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State of California Franchise Tax Board

Failure to Withhold Liabilities for Partnership, LLC, and S Corporation Distributions

Purpose of bulletin

To inform staff beginning June 1, 2010, we will assess a failure to withhold liability on partnerships, limited liability companies (LLCs), and S corporations who make distributions to nonresident partners, members, or shareholders, and do not withhold or remit.


California law requires partnerships, LLCs, and S corporations that have a place of business in California to withhold and remit from nonwage payments to its nonresident payees. The entities must withhold 7 percent on distributions of California source income they make to domestic nonresident payees when distributions to payees exceed $1,500 for a calendar year. They must also withhold on allocations of California source income to foreign (non-US) partners or members at the maximum California tax rate.

California Revenue and Taxation Code (R&TC) §18668 allows us to assess a liability for failure to remit withholding. A withholding agent who fails to remit or under remit is liable for the greater of:

  • The amount actually withheld, plus interest.
  • The amount of taxes due from the nonresident, but not more than the amount required to be withheld, plus interest.

California R&TC §19183 allows us to assess a penalty of $100 per payee for each informational form not filed.

What’s new?

The Withholding Services and Compliance Section’s Discovery and Compliance Team is currently reviewing cases where a Form 588, Nonresident Withholding Waiver Request,was submitted in 2007 or 2008 and denied. If no withholding was remitted for the denied partner, then a liability of 100% of the amount required to be withheld, plus interest will be assessed on the withholding agent. This will be calculated using the distribution information provided on the partnerships, LLCs, or S corporations K-1’s for the applicable tax year.

Taxpayer Inquiries

Taxpayers can call our automated line at 888.792.4900, or 916.845.4900 (if outside the United States), Monday through Friday, 8 a.m. to 5 p.m., except state holidays.

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