Be Aware of California’s Stringent Source Income Rules for Service Businesses
Be Aware of California’s Stringent Source Income Rules for Service Businesses
A recent California Office of Tax Appeals ruling determined that an Arizona individual who had a contract for screenwriting services for two California LLCs had California source income on which he had to pay California tax, even though all the services were performed in Arizona.
The Court found that the taxpayer received income from California LLCs, so he was deemed to be conducting business in California, making the sole proprietor’s income subject to apportionment under California’s apportionment rules. The Court applied California regulations that focus on where the taxpayer’s buyer received the benefit of the services provided, not where the taxpayer performed such services. In this instance, the Court determined that since the LLCs to which the taxpayer provided the services are registered and located in California, one of the benefit tests was met, with the benefit being received in California.
Every state has its own rules for determining when a business is considered to be conducting business within their state (not all are as stringent as California!). If you have questions about your business’s operations in other states, please give us a call.