@Anonymous Maryland is asking for proof that your income is not taxable in Maryland. As I provided in my original answer, only 5 states have been using the "convenience of the employer" principle to tax a telecommuter working for a company within the state, although the telecommuter lives outside of the state: New York, New Jersey, Pennsylvania, Delaware, and Nebraska. Maryland has not done so up until this point. I did research and did find comments from a gentleman working outside of Maryland who telecommutes for Johns Hopkins. Maryland was challenging that his income was taxable inside of Maryland, but acquiesced when he proved that he was working from home (a state that does not assess income tax).
Maryland is not forthcoming about this in their tax booklets. The reference you cite states that they can tax your "income from a business, trade, profession or occupation carried on in Maryland..." Until now, however, Maryland has not considered a telecommuter to be obtaining income from an occupation carried on in Maryland if you are telecommuting from outside of it. However, it is possible that since you had Maryland withholdings from a Maryland-based company (or organization), the audit division has flagged your return.
What hopefully will satisfy them: A copy of your Teleworker (or Telecommuter) agreement, proof of California residency (copy of driver's license, mortgage statements or lease agreement or something similar), and perhaps a copy of your California resident return. If you prepared the return through TurboTax, you may also visit the TurboTax Audit Support Center to receive any needed assistance.
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