Ask HN: Have you had a massive bill from the California Franchise Tax Board? | Hacker News Reader

Ask HN: Have you had a massive bill from the California Franchise Tax Board?

14 pointspetenixey10 comments

After diligently paying my Delaware taxes for the seven years I've had a company I was surprised to receive a letter (my first) from the California Franchise Tax Board telling me I owed them $64,000.

When I phoned up to check this they said that on recalculating it I owed $1,400 in taxes but another $8,600 in fines. However this was the first time they had contacted me. Seven years after the company was founded and with no prior invoices or notifications.

On speaking to one of the YCombinator founders last night I discovered that I'm not the only person this has happened to. Many businesses have been flipped over by the CFTB and forced to pay these fines with no prior warning.

Has this happened to you? Have you successfully fought it? If not how many of us are there?

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You should yell at your accountant. They should have seen this coming. (Early in my relationship with my accountant, while he was getting his head around the jurisdictional issues, he spent about 5 minutes grilling me about every business trip ever to California and all of my clients there. "Look, you know you're not a California business and I know you're not a California business but the question is are we sure that California will come to the conclusion that you're not a California business. They're real bastards about some of the edge cases so I want to know if you're going to hit any.")

You have an accountant, right?

With regards to fighting the penalty: there's often a bit of play with government offices particularly if you happen to bring the honest mistake to their attention first and try to come in out of the cold. You might find that tax offices take a sort of dim view about not filing taxes. I have yet to have ever heard of a tax office which thinks "If you're not aware of the existence of taxes, whoops, that was our bad."

Thanks Patrick. I guess I'll try some sweet talking.

Hmm, how do I mention this to my accountant without sounding paranoid? Does a SaaS company in another state need to worry about this? What about consulting from another state?

"I read a story online about how a small business got hit with an unexpected $64,000 bill for back taxes because the state of California determined that an edge case applied to make it an in-state business. I realize this probably doesn't apply to me, but would you please double check?"

If you physically do all your work in one state you have no problems. When I was consulting I had a VERY booked travel schedule where I was doing an awful lot of work while flitting between multiple aggressive high-tax jurisdictions, so my accountant went through the specifics. Again, took only a couple of minutes while reviewing my travel log.

Relatedly, if you incorporate, your accoutant can walk you through where you should do that. (Delaware C corps are the gold standard in the Valley due to investors liking Delaware's laws/courts. I didn't need to optimize for investors so I have LLCs in Nevada, because they're fairly cheap and can't cause state income tax since Vegas means Nevada will never have one.)

Did you not owe tax earned by CA companies consulting? It was my understanding that work in the state for an in-state client was income taxable (yes, that understanding came from my accountant).

If yours thinks differently, I'd like an intro.

Mine thinks substantially the same, but allocates costs such that I've never profited from work physically performed in California.

This is what happened to my first company. We were incorporated in Delaware but resided in California, so we were hit with a double tax bill and had to pay retroactively.

For our current company, we decided to just incorporate in California and everything has been much easier. I'd advise anyone looking to incorporate Delaware, while based in California, to make sure it makes sense for their company.

What's your relationship with California? Do you have an office there? Do you have employees that live in California?

Curious are you physically located in California? I know that lot of states are starting to claim you a "nexus" if you take a trip through them or do any sort of business with them. It's a real problem if every state you touch tries to claim your business and the taxes.

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