The State of California does not consider the Water Conservation Rebate to be taxable, but according to the Contra Costa Water District, the IRS has indicated that the rebate is taxable on the federal return (https://www.ccwater.com/743/Potential-Tax-on-Water-Conservation-Reba).
So add the 1099-MISC to your federal return as Miscellaneous income. To exclude this rebate from tax in California, please go through the California interview until you come to the screen "Here's the income that California handles differently". Scroll down to the subheading Miscellaneous, and click Start for "Other Adjustments to Income."
On the next screen, enter "adjustment for Water Conservation Rebate" and the amount of the rebate in the SUBTRACTION column. This entry will subtract the rebate from California income, which is correct since your California will have the rebate as it was carried down from the federal.
