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    6 Replies Latest reply on Dec 24, 2009 1:34 AM by booboo

    New online service. Does state tax apply? NV DE

    booboo Wayfarer
      Hi,
      I'm in the process of starting an online business. I am located in CA but looking at other states to incorporate in.

      I've been reading the tax laws in CA and very familiar with it. However, If I were to incorporate in Delaware (file to conduct business outside DE) or Nevada, am i subject to any state tax requirements? My market does involve people across the US but I'm confused if I would have to pay any corporate taxes at the state level if I plan on operating specifically online?

      As I mentioned before, my business is a service type busines. I also plan on using my home where I can update my website but there seems to be some fine lines as to what constitutes operating in that state. I'm guessing of internet businesses aren't subject to the corporation tax (besides sales tax) otherwise they would be paying taxes in every state.

      Please correct me if I'm wrong.

      Thanks for all your help.
        • Re: New online service. Does state tax apply? NV DE
          Lighthouse24 Ranger
          As you said, there are "some fine lines" involved. If you incorporate in NV, then there are no state corporation taxes (only annual registration and filing fees) -- but you would be contacted by other legal entities regarding things like state sales and use tax, business property taxes, local licenses, etc. If those did not apply because you were not actually operating the business within the state of NV, then the obvious question would be, "Where ARE you running the business from?" If the answer was your home in CA, then you would technically be operating a foreign corporation in CA -- which is legal and perfectly fine, but may involve registration, more annual fees, taxes, etc. under CA law.

          The "best" solution for you really depends on a lot of factors ranging from your personal financial situation to your long-term objectives for the company. That's one reason I often suggest that one-person, first-time start-ups begin as sole proprietorships initially -- in order to get the business up and running as quickly, as simply, and as inexpensively as possible. You can always incorporate (or whatever) later, when you know exactly what business structure and state venue will provide your emerging operation with the greatest advantages. Just something to consider . . .

          Hope that helps. Good luck with your new enterprise.
            • Re: New online service. Does state tax apply? NV DE
              booboo Wayfarer

              Thanks for the GREAT information you posted. I really appreciate the advice.

              I guess my entrepreneurial mind had thought of another alternative?

              Would it be justifyable to say that I am operating in a different location is my website is uploaded to a server that is out of state?

              I'm really just trying to avoid the CA franchise tax, which after I have been going through my financials, I may be loosing a lot of money beacuse of this.

              thanks for your help!

                • Re: New online service. Does state tax apply? NV DE
                  Lighthouse24 Ranger
                  I may be misunderstanding . . . but it sounds like you're asking if/how you can create a sort of "phantom" corporate entity that generates revenue, yet doesn't pay any fees or taxes anywhere. If that's the case, there's probably a way to do it (for awhile, anyway), but I can't offer any specific guidance or suggestions in that regard.

                  Again, good luck with your endeavor.
                    • Re: New online service. Does state tax apply? NV DE
                      booboo Wayfarer
                      Lol no...I was just trying to asked could I instead be taxed in the state that the server/website was located in.

                      For example.. A service like paypal uses the internet to transact payments electronically. Now if their hosting site/servers are located in Texas, wouldnt they technically be operating in that state and liable pay taxes in Texas even though they are located in CA? I guess this is where Im confused as to what consitutes the location where you operate the busness from.

                      Even though I live in CA, the majority of the business is operated through servers and internet which are usually located somewhere else.

                      Thanks again.

                        • Re: New online service. Does state tax apply? NV DE
                          Lighthouse24 Ranger

                          Okay, I see . . . thanks for providing the example -- and it's a good one. PayPal is a Delaware corporation, it's headquartered in CA, and has significant operations there, as well as in TX, AZ, and NE. It is registered with each of those states as a foreign corporation and pays all the required fees/taxes accordingly. In their case, they own/lease property in those states, have employees there, etc. So if you own the server you mentioned that's in another state, or own/lease the building it's in, or employ people to run it, etc. then (like PayPal) you'd be operating a portion of your business there. But I'm guessing that's not the case.

                          Essentially, the laws of the state within which a for-profit activity is being conducted decides whether the activity constitutes a "business operation" that requires the enterprise to register with the state.

                          Does that help?
                            • Re: New online service. Does state tax apply? NV DE
                              booboo Wayfarer
                              Thanks for all your advice, it was very informative. I guess you just confirmed everyting I have read. After reading your replies, I've noticed that the state in which the business operates would essentially be the state I "manage" my business from. I think it in the end it would still be determined that I operate in CA since I would technically be "hiring" someone else from another state to host my website. Similar to hirng out of state contractors to do work for you.

                              Well thanks for all your help and yes, I do see the reason why you advise people to start as a sole proprietor. Nowadays, starting a corporation seems finacially difficult unless you have a lot of capital to start off with. It takes time for a business to grow and being stuck with that minimum franchise tax sucks even though it's still deductable at the federal level.

                              Anyways, I appreciate all your help!