For example, if you’re based in Tennessee and you if hire an employee in Washington and decide you only need to follow Tennessee minimum wage policy, Washington has every right to fine you or take you to court under Washington law.
You don’t get to set up shop in a state with low taxes and minimum wage then pay your employees in another state using whichever state’s laws you prefer.
CA gets to regulate the company with respect to its CA operations, i.e., that employee in CA. The CA regulations don't apply to any of the company's non-CA employees.
This has always been the rule with respect to employees working in other jurisdictions.
The real "untenable" thing is proposing that corporations can neuter state laws entirely by the simple act of incorporating in not that state. I'm sure that wouldn't lead to a race to the bottom or anything, the US definitely doesn't already have issues with corporate-owned states or anything
I have no problem with California exercising its sovereignty over its own citizens. The employee in question should have been protected by California laws, being a resident of California.
What the article's author relates is California asserting sovereignty over an entity that has no nexus or revenue derived from California. This is the overreach and should be outright banned at the Federal level, otherwise there's nothing stopping a state from passing a law that requires companies to pay $30,000 tax for the next five years for every employee that vacations in that state. Do we really want to stomp small businesses with having to know the business tax codes for all fifty states in this age of remote work? I think not.
It's about as stupid as the five states in the US that decide they can impose income tax on non-citizens of those states if the employer resides in that state.
The idea that the employees and the work they do aren’t part of the business is some new idea that I hope doesn’t gain traction.
Say the federal government did allow for this line of reasoning and prevented states from treating remote employees as having nexus in the state they live and work in. How does that not end up with every company incorporating in one state and hiring all their employees in other states so they can avoid all state level regulation?
The revenue any business derives is the sum of its employee efforts. A physical presence vis a vis an employee is surely a nexus.
> otherwise there's nothing stopping a state from passing a law that requires companies to pay $30,000 tax for the next five years for every employee that vacations in that state
You know, I'm not surprised you would make such a hilarious non-sequitur given your position makes no sense in the first place, but to argue "an employee going on vacation in a state" is even in the same universe as "employing a resident of a state" is actually pathetic.
> Do we really want to stomp small businesses with having to know the business tax codes for all fifty states in this age of remote work? I think not.
Do we really want to simply take away all regulations so corporations can take advantage of interconnectivity and globalization to be even more exploitative of workers and increase wealth inequality further? I think not.
> It's about as stupid as the five states in the US that decide they can impose income tax on non-citizens of those states if the employer resides in that state.
What is a "non-citizen of a state"? I have never heard of citizenship in a state, that is a country-level concept. If you perhaps mean non-residents, I would also agree this seems like overreach, except funny enough the US government does the same thing to all its citizens unless they pay a big fee to renounce their citizenship, so it is a distinctly American brand of overreach!
Maybe there is a reasonable explanation for treating these differently, I just don't see it right now.
Yes, because if the person moves to a new state, their entity has established a nexus in one state, and therefore that state exclusively governs them.
The business entity who has employees in other states is, by the exact same logic, subjected to the laws of each state they have nexus in, and an employee that is a resident of a state is transparently a nexus in that state, as you agreed upon in your "moving" example.
Hopefully it's clear!
National governments are allowed to enforce laws outside their own borders, such as intellectual property and copyright. While challenging to enforce, it is possible.
I believe those are done through treaties.
I'm not sure how the federal government weighs in on this since they have the authority on interstate commerce, which this falls under.
If that's right or not, is certainly debatable.
They are of course free to capture anything that crosses their border, which in this case ought to mean that your company won’t be able to send money to the state.
However USA law defines this, I think is wrong. That’s what I’m saying.
The USA is an outlier in many ways. It taxes it’s citizens outside of the country, forces awkward bilateral trade agreements , and is not at all harmonized with work laws of other countries.
An office is a physical presence to me. A single person working from their own house is not.
But I suppose if your company already is in the USA, you should have to deal with the tar pit if it’s multiple jurisdictions. I hear people who WFH for NYC companies have to pay city tax even if they are in some other US state, so this is really no difference.
Why would the intellectual property the employee generated be worth nothing simply by originating in California?
In other words, if a bottle manufacturer in Illinois sourced raw glass pellets from a plant they owned in California, they would be deriving value from a source in California. The glass is not worthless because it hasn’t been converted into bottles yet.
The employee is providing intellectual property across state lines, which is why the state can enforce laws on that value that originated from within their jurisdiction.
The value to the company was provided in Illinois, with bits inside of Illinois. The company doesn't value bits inside California that it cannot access. They compensated for bits they can actually access within Illinois.
