as a nonresident who never sets foot in California to perform his services, the source rule works in the nonresident’s favor, even if the employer is California based. the income sourcing is determined by the location where the employee services are actually performed, not the location of the employer. A nonresident programmer who monitors and upgrades satellite dish software for a California based company, all while sitting comfortably in front of his computer somewhere in VA, doesn’t earn California-source income and doesn’t have to pay California income taxes, as long as the work is performed outside of California.
At the employer end, while California companies have to withhold state payroll taxes for resident employees wherever they perform their services, and for nonresident employees for services in-state, this is not the case for nonresident employees who perform services outside of California.
the above assumes the nonresident is an employee, and not an independent contractor. For nonresident independent contractors, different rules apply. Specifically, the issue is in what state the benefit was received. Accordingly, even if the independent contractor never sets foot in California, if he is performing services for a California-based customer, he has an economic nexus with the state and is likely doing business in California for income tax purposes. That determination falls under a totally different set of stringent, often complex rules, which typically result in the net revenue from a sale of products or services to a California customer being subject to California income taxes.
This often comes as a shock to nonresident independent contractors who thought the “never set foot” defense applies to them. It doesn’t. It only applies to employees. Moreover, the status of the vendor as independent contractor matters not only to nonresident sole proprietors, but any out-of-state business entity with sales to California customers. For more details about the economic nexus rules for independent contractors, see “Internet-Based Companies and ‘Doing Business’ in California: Be Careful What Your Website Says About You.” https://www.palmspringstaxandtrustlawyers.com/internet-based-companies-business-california-careful-w...
