When is Your Out-of-State NPO Doing Business in California?

Nonprofits formed and based outside California (“foreign entities”) need to monitor whether they are “doing business in” California, perhaps unawares, and without a physical presence there. The consequences are potentially significant, so this warrants some level of Board oversight .

What is “Doing Business In” California?
Doing business in (“DBI”) California means different things to different California laws and agencies.

1. The California Corporations Code section 191(a) describes DBI rather narrowly as “entering into repeated and successive transactions of its business in [California], other than interstate or foreign commerce.” This would include an online business engaging in repeated contacts and transactions with California residents and entities. But, sections 191(c) and (d) exclude:
   
   (a) maintaining, defending, or settling any action, arbitration, or administrative proceeding;
   (b) effecting sales through independent contractors;
   (c) transacting any business in “interstate” commerce (i.e., between or across states); and
   (d) conducting an isolated transaction which is completed within a period of 30
   days and not in an ongoing course of similar transactions.
   
2. The Revenue and Tax Code section Rev. & Tax. Code § 23101(a) defines “doing business” more specifically as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” The Tax Code further provides that a company is viewed as DBI California if it:
   
   (a) is commercially domiciled in California (its principal place of business); or
   (b) the company’s sales in California exceed the lesser of:
   (1) $610,395 or
   (2) 25% of its total sales;
   (c) the value of company’s property in California exceeds the lesser of:
   (1) $61,040 or
   (2) 25% of the its total real and tangible property; or
   (d) the company’s payroll in California exceeds the lesser of:
   (1) $61,040 or
   (2) 25% of the company’s total compensation paid.

3. The Attorney General’s Registry of Charities and Fundraisers (“Registry”) at https://oag.ca.gov/charities/initial-reg applies a broader and more embracing definition of DBI California. The AG includes property ownership as well as any of the following activities:
   
   (1) soliciting donations in California in person, by mail, advertisements, or any other means targeting California residents;
   (2) holding meetings of the Board or of statutory members in California;
   (3) maintaining an office in California;
   (4) having officers or employees who perform work in California, or
   (5) conducting charitable programs in California.
   However, the AG has acknowledged the following alone will not amount to DBI California:
   (A) making grants to persons or organizations located in California; or
   (B) maintaining financial accounts or investments at a financial institution’s office located in California.

The Consequences
If a foreign entity is determined to be doing business in California then cascading consequences may follow. The entity must now:

(1) file a Statement and Designation by Foreign Corporation (Form S&DC-S/N) with Secretary of State and pay the fee, which requires a Certificate of Good Standing from the home state, within 90 days of starting to DBI California;

(2) register with the Attorney General’s Registry (Form CT-1), if holding charitable assets, and pay the fee, within 30 days of receiving the assets;

(3) file for state tax exemption using Form 3500A (Submission of Exemption Request) if already 501(c)(3) recognized, or otherwise Form 3500 (Exemption Application), and pay the fee, as soon as practical to avoid the annual franchise tax and income taxes;

(4) file California tax return 199N (if revenue $50,000 or less), 199 (if revenue over $50,000), and maybe 109 (if unrelated business income $1,000 or more), by the 15th day of the 5th month after the close of fiscal year.