California rules for out of state self-employed remote worker with CA clients

[Lee B]

In recent years, I have prepared tax returns for CA, IA, ID, MT and UT.

As far as I know I will only be preparing Oregon Tax Returns this year and I plan to keep it that way.

[Lee B]

Here is a lengthy analysis of the state income tax nexus situation in The Tax Advisor, dated December 1, 2022:

https://www.thetaxadviser.com/issues/2022/dec/states-reactions-to-mtc-application-pl-86-272-to-internet-sales.html

[mircpa]

On 1/15/2023 at 1:49 PM, mircpa said:

I believe nexus determines taxability of services.

@Abby NormalDoes your friend hired an employee to provide services to client in CA. If the answer is yes then business should file 100S, Sch R & individual owner 540NR (if it's an a S corporation)

I am surprised I was the first person to talk about nexus unfortunately my post was voted down.

[BulldogTom]

15 minutes ago, mircpa said:

I am surprised I was the first person to talk about nexus unfortunately my post was voted down.

@mircpa CA has moved to a new scheme of revenue sourcing regardless of the old nexus rules.   Nexus rules still apply in some circumstances, but in the case of service based business, the location of the benefit of the service takes precedence now.  

Tom
Longview, TX

[Lee B]

27 minutes ago, mircpa said:

I am surprised I was the first person to talk about nexus unfortunately my post was voted down.

There are different kinds of nexus. The one that your first post referenced is payroll related. The one most people are familiar with is sales tax nexus, which has undergone major changes in the last three years. Then there is corporate tax nexus with the apportionment factors. Finally we have state income tax nexus which we have been discussing on this thread.

[mircpa]

If you look at CA Sch R apportionment & allocation It has 2 subsets first is CA sales to total sales & 2nd subset has 3 factor formula CA property, payroll & sales to total sales.

[Lee B]

"If an apportioning trade or business is (1) operating as a sole proprietorship owned by a nonresident individual or (2) operating as a single-member disregarded LLC owned by a nonresident individual and therefore treated as a sole proprietorship, for income arising from activities that occur both within and outside California, the single-sales factor formula must be used to determine the California source income of the individual on Schedule R-1. For more information, see Cal. Code Regs., tit. 18 section 17951-4(c)(2).

Nonresident individuals with service or intangible income from a trade or business or profession may have California source income if they have income from California as result of market assignment. See market assignment information in the General Information section, Specific Line Instructions, R&TC Section 25136, and Cal. Code Regs., tit. 18 section 25136-2, for more information."

33 minutes ago, mircpa said:

If you look at CA Sch R apportionment & allocation It has 2 subsets first is CA sales to total sales & 2nd subset has 3 factor formula CA property, payroll & sales to total sales.

This relates to a Corporation, which is a horse of a different color.

[mircpa]

Around last week of December 2022 I had to talk to CA FTB agent, one of my client received notice requesting to file 100S for few past missing years for IL based software consulting business. Normally I file tax returns only when consulting business hires employee in CA or have an end client who is being serviced in CA for that respective year.

Earlier CA use to collect minimum $800.00 franchise fee regardless of whether you did business in CA or not. As long as your business is registered you are on the hook to pay this fee unless you forfeit your right to do business in CA

Since client did not file tax returns as there was no CA source income in fact agent waived off franchise fee whichever years business had zero source CA income. This was something new to me because in the past for other clients they had to pay $ 800.00 fee regardless of whether you did CA business or not.

In fact client requested me to close CA business account but FTB agent suggested me to keep it open & continue doing what I am doing & just file tax returns when business has  CA source income.

[Catherine]

@BulldogTom I have a weird situation. Client is a resident of NY (state and city) who spends about a third of his year (all broken up) in CA. We file a CA NR return to allocate his earnings in CA to CA and he pays tax there. Do I then have CA-source income from a NYS resident? And would it only be based on the fee for the CA return, or the entire return including federal and NYS/NYC?

[BulldogTom]

1 hour ago, Catherine said:

@BulldogTom I have a weird situation. Client is a resident of NY (state and city) who spends about a third of his year (all broken up) in CA. We file a CA NR return to allocate his earnings in CA to CA and he pays tax there. Do I then have CA-source income from a NYS resident? And would it only be based on the fee for the CA return, or the entire return including federal and NYS/NYC?

I don't think so.  Because the preparation is sited to NY, their domicile, that is where the customer received the benefit of your services.  I would think it would be the same for a company that you prepared Sales Tax Returns for a limited amount of sales via internet in the state.  The benefit would be in the home state of the company.

I have played with the idea of aggressively pushing back by taking only the portion of my fee that relates to CA fees (I include the resident state in my Federal fee and only charge for NR state returns), but I think that fails under the way the FTB interprets the regulations.   A CA resident who has a Federal filing requirement in their domicile state received the benefit of the federal filing as well in their domicile state.    If CA ever got so aggressive as to come after you for the filing of the NR returns, I think you would be able to say that only the CA portion of the fee relates to the benefit received in the state.

That is how I see it at this point.   

What I have been told at seminars is that FTB will be looking for 1099NECs from CA companies to trigger the first few rounds of inquiries.  But, since we sign the tax returns, our information is on the bottom of the return, and it would not be hard for FTB to collect that information if they wanted to go after tax firms.

Tom
Longview, TX