>Why would the intellectual property the employee generated be worth nothing simply by originating in California?
It may be worth something to someone in California before it's exported, but that transaction never happened. In this case though the actual transaction took place in exchange for a product inside Illinois.
>In other words, if a bottle manufacturer in Illinois sourced raw glass pellets from a plant they owned in California, they would be deriving value from a source in California. The glass is not worthless because it hasn’t been converted into bottles yet.
This is actually a great example. I buy ammunition online from a company in Oklahoma, where all the business and employees of the ammunition company resides. Yet I pay sales tax here in <my state> based on recent court rulings regarding 'internet sales tax' which state the tax is where the transaction took place (/the finished product goes to), not where the company and/or workers physically resides. It wouldn't make sense at all for me to pay sales tax to Oklahoma, even though the ammunition and even all the physical presence was initially generated there. I pay sales tax where the transaction and actual value to me, the buyer of the goods, actually are. Using the same analogy from this court ruling, you would pay tax on the IP you bought in Illinois and not where it was initially produced California.
>The employee is providing intellectual property across state lines, which is why the state can enforce laws on that value that originated from within their jurisdiction.
The employer is buying IP within their state lines of Illinois. You may be arguing the 'employee' is actually misclassified and is an illegal exporter who is a business owner in California with an export and bit smuggling business. Go after this 'employee' (bit smuggler), not the person buying bits in Illinois.
Your comment confirmed that the value originated in one place, California where the company could not access it, and was transferred to another place, Illinois where the company could access it. The employee was compensated for the transfer of this value. That is interstate commerce, and therefore the jurisdiction of the originating state, California, can apply.
> It may be worth something to someone in California before it's exported, but that transaction never happened. In this case though the actual transaction took place in exchange for a product inside Illinois.
The company in Illinois compensated the employee for their time to generate intellectual property, so the company valued their work and exchanged payment to the employee for exchange of that value. So then the work clearly has value prior to being packaged and sold to the end customer.
> I buy ammunition online from a company in Oklahoma, where all the business and employees of the ammunition company resides. Yet I pay sales tax here in <my state> based on recent court rulings regarding 'internet sales tax' which state the tax is where the transaction took place, not where the company and/or workers physically resides.
The exchange of value and compensation between a company and their employees is governed by employment law. You seem to have conflated the concept of an employee with that of a business or an independent contractor, which are not the same thing, and are not governed by the same laws. When you hire employees across state lines, you are extending your business operations across state lines, and are subject to state jurisdiction. That is the cost-benefit trade-off of hiring outside your state, if you hired employees outside your country, for example in Canada or Mexico, then you would be beholden to inter-national laws governed by treaties.
> The employer is buying IP within their state lines of Illinois.
No, the business is not "purchasing IP within their state lines", the business is employing a person who resides within another state, and therefore the business must abide by the employment laws of the employee's state, as well as the business state of origin. An example of buying IP would be purchasing a legal contract template, or a software license. In the examples I provided sales tax for the state where the purchase originated would apply.
> You may be arguing the 'employee' is actually misclassified and is an illegal exporter who is a business owner in California with an export and bit smuggling business. Go after this 'employee' (bit smuggler), not the person buying bits in Illinois.
I'm unsure if you are trolling or just very confused, but your statement makes no sense and does not fit within the logical framework of United States inter-state commerce law. Employees are not classified as an independent business, they are and extension of a business's operations.
States are divested of the power to regulate interstate commerce. This is squarely jurisdiction of federal government, not the states.
>Your comment confirmed that the value originated in one place
The bits originated in California. The value originated in Illinois. It was valueless to the company while locked in California. Perhaps it was valuable to someone else who never made the transaction in California, but not to the company in Illinois who actually paid for it.
>The company in Illinois compensated the employee for their time to generate intellectual property,
If the employer were simply paying for time then why not hire a prisoner or a nice retired old lady to sit in a chair for 8 hours a day? We both know they aren't paying for time, they're paying for the useful bits they have in Illinois. They want the IP, not to burn people's time.
>So then the work clearly has value prior to being packaged and sold to the end customer.
It has value to the customer in Illinois, not in California. It is valueless to the customer locked up in California. It has value perhaps to the employee in California, but not the employer (customer).
>You seem to have conflated the concept of an employee with that of a business or an independent contractor, which are not the same thing, and are not governed by the same laws
I haven't conflated, I'm showing the courts contradict themselves. They say it's fair game to charge sales tax even with no physical presence, with no tax paid to the other state with physical presence, but then want the exact opposite if you buy IP from an 'employee' instead of bullets from a company. It makes no sense. They want to have their cake and eat it too. One may argue such wishy-washy behavior is 'arbitrary and capricious' which could cast doubt on whether their rulings are even enforceable.
