San Francisco Tax Preparation / CPA: CA – Protest granted because taxpayer had no state-source income

Filed in CCH NEWS FEED by on January 10, 2020

A nonresident taxpayer had no California-source income and, therefore, was not required to file a personal income tax return for the tax year at issue. In this matter, the taxpayer was a software and technology designer who operated his business from his home as a sole proprietor. The Franchise Tax Board (board) issued an income tax assessment, including penalty and interest, based on its determination that the taxpayer derived some income from California. However, the taxpayer asserted that the benefits of his services were delivered to out-of-state clients and therefore there was no California-source income for tax purposes. Generally, California nonresidents are taxed only on taxable income “derived from sources within” California. To determine if an income is “derived from sources within” California, taxpayers must consider four conditions as per the applicable statute: (1) the taxpayer must be conducting business as a sole proprietorship; (2) the taxpayer’s business must be conducted within and without California; (3) the taxpayer must be carrying on a unitary business; and (4) the taxpayer must derive California-source income. In this matter, the taxpayer provided sufficient documentation to establish that the income at issue was not California-source income and therefore the assessment was erroneous. Additionally, it was noted that, under California’s market-based sales factor sourcing provisions, it was not reasonable and rational for the board to source all of the taxpayer’s service income to the state merely because his clients had a billing address there. Wood, California Office of Tax Appeals, No. 18042717, July 8, 2019, released November 2019

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