The FTB advises a taxpayer that its corporate subsidiary, which had a single employee located in California, was doing business in the state during pre-2011 tax years and therefore was subject to corporation franchise and income taxes during those years because the employee’s transactions were conducted for the purpose of the subsidiary’s financial or pecuniary gain or profit and went beyond the P.L. 86-272 protections. The subsidiary and its parent manufacture and sell various products for consumer and professional use. The subsidiary sold its products to distributors in California, including the parent corporation, which then sold the subsidiary’s products to various retailers throughout California.
In a chief counsel ruling, the FTB stated that the employee’s training of distributors and retailers on the subsidiary’s products, and providing customer support by resolving disputes and replacing products, were transactions that were conducted for financial or pecuniary gain or profit, and therefore established nexus. In addition, the following activities conducted by the employee were sufficient to establish nexus and went beyond the P.L. 86-272-protected activities because they were neither essential nor ancillary to the solicitation of orders for tangible personal property that were filled outside California:
-collecting delinquent accounts;
-installing the subsidiary’s product for retailers;
-training retailers on general sales techniques that were not specific to the subsidiary’s product;
-providing technical assistance to retailers by providing services related to the design and construction of custom subsidiary’s products;
-resolving customer complaints;
-selling the subsidiary’s products that were used for demonstrations at trade shows; and
-on a regular weekly basis, taking orders from a retail store and passing those purchase orders to a California distributor-customer for fulfillment.
Chief Counsel Ruling 2013-07 , California Franchise Tax Board, December 5, 2012, released January 23, 2013, ¶405-804