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Foreign qualification in 2020: California, New York, Texas, and the Wayfair aftermath

Two years after South Dakota v. Wayfair, the three biggest qualification states still charge the same headline fees and still bury the cost below the line

The Editors
Staff, Incorporator.org
10 min read Updated
Contents 6 sections
  1. What the three states charge in February 2020
  2. The California arithmetic after A.B. 91
  3. New York in 2020: the publication rule is still the tax on qualifying
  4. Texas in 2020: the no-tax-due threshold keeps drifting up
  5. What has actually changed since 2017
  6. Sources

California foreign LLC still costs $70 to register, a New York foreign LLC still costs $250 plus publication, and a Texas foreign LLC still costs $750. The headline fees have not moved in the 29 months since we last walked through this. What has moved is the set of activities that counts as "transacting business," and that has made foreign qualification a question for a much larger share of out-of-state entities than it was in 2017.

The shift is Wayfair. Since South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), a state's ability to require tax collection from a remote seller no longer depends on physical presence. The tax-nexus question and the foreign-qualification question are legally distinct (one is sales-and-use-tax jurisdiction, the other is the entity-registration statute), but they share a premise, which is that an entity that sells into a state at scale is doing something the state wants to tax and register. Companies that comfortably sold into California, New York, and Texas without registering in 2017 are finding their names on more nexus questionnaires in 2020. The filing fees below are unchanged. The exposure they foreclose is larger.

What the three states charge in February 2020

California, New York, and Texas all still use the same forms they used in 2017. A foreign LLC qualifies in California by filing Form LLC-5, "Application to Register a Foreign Limited Liability Company," with the Secretary of State, with a $70 filing fee per the current Business Entities Fee Schedule. Foreign corporations file Form S&DC-S/N, "Statement and Designation by Foreign Corporation," for $100. Both filings require a Certificate of Good Standing from the home state, dated within the last six months.

New York still uses Form DOS-1025-f, "Application for Authority," for a foreign LLC, with a $250 fee to the Department of State. Foreign business corporations file an Application for Authority under Business Corporation Law § 1304 for $225. Both require a Certificate of Existence from the home state, dated within one year. The publication requirement under LLC Law § 802 is still in force: within 120 days of qualification, a foreign LLC must publish notice for six consecutive weeks in two newspapers designated by the county clerk, then file a Certificate of Publication for a further $50. Manhattan publication still routinely runs $1,500 to $2,000; upstate counties are often under $200.

Texas remains the most expensive of the three at the door. Foreign LLCs file Form 304, "Application for Registration of a Foreign Limited Liability Company," for $750 under Texas Business Organizations Code § 4.158. Foreign for- profit corporations file Form 301 for the same $750. The application requires a Certificate of Existence from the home state, issued within 90 days, and a registered agent with a Texas street address. The late-filing penalty is unchanged and still the sleeper liability: under BOC § 9.054, an entity that has been transacting business in Texas without registration owes the registration fee it would have paid for every year, or part of a year, of unregistered activity. Four years late is $3,750 on top of the $750 current-year filing.

The California arithmetic after A.B. 91

The $70 California filing fee is still the smallest number in the California transaction. The $800 annual LLC tax under Cal. Rev. & Tax. Code § 17941 is still the second-smallest. The interesting change for 2020 is upstream: Assembly Bill 91 (the California "Loophole Closure and Small Business and Working Families Tax Relief Act"), signed in July 2019, conformed California to several federal TCJA provisions, including the revised net-interest-expense limitation and the elimination of like-kind exchanges for personal property. The foreign-qualification paperwork did not change. The franchise-tax picture underneath did.

The structural point is the one we made in 2017 and it still holds: an entity that qualifies in California on March 1, 2020 owes $800 to the Franchise Tax Board for 2020 and $800 for 2021, whether or not it earned a dollar in California, and owes the gross-receipts fee under § 17942 on top of the $800 if California-sourced income crosses $250,000. The fee tiers still run from $900 at the $250,000 threshold to $11,790 at $5 million and above. Budget the $800 as the cost of walking through the door; budget the § 17942 fee if the California revenue plan is serious.

One qualification activity that does not trigger California foreign-entity registration is maintaining bank accounts, holding management meetings, or selling through an independent contractor; Cal. Corp. Code § 17708.03 still lists the safe-harbor activities for an LLC, and the list has not changed. Selling into California from a Nevada warehouse is not on the safe-harbor list, and after Wayfair the Franchise Tax Board and the California Department of Tax and Fee Administration have been more willing to press the question.

New York in 2020: the publication rule is still the tax on qualifying

The mechanics in New York are unchanged. The Department of State still takes Form DOS-1025-f and $250. The biennial statement is still $9, filed in the anniversary month. The publication requirement under LLC Law § 802 is still the real cost, and it still falls hardest on Manhattan qualifications because the designated New York County papers are expensive on purpose. A foreign LLC that qualifies in Manhattan in February 2020 typically pays $250 to the Department of State, $50 for the Certificate of Publication, and somewhere between $1,500 and $2,000 to two newspapers. A foreign LLC that qualifies in Albany County pays the same $250 and the same $50 and roughly $150 to $300 in publication. The statute applies regardless of county, so the only lever is where the LLC's office sits.

