ending in 2013. The purpose of the BAT is to maintain adequate revenue levels for the state, while providing a fair and simplified system of taxation for businesses and individuals. Under the new law, existing franchise and ad valorem taxes on the intangible personal property of businesses operating in Oklahoma were suspended for the tax years 2010-2012, set to end before July 1, 2013.
The new BAT requires an annual tax of $25 and a 1% tax on the net revenue from business activity allocated or apportioned to Oklahoma on all entities doing business in the state except public service corporations, air carriers, and railroads. This includes individuals, partnerships, limited liability companies, trusts, estates, and corporations.
The BAT is applicable to tax years beginning on or after January 1, 2010 and expires for tax years beginning after December 31, 2012. For tax years beginning in 2010, 2011, and 2012, for corporations and other persons that were subject to the franchise tax, the 1% tax on net revenue due under the BAT is equal to the tax due under the franchise tax for the tax period ending prior to December 31, 2010.
California Issues Nexus Guidance
The State of California has issued a legal ruling regarding how owners of disregarded entities (i.e. Qsubs and LLC’s) determine whether they have a nexus in the state. ( “Nexus” is the minimum connection needed between a business and a state to establish if the business must report income, collect state sales taxes and file taxes in that state in addition to the state where the business is located.) The ruling creates additional franchise tax liabilities for owners of disregarded entities that may previously not have been required to pay state franchise tax.
Two specific examples were provided where new or extended nexus may occur:
- Qsubs. A non-California corporation that elected S Corporation status for federal purposes owned a Qualifying S Corporation subsidiary (QSub) that was doing business in-state without authority to do so. The owner had no separate activities in-state sufficient to constitute “doing business” and did not file a California return as an owner. The ruling maintains that the activities of the QSub are to be treated as the activities of the S Corporation so that the business activities in-state of the QSub create a substantial nexus.
- Single Members LLC’s. A non-California corporation owned a single-member limited liability company (SMLLC) formed in another state that was doing business in California without being registered. The owner had no separate activities in-state sufficient to constitute “doing business” and did not file a California return as an owner. The ruling asserted that the activities of the disregarded entities are considered to be the same as that of the owners. As a result, the owner has significant nexus with the state and must pay the franchise tax.
Although the revenue ruling was limited it does have a significant impact on non-California companies with business activities in the state. Remember, since it applies to disregarded entities it can have an impact at the corporate or personal level!
Are you unsure whether these new regulations create or increase your nexus responsibilities? If it is not clear how these changes will impact your tax situation or what your liability may be, please contact Faith Gorman, JD, State & Local Tax Manager, at 561-367-1040, or click here to email Faith. In a brief consultation she can explain the implication of these changes and determine how you will be affected.