They may be moving towards a telecommuter tax in CA...Like NY
....NY has successfully claimed that a person telecommuting to a NY job site from another state....that income is NY-sourced-and NY-taxable income.
I haven't seen where CA has changed their tax laws in the past year to come more in line with what NY does, but I don't really know whether CA has passed some subtle-hidden tax law tacked onto something else this year. What you just said seems to be a strange mixture of that, with the added complication of applying only to the portion of you income that is tied to CA-students.
You can certainly reply to them, challenging their assertion, and claiming that since you live, and work remotely from another state, and never stepping into CA physically...that all of that income is not CA-taxable. IF they don't relent, then your only recourse is help/advice from a CA tax attorney.
____________*Answers are correct to the best of my knowledge when posted, but should not be considered to be legal or official tax advice.*
