What Constitues as Doing Business for State Franchise Tax Purposes?

by Eric Feigenbaum

You start selling an art, craft or your baking as a way to make a little extra money. It's just a transaction here and there, but you don't consider it a real business. However, your state might -- and if does, it may want you to pay taxes. Likewise, if you have an established business which branches out into interstate commerce, you may also find yourself subject to taxation from other states. While definitions of "doing business" vary by state, there are some commonalities in the way state franchise tax laws are written and applied.

Encompassing Definition

The California Franchise Tax Board defines doing business as, "'Doing business' means actively engaging in any transaction for the purpose of financial or pecuniary gain or profit." This very broad definition means that it doesn't matter if you are selling cupcakes out of your home or operating a factory, your business revenues are subject to California tax laws. Obviously, the Franchise Tax Board isn't too concerned about the profits from your garage sale, but once a small operation crosses the line into becoming a consistent source of revenue which you can classify as a business, you run the risk of tax evasion by not registering your business and filing business tax returns.


When examining if your business is subject to other states' tax laws, you will face tests based on revenue amounts and percentages. From 2011 forward, California considers a "foreign" business subject to California taxation when it exceeds $500,000 or 25 percent of its total revenues from California sales. Other states, such as New York, do not use revenue as a measure of a foreign corporation's taxability. However, New York requires foreign corporations to apply for authorization from the New York Division of Taxation and Finance, which allows the state to inquire annually about the nature and finances of the business.

Physical Presence

Numerous states use physical presence as a measure of whether or not a foreign business is subject to taxation. For New York and California this includes paying employees located in their state, owning property, and operating an office or business site. New York and Michigan make having any of these in any amount grounds for taxation, while California uses measures, including the number of employees, how much they are paid when considering whether a foreign corporation is grounded in California. In addition, when foreign businesses "pass through" their tax burdens to owners -- such as S corporations, limited liability companies and limited liability partnerships -- many states consider the business income taxable based on the residence of the owners who receive the profits and losses.

Photo Credits

  • Jupiterimages/Polka Dot/Getty Images
Suggest an Article Correction