California Assembly Bill 5 & Domicile

In September 2019, the California Senate passed the AB 5 bill to manage the concerns regarding employee misclassification in the gig-economy and it goes into effect on January 1, 2020. Many gig economy business owners/workers may be considering moving their residence or part of their business out of California to protect themselves from this new law and still run business operations in California. 

If corporations decide to change their state of incorporation, they may still be liable for California franchise tax including employment taxes, if commercially domiciled. Commercial domicile refers to a place where a nonresident entity’s affairs are conducted. 

The legal home of any corporation is the place where all corporate and business affairs are maintained and directed at. If a business decides to not domicile their entity, they still have to be registered in the states that they are doing business in.  Gross income derived from more than one state would most likely need to be apportioned between the various states where the entity has commercial domicile.  

California EDD (Employment Development Department) may still subject an entity to employment taxes whether or not they conduct business in California. 

One criterion is “place of direction and control”. An entity domiciled in another state may also be subject to California franchise taxes and EDD payroll taxes. Commercial domicile and “place of direction and control” are important factors.

For example, an entity with corporate domicile in Texas may still need to register as a foreign entity with the California Secretary of State, if commercially domiciled in California.  This same entity may also need to make sure they are treating a California resident consistently with the new AB5 rules. If this same entity has a presence in California and gives direction and control to its workers in California or from California (in the case of interstate employees), then it may be subject to California employment taxes.  

Below are examples of cases where commercial domicile was the main issue. CA may come after foreign companies that still have operations in CA and drag them into complying with AB5 as the CA operations may be the place of direction and control.

In the case below, CA FTB levied the tax where commercially domiciled in CA,

Document Title: Cases: CA: In the Matter of the Appeal of NORTON SIMON, INC., SUCCESSOR IN INTEREST TO HUNT FOODS AND INDUSTRIES, INC., SUCCESSOR IN INTEREST TO HARBOR PLYWOOD CORPORATION., 72-SBE-008, 03/28/1972

In this case, the domicile for the company was found to be California and the plaintiff was required to pay taxes for the years the company operated from California. This case showed us the importance of domicile while determining the tax laws one is subjected too. It is important to understand the tax laws when doing business in multiple states. 

In the following case, CA Franchise Tax Board (FTB) failed, i.e., commercial domicile was proved to be out of state,

Document Title: Cases: CA: DANIEL V, Inc., a Nevada Corporation, Plaintiff, v. CALIFORNIA FRANCHISE TAX BOARD, Defendant, BC 457301, 02/06/2013

In this case, the commercial domicile for the corporation was determined to be Nevada and not California, on the basis of the bank accounts, brokerage accounts, board of directors’ meetings and all other business affairs being operated and controlled from Nevada. The Court then ended up ordering a refund of the taxes paid, the interest paid, and the penalties paid by the plaintiff. 

You may call our office at 909-217-7855 to better understand your options and ease your burden with all the changes happening. We also have a network of expert attorneys that can help navigate the extremely complex legal landscape.