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Level 2
posted Mar 23, 2022 3:38:45 PM

Need help to determine whether my self-employed income is from California resources?

I am an independent contractor living in Oregon, hired by a company located in California. This company send me to provide on-site service to another company located in Idaho (The California company and Idaho company have service contract. I am a sub-contractor with the California company). Last month, I received 1099-NEC from the California company. My question is whether I should file California state tax (I have never been to California for any purpose). From California's market-based sourcing rules, I think that the place where the benefit of my service received is in Idaho, not California. So my income is not from California resources, and not taxable to California. Please correct if I am wrong. Thanks for help!

 

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1 Best answer
Expert Alumni
Mar 23, 2022 4:06:41 PM

It appears you may be correct.  The following excerpt is from the 2021 CA Franchise Tax Board Publication 1031:

 

  • Business Income (or Loss) 

 

  • A nonresident’s income from California sources includes income from a business, trade, or profession carried on in California. If the nonresident’s business, trade, or profession is carried on both within and outside California, the income sourced to California may be based only on the business conducted within California, or may be determined by using the apportionment formula for corporations engaged in multistate businesses. 
  • California uses a mandatory market assignment method and single-sales factor apportionment to apportion business income to California. A nonresident may have California sourced income or apportionable business income if receiving income from sales or services sourced to California. Such income includes: 
  • 1. Sales of services to the extent that the purchaser of the service receives the benefit of the service in California. 
  • 2. Sales of intangible property to the extent that the intangible property is used in California. For marketable securities, the sales are in California if the customer is in California. 
  • 3. Sales from the sale, lease, rental, or licensing of real property if the real property is located in California. 
  • 4. Sales from the rental, lease, or licensing of tangible personal property if the property is located in California.

It would appear from the above excerpt that CA sourced income depends on whether the services were performed within CA.   In your situation, you indicated that you performed none of your services within CA.  

 

 With regard to property, intangible property, real property, and tangible personal property that too must be located within CA or the benefit for the service must have been received within CA.  

 

@wujz2004

4 Replies
Expert Alumni
Mar 23, 2022 4:06:41 PM

It appears you may be correct.  The following excerpt is from the 2021 CA Franchise Tax Board Publication 1031:

 

  • Business Income (or Loss) 

 

  • A nonresident’s income from California sources includes income from a business, trade, or profession carried on in California. If the nonresident’s business, trade, or profession is carried on both within and outside California, the income sourced to California may be based only on the business conducted within California, or may be determined by using the apportionment formula for corporations engaged in multistate businesses. 
  • California uses a mandatory market assignment method and single-sales factor apportionment to apportion business income to California. A nonresident may have California sourced income or apportionable business income if receiving income from sales or services sourced to California. Such income includes: 
  • 1. Sales of services to the extent that the purchaser of the service receives the benefit of the service in California. 
  • 2. Sales of intangible property to the extent that the intangible property is used in California. For marketable securities, the sales are in California if the customer is in California. 
  • 3. Sales from the sale, lease, rental, or licensing of real property if the real property is located in California. 
  • 4. Sales from the rental, lease, or licensing of tangible personal property if the property is located in California.

It would appear from the above excerpt that CA sourced income depends on whether the services were performed within CA.   In your situation, you indicated that you performed none of your services within CA.  

 

 With regard to property, intangible property, real property, and tangible personal property that too must be located within CA or the benefit for the service must have been received within CA.  

 

@wujz2004

Level 2
Mar 23, 2022 4:42:49 PM

@GeorgeM777  Then should I still fill 540NR, just put CA amounts 0? If I do not file, California Department of Tax will never knows where my income resource is from. I am afraid that they will come back to me later.

Expert Alumni
Mar 23, 2022 5:17:39 PM

You could file a California non-resident return but if you report no California income, they may come back at you even though you filed the tax return. The form 1099-NEC should not have been issued so you could request the issuer to correct it, but they may not want to do so.

 

Your other option is to not file the California return, since you aren't required to in spite of what the form 1099-NEC says. You could document the work that was done out of state in case you need to prove it to the State of California should they assess tax based on the income.

 

 

Level 2
Mar 23, 2022 6:12:31 PM

@ThomasM125  Good point! Thanks to @GeorgeM777 and @ThomasM125 for your time and help!