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We already mentioned PL 86-272 a number of times in past episodes. Frances Ellington mentioned it and then also Ed Antolin. Today let’s drill deeper because losing the protection that PL 86-272 grants you, can cost you a lot of money in state income taxes.

While PL 86-272 is federal law and so applies to all 50 states, let’s discuss the technical advice memorandum California’s Franchise Tax Board issued. Because California is trying to limit the application of PL 86-272 and chances are that other states will follow suite.

And just one comment on the side: The state revenue office in California is called the Franchise Tax Board, in short FTB.

The speaker in this episode is Edwin Antolin of Vallejo Antolin Agarwal Kanter, or in short VAAK, in Walnut Creek, California about California’s technical advice memorandum to PL 86-272.

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Let’s talk about state tax sourcing rules. How do you determine which income is taxable in which state? If you sell into California but also into lots of other states, how do you determine what is taxable in California and what is taxable in other states? That is the question that Ed Antolin of Vallejo Antolin Agarwal Kanter, or in short VAAK in Walnut Creek, California will discuss with you.

To determine which net income is taxable where, you look at sales. You determine the sales for each state. And then you apply that percentage to your net income. That portion of net income is then taxable in that particular state. But in addition - if a particular state has the throwback rule - then any net income in tax-free states is then also added to your taxable income in that state.

What you do when you have sales in two states with a throwback rule. So let’s say you have sales in California and Colorado. Both states use the throwback rule. But then you also sell into Wyoming which has no state income tax. So the throwback rule applies. But which state gets that net income? California or Colorado?

If a state has a throwback rule like California, the sales gets thrown back to the state from which the goods were sent. For example, if you store inventory in CA and sell to a customer in WY, the sales are thrown back to CA. So the state that gets the throwback is the state from which the inventory was sent.

So in our example of California v Colorado. If the goods were sent from California, California gets to tax the Wyoming net income. And if the goods were sent from Colorado, then Coloardo gets to tax that income under the throw back rules since Wyoming has no income tax. So that makes it even more important to store your goods in a low tax state.

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In US update 24 Frances Ellington already gave you a first overview of Californian income tax. In this update let’s drill deeper with Ed Antolin of Vallejo Antolin Agarwal Kanter, or in short VAAK in Walnut Creek, California.

Just like with federal income tax, you have to distinguish between individual and corporate state income tax. So the first question to Ed Antolin is: what triggers corporate income tax in California? Only physical presence or is there - just like with sales tax - an economic nexus?

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