California Proposes Another Reason For Corporations To Move Their Principal Executive Offices To Another State

The California Franchise Tax Board recently proposed a new regulation that will add to the growing list of reasons for corporations to consider moving their headquarters to some other state.  The new regulation purports to “clarify” existing law by establishing a sourcing rule for compensation paid to nonresident, nonemployee, and independent directors.  As proposed, the regulation provides that fees and other compensation for serving on a company's Board of Directors should be sourced to the “commercial domicile” of the corporation, regardless of where the services are performed.  Under current Revenue and Taxation Code Section 25120(b), a corporation’s “commercial domicile” is the “principal place from which the trade or business of the taxpayer is directed or managed”.  In proposing the regulation, the FTB has explained that compensation paid to an independent, nonemployee director, who is a nonresident of California, would not be sourced to the place where the director performs services for the company for which they serve, because the independent director is not, by definition, an employee.   The proposed regulation does not address a taxpayer’s withholding obligations with respect to director compensation.

The FTB is floating this proposal in advance of formal rulemaking under the Administrative Procedure Act.  It is seeking comments by November 5.  Presumably, it will thereafter proceed with formal rulemaking.  In the interim, the FTB may take the position that the regulation merely reflects current law. 

Does anyone else hear the moving truck revving their engines?