>No, the business is not "purchasing IP within their state lines", the business is employing a person who resides within another state, and therefore the business must abide by the employment laws of the employee's state, as well as the business state of origin. An example of buying IP would be purchasing a legal contract template, or a software license. In the examples I provided sales tax for the state where the purchase originated would apply.
We simply disagree here. I see that they are purchasing IP within their state lines, you see something completely different.
>I'm unsure if you are trolling or just very confused
I could say the same for the state of California. It seems they are trolling to go after someone in Illinois for buying bits in Illinois. Once it was in Illinois it had value, before that it didn't have value to the buyer. Again it was useless to the Illinois company while locked up in California.
California wants to regulate interstate commerce, which of course is flatly unconstitutional. California's tax board is a clown circus of petty tyrants who have tortured and subjugated their victims for far too long.
It's not as simple as that. States can indeed apply their laws to interstate commerce in a myriad of ways, but not to the degree that the U.S. federal government can. States for example can force e-commerce companies to apply sales tax to purchases made by customers based in the given state, even though the business is based in another state. By your logic, the state should only be able to enforce their laws on the resident customer, but that's not true, they can apply their law to the online retailer who doesn't have a presence in the state and force them to collect the taxes on the state's behalf and remit the taxes to the state. [0]
As a second example, a state's minimum wage laws apply to any person who resides within the state, even if that person works remotely for a company based solely in another state. If you have a company in Illinois, your minimum wage is $12.00 per hour. If you employ a person who resides in California for remote work, you still must pay them the California minimum wage of $14.00 per hour. You must also adhere to other labor laws for the employee who resides in California for overtime, maximum hours worked per day, and others. [1]
> We simply disagree here. I see that they are purchasing IP within their state lines, you see something completely different.
We do disagree, but your opinion also disagrees with one-hundred years of U.S. employment case law, and so I would argue is factually incorrect.
Which of course is insane and shows the dire state of constitutional crisis in our nation.
>minimum wage laws
Another horrible kick in the teeth to the poor -- outlawing work for the lowest on the rung of the economic latter. Minimum wage laws are an argument against this legislative tyranny, not for it.
>We do disagree, but your opinion also disagrees with one-hundred years of U.S. employment case law, and so I would argue is factually incorrect.
I count that as a pro, not a con. The last 100 years of legislation in the US is the biggest swath of which ought to be eliminated, IMO. Starting with the 16th amendment.
So basically, you're just arguing against more than a century of essentially universal law.
That the federal government can’t or won’t step in and help people in the USA out of this morass is shameful. That’s my value judgment.
Yes, basically, and doubly so for the income tax.
If they can reach there, legally, it is, by definition, their jurisdiction, whether or not it is their territory, but, in any case, this is about regulation of work within the clearcut territorial boundaries of the state, so there isn't any reaching outside going on. There is a foreign business reaching inside and getting upset that when doing so what they do in that context becomes subject to the laws of the jurisdiction they voluntarily reach into in order to exploit business opportunities available there.
No such department exists in California state government. Major state-level tax bodies in California are the Board of Equalization, the Franchise Tax Board, and the Department of Tax and Fee Administration. Sales and Use Tax is handled by the last.
* We have 50 states
* ... and if you're doing business online, add 50 countries to that...
* ... with their own sub-regions which may have their own laws (see the comment about Quebec above)
* Each of these local jurisdictions tends to have a LOT of laws on the books;
* Many of which are poorly written and unclear
* Many of which have been inconsistently, infrequently or unclearly applied as the internet has grown (you can very easily find examples of even giant companies, with corporate legal teams, running into unexpected issues)
Finally, there's the kicker:
* Even lawyers will end up telling you that, due to lack of clarity around laws applying to the internet and their enforcement, you might engage in a practice now only to find out later that it was more risky than you thought
Granted, OP's case is not the most complicated out there. It has a fairly clear answer: California is extremely aggressive about taxation and will grab any money it can. Hence the nickname "Taxifornia". And, be aware that employment is a particularly risky area.
But interstate commerce is really not as simple an issue as you're making it out to be. I've asked my accountant about issues where the answer was "well, you could technically be fined $50,000 and nobody really knows whether the state could successfully apply the fine, but right now they're not doing it sooooo..."
You can't have 'states rights' (which, for better or worse, is how America claims to govern itself) and also have a single law of the land.
If you aren't sure that you're breaking a state law, don't do business in that state. Or do, and live with the consequences.
