Brotman Law

What Does AB5 Mean From a Tax Perspective in California?

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So in January of 2020, California Legislature passed AB5 which governed the relationship between companies and their workers. Basically what AB5 states is that unless a hiring entity can prove that a worker is truly independent according to three specific factors, that worker will be deemed to be an employee of the company itself. The factors are number one, the company must not have in any condition of control over the work. Number two the worker services must be outside the core business or the hiring entity and number three the worker must maintain their own separate and independent business. So this was all raised with much fanfare and rightly so was called the death of independent contractors in California because unless you qualify for one of the exemptions that’s under the statute, pretty much all workers fall within an AB5 framework and they can be deemed employees. It’s only those that are providing true outside services like they have bookkeeper or CPA or law firm or videographer that really qualify outside the scope of AB5. The statute really is meant to pull as many people as possible into the employee relationship however from a tax perspective despite all the fanfare on the labor side, it doesn’t really have any impact. The reality of the situation is that the EDD has been using an AB5 framework for quite some time. So what I mean by that, well the reality is that when you go through an employment tax audit, EDD is already looking at control. Control was a previous factor under the old past and now really

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What Are the Differences Between the Federal System and the State of California?

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What Are the Differences Between the Federal System and the State of California? So the IRS tends to get a lot of flack but the federal system for tax is actually pretty well developed and here’s why the IRS is an administrative agency so as an administrative agency it makes rules interpreting the way that it’s going to enforce the tax law and it makes rules to govern what will happen if you get into a dispute with the IRS so the IRS is essentially a rulemaking Authority but in addition to the IRS you’ve got a Tax Court and what the Tax Court does is the Tax Court is a judicial system you’ve got judges it’s a court and you’ve got people in all 50 states who are litigating tax issues in court and there’s a series of judicial opinions that come out and what happens is those judicial opinions function as a check against the IRS so the IRS isn’t allowed to just ignore a judicial opinion so what happens is you’ve got this system of pools that’s created on the administrative level and then you’ve got this judicial check which functions against those rules so you’ve got this really well-defined harmony between the administrative system and the judicial check the system that operates and enforces the IRS rules and you can see that and a lot of the procedure that’s come out of the IRS level is it’s very well shaped by the courts in California you don’t have as good of a judicial system number one if you’ve ever been to court in California you know how difficult it is to get in there in.

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Recent Case History Impact in Multi States

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So I Want to Talk About the Recent Case history that has impacted the multi-state landscape and how we got to the place that we’re at today so the first case I want to talk about is complete auto transit versus Brady so complete auto transit versus Brady basically set up a system where the states are free to make independent judgments about what goes on in their state borders absent any sort of federal preemption so what that means is if the federal government hasn’t ruled that something is a national activity and it falls under the Commerce Clause of the Constitution that essentially the states can control what’s in their own borders so that was the first major case because it gave the states the power to basically operate as they see fit within their borders the second case is a case called quill quill was a Supreme Court case in the nineties and quill is significant because well basically ruled that unless a company or an individual had sufficient minimum contacts with a state that the state couldn’t charge sales or use tax and so this was significant because for the first time it mandated that company at least had to have some basic physical presence or some substantial contact in order for a state to mandate that a charge sales and use tax so quell was an extremely unpopular decision it states.

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Multi State Tax Issues

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Multi state tax issues don’t just impact businesses. In fact they impact people probably a lot more than they impact businesses. The reason for that is people move around a lot more than businesses do. So think of it this way. You have a situation where you have a client who’s in one state and they travel back and forth frequently between let’s say California and Texas, California has a 13.3% individual income tax rate, Texas has a 0% individual income tax rate. So the amount of tax that the taxpayer pays based on their movements between different states is going to depend on the residency of the particular taxpayer. Now residency is closely tied with domicile, which is a legal term. The domicile is essentially somebody’s home base so once you move into a home and take steps to establish your domicile in one state, that state becomes your tax home however until you establish a domicile in that state or until you more specifically move your domicile outside of a state, that’s where you run into problems. So take for example California that’s been super aggressive in dealing with some of these issues.

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