California tax on Washington State LLC

I'm a Pennsylvania CPA with a client in Washington State, an LLC filing as a partnership. They are a consulting company doing work in California and their client there withheld 7% for a tax there, presumably because they are a foreign company.

Can enyone enlighten me as to what forms have to be filed in CA, if any to account for the 7% and should we have received something from the client acknowledging the tax withheld? Seems we have nothing to hang our hat on there.

To make matters worse, I called CA and was told yes they have a tax on foreign entities, but they try to tax everything, so it's something I really shouldn't get started with. (Maybe it was his last day there. :))

Any help is greatly appreciated.

Jeff Berk

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Reply to
JB
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Actually, I think it's more because they *are not* a foreign company. For corporations, anyway, CA payers are supposed to withhold 7% from an out-of-state recipient that can't prove they are registered as a foreign corporation. So it seems either your clients didn't register, or their client withheld the 7% by mistake. I'll assume the former.

They'll presumably first need to register as a foreign LLC. If they send employees out there to do any work, the LLC will need to register with the CA EDD, & withhold on employee salary. The workers too will have to file and pay CA income tax (on world-wide income, not just CA income) and SDI. I think the de minimus exemption is a laughable 5 days. It'll be interesting to see what happens to that 7%, since to get it, your client would seem to have to admit to doing business in CA without being registered. Perhaps it'd be cheaper and less hassle to let CA simply keep the money & hope they'll be satisfied with that? Seems to me there are possible criminal sanctions here, especially if they were sending employees to CA to "consult", but I'm no lawyer (or a CPA for that matter).

The guy you spoke to gave you sensible, but probably invalid, advice! He was certainly right when he told you that they'll try to tax everything, so I hope you gave a false name. Telling you not to get into it is most likely illegal. But in general, unless your clients plan on doing lots of business in CA, its probably more hassle than it's worth dealing with their complex and draconian FTB and EDD regulations, and avoiding their inefficient and cynical agents. If your clients do register, remind them to "deregister" when they've finished. CA continues to assess foreign entity minimum franchise taxes even if you're no longer doing business there, and are not shy to let these taxes accumulate without telling you until (with penalty and interest) they are quite substantial. Katie will no doubt give you a more authoritative response. Anyone in CPA-land had clients who took the 7% hit in lieu of filing? How did it turn out?

Reply to
Tony Cox

"JB" wrote:

Your client's LLC is doing business in California if it is performing consulting services there. It must register with the California Secretary of State. It is subject to the annual $800 minimum tax and the LLC fee. (Note the constitutionality of the LLC fee is the subject of pending litigation. Until there is a published authoritative court decision holding the fee to be unconstitutional, the fee should be paid and a protective claim for refund filed. Check the FTB web site,

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for instructions.) The LLC must file Form 568 to report its activity and pay the minimum tax and fee, and provide California K-1s to its members. The LLC's members are California taxpayers. The LLC must apportion its income to California using the three-factor, double-weighted sales apportionment formula, and each member of the LLC owes tax to California on his or her distributive share of California source income. Individual members will file nonresident personal income tax returns on Form 540NR. A composite nonresident return may be filed on behalf of those members who agree to be included in such a return and who have no other California source income. California businesses are required to withhold 7% of compensation paid to nonresident independent contractors performing services in California. Here is a link to the FTB publication explaining the nonresident withholding program:
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client should have received Form 592-B, NonresidentWithholding Tax Statement, for each member of the LLC,dividing the withholding credit among the members inaccordance with their interests in the LLC. If only one592-B was issued to the partnership, each member shouldattach a copy of it to his or her California nonresidentpersonal income tax return along with a list of members andtheir proportional interests, and claim the credit inproportion to his or her interest in the LLC.

Reply to
Katie

Katie and Tony,

Thanks for your help and direction. Glad I'm on the right coast. If I can ever help out in PA, be glad to. Jeff Berk Jenkintown, PA

215-886-8700

Reply to
JB

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