Significant responsibilities or liabilities can depend on whether one is “doing business” in a state. As this post explains (principally referring to California law for examples), “doing business” can mean three different things in three different contexts.
Doing Business as a Foreign Entity
First, an out-of-state entity will need to register with a state as a “foreign” entity if it is doing business in the state. As explained in “Doing Business in CA? Be Sure to Register”, the term used in the California Corporations Code is to “transact intrastate business”, which is defined as “entering into repeated and successive transactions of its business in this state, other than interstate or foreign commerce” (emphasis added).
Doing Business and Paying Taxes
Second, one will need to pay taxes to a state if it is doing business in the state. The term used in California Revenue and Taxation Code Section 23101 is whether a business is “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” (emphasis added) or any of several tests pertaining to domicile, sales, property or compensation is satisfied.
Doing Business and Personal Jurisdiction
Third, one will be subject to personal jurisdiction in a state (i.e., one can be sued there) if one is doing business in the state. The test set forth in California Code of Civil Procedure Section 410.10 is the broadest one that is legally possible: “A court of this state may exercise jurisdiction on any basis not inconsistent with the Constitution of this state or of the United States” (emphasis added).
Interestingly, the limit of what is consistent with the U.S. Constitution is discussed in New York Department of State Legal Memorandum CO01, which addresses the three tests for “doing business” in New York:
The classic statement of that principle is that for a state to assert jurisdiction the defendant must have “certain minimum contacts . . . such that the maintenance of suit does not offend traditional notions of fair play and substantial justice.” International Shoe Co. v. Washington. A party subjects itself to jurisdiction consistent with traditional notions of fair play and substantial justice when it “purposefully avails itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of its laws.” Hanson v. Denkcla. Conducting activities without the state that are purposefully directed at the forum state also satisfies the constitutional standard. Burger King Corp. v. Rudzewicz. The defendant’s conduct and connection with the forum state must be such that he should reasonably anticipate being brought into court there. World-Wide Volkswagen v. Woodson. [Citations omitted.]
Bottom line: If you want to know what constitutes doing business in a state, be clear on why you are asking the question.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.