The 2020-specific wrinkle is not in New York; it is across the river in New Jersey. The New Jersey Business Alternative Income Tax (the "BAIT"), P.L. 2019, c. 320, was signed on January 13, 2020 and applies to tax years beginning on or after January 1, 2020. It is an elective pass-through entity tax that lets partnerships, multi-member LLCs, and S-corps pay New Jersey tax at the entity level and take a dollar-for-dollar credit against the members' New Jersey individual income tax. The election matters because the TCJA's $10,000 state-and-local-tax deduction cap is applied at the individual level, and a BAIT payment made at the entity level is deducted as a business expense on the federal return before it reaches the owners' Schedule E. Connecticut pioneered this structure in 2018; New Jersey's version is more generous because the credit is refundable.

For a Delaware or Wyoming LLC that is qualified in New Jersey and operating through New York clients, the 2020 planning question is whether the New Jersey BAIT election is worth making for the federal SALT workaround. The answer depends on the share of income sourced to New Jersey under its apportionment rules and on whether the members would otherwise be capped on SALT. The IRS has not definitively blessed the entity-level PTET workaround, though Notice 2020-75, issued in November 2019, said Treasury and the IRS intend to propose regulations clarifying that state and local income taxes paid by partnerships and S-corps in computing non-separately stated income are not subject to the $10,000 limitation. Practitioners have read that as a green light. We would read it as a yellow one and stay current with the proposed regulations when they issue.

The foreign-qualification filing in New Jersey is a separate action from the BAIT election; a foreign LLC registers with the Division of Revenue using Form NJ-REG, then makes the BAIT election with the Division of Taxation. The registration does not create the election, and the election is not available to entities that have not registered.

Texas in 2020: the no-tax-due threshold keeps drifting up

Texas has no state income tax and does have the margin tax administered by the Comptroller. The franchise-tax "no-tax-due" threshold is indexed and has continued to rise: for reports originally due on or after January 1, 2020, the threshold is $1,180,000, up from $1,130,000 for 2018 and $1,110,000 for 2016 and 2017. Below the threshold the registered foreign entity still files an annual No Tax Due Report and a Public Information Report; above it, the tax is 0.375% for retailers and wholesalers and 0.75% for other entities on the taxable margin.

The $1,180,000 figure is the policy feature Texas quietly maintains that the other two states do not: a large share of out-of-state LLCs qualifying in Texas will never owe franchise tax, because they will never cross $1.18 million in Texas-sourced revenue. Those entities pay the $750 registration fee, file the annual informational return, and are done. For a Delaware LLC making $400,000 a year with half its customers in Texas, that compares favorably to the California $800 minimum or the $2,000 Manhattan publication bill, both of which arrive regardless of revenue.

Wayfair changed the sales-tax calculus in Texas, not the franchise-tax calculus. Under the Comptroller's rule adopted in late 2018 and effective for sales-tax periods beginning October 1, 2019, a remote seller with more than $500,000 in Texas gross revenue must collect and remit Texas sales and use tax. That is a collection obligation, not a foreign- entity registration obligation. But an entity that has crossed the sales-tax threshold has almost certainly crossed the qualification threshold for "transacting business" under BOC § 9.251 as well, and the penalty for qualifying late is the compounding one described above. Registering when the sales-tax obligation attaches is the cheap move.

What has actually changed since 2017

Three things. First, Wayfair. The Supreme Court did not touch the foreign-qualification statutes of California, New York, or Texas, but by removing the physical-presence floor for sales-tax nexus, it made the qualification conversation louder for remote sellers. Second, state-level PTET. New Jersey's BAIT is the most significant 2020 addition for qualified out-of-state LLCs with New Jersey-sourced income, and Connecticut, Louisiana, Oklahoma, Rhode Island, and Wisconsin are all running their own versions of the same workaround. The federal answer is still pending. Third, California's A.B. 91 conformity cleanup and the continuing drift of the Texas no-tax-due threshold, both small, neither a structural change.

What did not change: the headline fees, the forms, the registered-agent rule, the Good Standing requirement, or the basic proposition that the $70 California filing is an $870 first-year obligation and the $250 New York filing is closer to $2,000 after the newspapers. If anything, the post-Wayfair environment makes under-registration more expensive than it used to be, because the sales-tax trail that now exists for any seller above the state's threshold is a map the foreign- qualification enforcement office can read.

For background on the mechanics that predate these 2020 wrinkles, see the 2017 version of this piece. For the Wayfair mechanics themselves, our analysis of economic nexus after the ruling walks through the state-by-state thresholds. For the PTET workaround more generally, our early look at the SALT-cap experiments is the place to start.

Rule of thumb: budget the filing fee plus one year of the foreign state's minimum franchise or privilege tax, plus the New York publication bill for the county where your office sits; add a second year of the California $800 if you register in Q4; and for any state where you have already crossed the Wayfair sales-tax threshold, treat foreign qualification as already overdue and register before the Comptroller or Franchise Tax Board writes first.

Sources

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