What is the difference between interstate and intrastate business?

Interstate business is business conducted between states. For example, if your company in state A provides a product or service for someone in another state (state B), you are conducting interstate business.

Intrastate business is business conducted within a particular state. So if a company and customer are in the same state, then you are conducting intrastate business.

This is important because states only have the power to regulate intrastate business. Therefore, if you set up an out-of-state company and conduct intrastate business with it in your state of residence, then that company must obtain a certificate of authority to transact business in that state. Furthermore, that company will be subject to any franchise or other tax which your state levies on companies of the same type.

Some states, most notably California, have become very aggressive and have probably overstepped their bounds when determining what constitutes intrastate business. For example, a recent California Board of Equalization ruling took the position that an out-of-state company was conducting intrastate business (and thus subject to the draconian minimum $800 annual franchise tax) merely because its manager was a California resident (quite frankly, I’m inclined to just give Kalifornia’s government the finger on that one!)

The laws of most states do provide some clarification on what does not constitute transacting intrastate business in regards to the activities of an out-of-state company. For example, the California LLC Act (section 17001) states the following:

a)      “Transact intrastate business” means to enter into repeated and successive transactions of business in this state, other than in interstate or foreign commerce.

1)      Without excluding other activities which may not be considered to be transacting intrastate business, a foreign limited liability company shall not be considered to be transacting intrastate business merely because its subsidiary transacts intrastate business, or merely because of its status as any one or more of the following:

A)    A shareholder of a domestic corporation.

B)     A shareholder of a foreign corporation transacting intrastate business.

C)    A limited partner of a foreign limited partnership transacting intrastate business.

D)    A limited partner of a domestic limited partnership.

E)     A member or manager of a foreign limited liability company transacting intrastate business.

F)     A member or manager of a domestic limited liability company.

2)      Without excluding other activities which may not be considered to be transacting intrastate business, a foreign limited liability company shall not be considered to be transacting intrastate business within the meaning of this subdivision solely by reason of carrying on in this state any one or more of the following activities:

A)    Maintaining or defending any action or suit or any administrative or arbitration proceeding, or effecting the settlement thereof, or the settlement of claims or disputes.

B)     Holding meetings of its managers or members or carrying on any other activities concerning its internal affairs.

C)    Maintaining bank accounts.

D)    Maintaining offices or agencies for the transfer, exchange, and registration of the foreign limited liability company’s securities or maintaining trustees or depositaries with respect to those securities.

E)     Effecting sales through independent contractors.

F)     Soliciting or procuring orders, whether by mail or through employees or agents or otherwise, where those orders require acceptance without this state before becoming binding contracts.

G)    Creating or acquiring evidences of debt or mortgages, liens, or security interests in real or personal property.

H)    Securing or collecting debts or enforcing mortgages and security interests in property securing the debts.

I)       Conducting an isolated transaction that is completed within 180 days and not in the course of a number of repeated transactions of a like nature.

J)       A person shall not be deemed to be transacting intrastate business in this state merely because of its status as a member or manager of a domestic limited liability company or a foreign limited liability company registered to transact intrastate business in this state.