You also completely ignored my point on the legal uncertainty factors. Businesses break laws every day that are just not enforced. Even a lawyer or accountant is occasionally blindsided by a state or federal authority choosing to selectively apply a law.
My sympathies lie with the small business owner here. It's very difficult to make sure that you've got every angle covered at all times, especially at the scale he's running at.
You mean, exist in the 21st century and sell or conduct any kind of business online? Is that a big business?
It's a well recognized fact that legal and accounting complexity, aka red tape, is an inhibitor of small business growth. Derisively sneering at anyone who doesn't want to do the "necessary work" or "behave" is a troll opinion, and not particularly rational.
Any business that has ever tried to do something at that scale at any point in human history needed to deal with compliance in all of them. Just because Stripe or the Apple Store provides payment processing as a service doesn't mean that you can just shrug your shoulders, and claim that none of the other regional distinctions and local laws apply to you.
> Derisively sneering at anyone who doesn't want to do the "necessary work" or "behave" is a troll opinion, and not particularly rational.
Claiming that the law doesn't apply to you because you're a small business and you can't be bothered to follow it what isn't particularly rational, here. If you think this is an excessive burden, you should work to invest more power in the federal government, or in international unions like the EU.
You don't just get to do a run-around of sovereignty because you're a foreigner and it's a lot of work.
Basically everything you've written is dripping with contempt for anyone who gets similarly blindsided, and you're making every effort to strawman and twist the message. Nobody, not me and not the guy writing this article, says that the law "doesn't apply" to us. Most people starting a business have a deep desire to follow the law as well as possible, because they don't want to run into future difficulties. But again, it's difficult to check all the boxes.
I wonder why you're so contemptuous, but it's kind of a moot point. Most people understand that the tax code complex, and understand that it would be better for small businesses if they were not so complex.
No, it's not.
“States rights” didn't really enter the political lexicon until it was injected there by the proponents of permanent institutionalization and expansion of slavery, who eventually revolted over it, lost, and whose ideological successors keep raising as a motto for their (usually unsuccessful, beyond the short term) attempts to resist progress on equal civil rights.
It is not “how America claims to govern itself”, it's how reactionary dissidents against the way America governs itself complain that they would prefer America to govern itself.
In the way America claims to govern itself, people have rights and governments, including those of states, have powers.
You probably mean “federalism” or “dual sovereignty” or something like that.
The general issue of the relative distribution of power between states and the central government has.
That's not what “State’s rights” historically refers to. As I explained, in detail.
Doesn't say anything about state's rights. But it does suggest that any powers not already reserved by the Federal government belong as much to the people (i.e., citizens) as they do to the states.
Yes, have you?
> State's rights are literally enshrined in the Constitution.
Find the word “right” or “rights” in the 10th Amendment.
“Rights” are nowhere associated with governments (state or federal) except in being protected against them in the Constitution (either base, bill of rights, or later Amendments); in the Constitutional model, people have both rights and powers, the latter of which they endow selectively to various governments.
“States rights” is a slogan created much later than the BoR by the pro-slavery faction that continues to be an anti-civil-rights slogan.
Leave any delusions of consistency at the door. :)
I get, from a legal perspective, that that's not fully aligned with all court precedent, but it's OK to call it dumb that CA has any say over this situation.
I'm not sure what you're missing here. I'm calling it dumb and inefficient. Yes, CA seems to have the legal right to set up a dumb system. That doesn't mean it's a Good Thing.
It does; that nexus consisting of 100% of its labor force working in the state.
> and should be the treated the same as a company with a warehouse and 500 employees
That's not the question, since a company with a warehouse and 500 employees in California is not treated the same, as it is subject to a whole lot of rules and mandates that a single-employee remote-only foreign-HQ’d business is not.
Yes, obviously. The part of my firm that is operating in California is.
Why does not having a physical location for the office change anything?
California is a very desirable place to live and to employ people, so they can charge through the nose, both in terms of taxes and bureaucracy, but also in terms of housing prices.
Low-tax sunbelt states are less desirable, ergo they have to compete on price, be it taxes, housing costs, or regulations. If Texas or Florida provided amenities that people wanted and a workforce as desirable as California, either there would be a massive influx to those states, 5, 10 million people a year, or they could charge people a lot of the pleasure of living or employing there.
I get that a state would want to prevent scenarios like that, and I think it's somewhat reasonable. I'd argue that a company with a sizable amount of employees in a state indeed can be said to have a business presence there. What's unreasonable is the lack of "minimums". California apparently tried to be reasonable by having the 25% rule, but failed miserably (maybe by design) by not considering very small companies, like the company from the article.
