I received a 1099 from a CA company and live in AZ, do I have to file a CA tax return?

[tmaun]

I do financial consulting for a CA company remotely and live in AZ. The CA issues me a 1099.  I do not make any consulting income in AZ. Do I have to file an AZ return for the CA income? Or do I have to file a CA return and file no return in AZ?

[DanielV01 · Accepted solution]

It depends.  For California, you are currently not taxed on income as a nonresident unless you physically work there.  It is important to know that there are states that consider income of remote workers or telecommuters to be income earned in their state and taxable there (NY is most notorious for this).  However, California still does not officially have this law.

So unless you were physically working inside of California, your income is not taxable there.  It is taxable in Arizona.  All of your income is taxable in your resident state.  (If the income were in fact taxable in California, you would file a CA Nonresident return, and an Arizona resident return.  Arizona would give you a credit for the taxes you pay in California on that income.)

[Tsukaska]

You are considered a nonresident of CA if you didn't live there.  According to CA FTB publication 1031, you are supposed to file a return there if you had CA-source income.  The CA 540NR booklet (and the previously mentioned publication) gives guidelines for if you have to file.  There is a gross income test (all income sources, not just CA), adjusted gross income test, children with investment income test, and an "other situations when you must file" section.  It does not state anything about being physically present.

[Tsukaska]

It is dependent on factors listed below. You are considered a nonresident of CA if you didn't live there.  According to CA FTB publication 1031, you are supposed to file a return there if you had CA-source income.  As a nonresident, the CA 540NR booklet (and the previously mentioned publication) gives guidelines for if you have to file.  There is a gross income test (all income sources, not just CA), adjusted gross income test, children with investment income test, and an "other situations when you must file" section.  It does not state anything about being physically present, as another had mentioned.  Ftb.ca.gov/forms/2018/18-540nr-booklet.html

[DaveF1006]

if you performed your consulting work strictly in Arizona you do not report this income as California income. it is Arizona income however since you performed your work in Arizona.

[Tsukaska]

The source of income was stated as coming from California.  Thus, it is California source income.  Period. I don't necessarily agree that California should tax the world like it feels it has the ability to, but if you read the actual literature and not stick to biased opinions, you should also file a CA return.

[AlexanderS08]

You are correct. Most likely, a California return will need to be filed. To the extent you are not able to allocate the income to Arizona (in other words you have to report it to CA and AZ), you should make sure you claim a credit against your Arizona tax for the tax you pay to CA.

[TomD8]

You have to file in both states.

Normally income is sourced where the work is actually (physically) performed, and your 1099-MISC income would not be taxable by CA since you never worked in CA.  (Note: W-2 wages and salaries are still sourced where the work is actually performed.  Page 6, https://www.ftb.ca.gov/forms/2019/2019-1031-publication.pdf)

However, due to the 2019 Bindley court decision, CA now taxes non-resident sole proprietors on income from services provided to California clients, even if the sole proprietor never set foot in California.

So it appears you must file a non-resident CA return, reporting the 1099-MISC income from your California client.

Since you are an AZ resident, you must also report the income on your AZ tax return.  That's because your resident state can tax ALL your income, regardless of where earned.

CA and AZ are "reverse credit" states.  That means that your non-resident state (CA) will give you a credit for the taxes you pay to AZ on the income that is taxed by both states.  (Normally the home state gives you the credit.)  So in TurboTax, you should complete the AZ return before you do the CA return, which is the opposite of the usual sequence.

You can read the details of the Bindley decision here:  https://www.coblentzlaw.com/california-office-of-tax-appeals-gives-precedential-authority-to-bindley...

[jmuccirelli]

So then if i am a painter in Vermont and a California company paid me to paint their rental in Vermont, and issued me a 1099nec, then i would have to file a California return?

[TomD8]

@jmuccirelli --

Unfortunately, I suspect that if the "Payer" shown on your 1099-NEC has a California address, the California tax board will take it that you are providing your services to a client located in California.  But remember that you're not required to file a non-resident CA tax return unless your income exceeds California's filing requirements for non-residents, which you can find here:

https://www.ftb.ca.gov/file/personal/residency-status/part-year-and-nonresident.html