How a tech company recovered $1.2 million in state tax refunds

The Challenge: Managing Complicated State Tax Regulations

A multi-generational, family-owned tech company based in California was unknowingly overpaying state income taxes. Despite having a global customer base and selling digital products worldwide, the company filed returns solely in California, apportioning 100% of its revenue to the state, one of the highest-tax jurisdictions in the U.S.

For years, they relied on a small local accounting firm. The company’s leadership was unaware that their business activities outside California could qualify for income apportionment. As a result, they were taxed as if all income originated in the state, creating a significant financial burden.

Eventually, internal concerns prompted leadership to reevaluate their tax strategy. Suspecting they might be overpaying, they sought a firm with deeper expertise in state and local tax (SALT) regulations.

The Turning Point: Discovering a State Tax Savings Opportunity

The company engaged the Elliott Davis SALT team, who immediately launched a sourcing study. By analyzing California law and the company’s business footprint, the team identified a substantial opportunity to reduce taxable income through proper apportionment.

Key findings included:

• Multi-Location Nexus: The company had established nexus outside California through business activities in other jurisdictions, qualifying them for income apportionment.
• Market-Based Sourcing: California regulations require sourcing of intangible property based on the location of the customer or use. The company’s foreign sales met the criteria for exclusion from California filings.
• No Throwback Rule: Under California law, sales of intangible property are not subject to throwback provisions, further reducing taxable income in the state.
• Apportionment Rights: Because the company was taxable both within and outside California, it was entitled to allocate and apportion income accordingly.

The Resolution: Securing a $1.2 Million Refund and Ongoing Savings

With the findings in hand, the SALT team, in collaboration with the tax engagement team, guided the company through the process of amending prior year California income tax returns. This strategic move resulted in a substantial refund of $1.2 million, which was fully validated during a rigorous state audit. The audit demanded meticulous documentation and justification for every adjustment, and the SALT team provided unwavering support throughout, maintaining transparency and compliance at every step.

Company leadership was thrilled with the financial outcome and gained a clearer understanding of their tax position. The company now benefits from ongoing tax savings by properly apportioning income across jurisdictions, positioning itself for smarter financial planning in future years.

Understanding nexus, apportionment, and revenue sourcing can be overwhelming for start-up companies and digital-first businesses, especially those selling products across state and international borders. Without specialized guidance, businesses risk overpaying taxes and missing opportunities for savings.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.