Why didn't Turbotax or the expert services by Turbotax live that I paid for catch income source from California?

[missqjay]

I was disappointed when I received a letter in the mail from the California Franchise tax board. I became a California resident in 2018 and used my CA address on my 2017 tax return. They sent me a letter stating I have to file a CA state tax return and pay the money I owe from the income I received in 2017. I am self-employed and had no idea that I had to pay taxes since my client was based in California and I lived in Florida at the time. I really wish Turbotax would have asked me or caught that since I had no idea about paying taxes on California source income. I also paid for a Turbotax CPA to review and she didn't tell me that either. I am definitely going to hire an accountant going forward to file my taxes and not personally use Turbotax. I could have filed and paid 2017 CA state taxes in 2018. If you use the wrong Turbotax product you could be screwed as well. 

[Critter]

Ok ... CA has sent out a lot of wrong letters lately ... so even if you used a CA address on the 2017 return does not mean you have to file a CA return ... if you did not live or work in CA for the 2017 tax year then you do NOT need to file a CA return... respond to the notice with the info you just posted here and get the situation dropped. 

[MisterD]

Critter, I am sorry to tell you.. but you are wrong.  We had just about the exact same situation happen to us and my thoughts exactly went to the same place this person's did --> Why didn't the Turbotax software catch this issue?!?  I called Intuit and spoke with one of their tax professionals.  The tax expert I spoke to was fully aware that CA regularly pursues non-CA residents to file a CA income tax return and pay CA income tax on any income that came from any business that resides in California .. even if the service is never performed inside the state of CA.  It's the most ridiculous tax law out there (if you ask me), but it's legit.  In any event, I got the Intuit tax expert to fill out an official request (case# 451943692) to have this problem fixed in the Turbotax software.  Hopefully it'll be there for the 2019 tax version. 

[Critter]

Well the explanation of the recent flurry of CA letters has since come to light ... there was a recent tax law change where CA has the ability to tax Self Employment income earned from CA clients by non residents ... many are not happy. 

[Critter]

In May 2019, the California Office of Tax Appeals ruled very recently that income from California-based clients is taxable as California source income.

For some discussion:

https://www.coblentzlaw.com/california-office-of-tax-appeals-gives-precedential-authority-to-bindley...

https://money.stackexchange.com/questions/95243/is-self-employed-work-performed-out-of-state-for-a-c...

[tagteam]

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@Critter wrote:

In May 2019, the California Office of Tax Appeals ruled very recently that income from California-based clients is taxable as California source income.

Barely constitutional, IMHO. I would be surprised if this is not struck down sometime in the near future.

[CA really likes to push the envelope on these issues]

[TomD8]

I agree with @tagteam .

It seems particularly unfair that CA is now using this 2019 ruling - which did not become "precedential" until a month ago - to justify taxing income from previous years, as in this taxpayer's case.

[Critter]

I am sure this is not the end of the story ... many people will fight this for sure ... especially the ability to make it retroactive ... personally I would require the state to provide proof that it can be retroactively applied before simply paying up. 

[ZTaxPro]

I have seen many posts about market based sourcing of income and I wanted to add a couple of items. California has had a market based sourcing of income since at least 2014. This is not a new thing (they have made some recent amendments). Business income has never been sourced based off of where the owner lives. Service income has historically been sourced based on where the services has been performed. With the advent of the internet there was a split between where the service has been performed and where the customer gets the benefit of the service. Many states have adopted a market based approach since then.

All that being said CA could be wrong in their assessment. You should make sure that the amount is correct.