Pop quiz: when it comes to business earnings, the State of Texas imposes: (a) an income tax; (b) a business activity tax that is not an income tax; or (c) no tax at all. Good news (or bad news)—no matter which answer you chose, you may be right (or wrong). Right now, the answer appears to be (b), but in a few months we may find out that the answer is actually (a), and barring a change of course by the State Legislature, the answer may be (c) in the near future. One thing is clear; the Texas Franchise Tax (or “margin tax,” as it is colloquially known), is in a state of flux.
An out-of-state corporation, whose sole connection to California was a 0.2% interest in a manager-managed California limited liability company, was not “doing business” in California for purposes of the California corporate franchise tax according to the California Court of Appeal for the Fifth Appellate District in its recently-issued decision, Swart Enterprises, Inc. v. Franchise Tax Board, Case No. F070922. The appellate court’s decision affirmed the judgment of the California Superior Court and overturned the rationale articulated by the Franchise Tax Board (“FTB”) in FTB Ruling 2014-01 (July 22, 2014), which was issued by the FTB while the Swart case was pending.