The franchise tax - in that amount and considering the lack of revenue - seems unreasonable too.
I don't know what paperwork is involved, but the 42 pages mentioned for a zero-revenue company with 1 employee sounds not just unreasonable but outright Kafkaesque.
A part of the blame goes to the author for not knowing the laws involved before hiring, but the major chunk of the blame, at least in my opinion, indeed goes to the state for creating absurd laws in the first place.
That's pretty accurate for most of what the California state government does. For example, crushing the young and disadvantaged between a lack of housing availability due to rent control and a lack of new housing construction due to restrictive regulations and zoning.
This sort of stuff is really common.
Judicial complaints, discipline, and files are so secret that you can't get access to them even if there's exculpatory evidence in them. They were not made that secret by the legislature in most cases, but rather by the judiciary themselves (conflict of interest much?). The arguments used to support such secrecy don't even stand up to mild scrutiny. The main reason they cite is that disclosing complaints and discipline would undermine trust in the system. However, that would only be true if inappropriate action were being taken on those complaints.
How about police holding a charge against you they know is incorrect and carries pretrial restrictions? I feel this violates state and federal protections such as the 8th Ammendment's restriction on unusual punishment (because you can't just publish someone you know is innocent of the charged crime) and violations of the rules of criminal procedure. I've seen this happen, and the state police say that it's within their rights to hold a charge that is incorrect and imposes pretrial restrictions. A civil rights attorney I contacted said it was a violation of our rights, but the courts don't care if your rights are violated unless there was substantial financial damage. I also reported it to the DOJ since they have a division that will sue states to change policies, patterns, or practices that violate constitutional rights. I'm sure my submission went right in the shredder. They have so many important things to look at that they don't even care about this.
I had a prosecutor that had the information that it was an incorrect charge and our rights were violated. They also acted outside of the rules of criminal procedure to make sure the court wouldn't talk to us, blocking our ability to secure remote accommodation for our witness (a violation of the Bar's professional standards and an overreach of their authority given the rules of procedures did not allow for this). Guess what. The Bar will not even investigate misconduct claims against prosecutors unless the court declares misconduct occurred. So what are you investigating if you'll only look into after someone else made the determination? Worthless.
I had a recording of a magistrate yelling at the defense, showing bias against the defense (magistrate was a retired police chief and showed blatant favoritism for the trooper), and they violated the state constitution that guarantees defendants the right to be heard when he denied the request to hear a valid petition to dismiss, responding simply with "That's not gonna happen". I submitted a complaint for his behavior. I mean, the yelling was actually an example of misconduct given on the disciplinary board's site. You would think that a textbook example would be investigated. The only response I got was that there was not enough evidence to confirm any misconduct, which would include the uncurteous conducted listed in their site (yelling). How much evidence do you need beyond a recording and witnesses?
I could go on. The point is, nobody gives a shit about your rights (or mine) - not law enforcement, not the judiciary, none of the agencies/boards that supposedly oversee them.
If nobody enforces your rights, them do you actually have any?
The main risk, say, as a Canadian, is if I visit a US-based client, then I can't be officially "working while in the US", but it's OK if I do it remotely.
I freelance for my local Canadian company, and if my company sends me to the US, then it's fine, because the client pays my company, who then pays me. The US company is not paying me directly.
I had a friend turned back because he said "the client pays me", when he actually meant "the client pays my company, and my company pays me" (he had an incorporated 1-person company, not freelancer).
When I was purely freelancer, I would say "I'm going to see a client, but it's only social, I'm not paid". Customs would frown, but let me pass. I've even had an agent argue "so you have nothing else to do on a weekday, and your work-friend either?" to which I said "yep, we're computer nerds", and he let me pass.
Isn't there some stuff about the Federal government governing interstate commerce? Of course IANAL.
The fact states can reach outside their own jurisdiction is pretty insane in my opinion. If I'm sending money to someone who lives in State A, compliance with the regulations of State A should be the responsibility of the person who lives there, not the person who doesn't. This regulatory burden means I would never employ anyone except as a 1099 until my business was large enough hire a full time payroll accountant.
I owe $800 for the “minimum franchise tax”. California charges this fee to everyone for the “privilege” of “doing business” in California, whether they have revenue or not.
How is this not extraordinarily counterproductive? Residents of California have a child, then spend tremendous resources both private and public raising and educating that child. When the child becomes an adult he find an employment opportunity with a company in another state. California behaves as if it would rather him just leave and take all those resources than stay and pay income tax on his earnings that come from out of state.