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We provide IT services remotely to a small business in CA from another state. Does this mean we are doing business in California?

According to the California Franchise Tax Board (CFTB)'s Doing business in California article:

We consider you to be “doing business” if you meet any of the following:

  1. Engage in any transaction for the purpose of financial gain within California
  2. Are organized or commercially domiciled in California
  3. Your California sales, property or payroll exceed the following amounts:

Of all this, items 2. and 3. do not apply, but having trouble interpreting "within California": Does it mean physically being there or it applies to any kind of transaction (i.e., received remuneration for remote services rendered)?

The CFTB's other article, Help with doing business in California is more verbose, but just as vague:

You can still be doing business if you actively engage in a transaction in California for the purpose of:

  • Financial gain
  • Profit

[..]

Partnerships, Limited Liability Companies (treated as partnerships) and S corporations

Partnerships and LLCs are considered doing business in California if they have a general partner or member doing business on their behalf in California. Likewise, general partners and members are considered doing business in California if the partnership or LLC, respectively, is doing business in California.


NOTE: We understand that answers on this site are personal opinions only, not legal advice, and we'll file taxes to err on the side of caution - but still interested how you would interpret this one.

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    The vagueness is by design. CA FTB is very aggressive when it comes to determining nexus, and you may be hit not only with the income tax liability (which is for sure) but also with demands for registering your entity as a foreign entity and paying the registration fees and entity taxes (if you're a L{LC|LP|P}/Corp entity)
    – littleadv
    Commented Feb 7, 2023 at 20:11

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You may not be surprised to learn that California is extremely aggressive when it comes to business income earned by non-residents. They use what is called "marked-based sourcing":

Under the market-based sourcing rules that went into effect January 1, 2013, a nonresident independent contractor's income is sourced to the location where the customer received the "benefit of the services."

If the nonresident performs services from her or his home state, and the benefit is received in California, an independent contractor operating as a sole proprietor will have California source income[...]

I'm not sure if it officially means you are "doing business in California", as your question asks, but if your real question is "do I owe state income tax on these earnings?" then I think the answer is yes.

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