Why Some Out-of-State Residents Could be Surprised to Learn They Could Owe Large Sums of California Income Taxes to the Franchise Tax Board (FTB)

Office of Tax Appeals (OTA) Sides with Out-of-State LLC Against Franchise Tax Board (FTB) in California Tax Dispute
September 27, 2019
How Have IRS Budget Cuts Affected Federal Tax Enforcement?
September 29, 2019

Why Some Out-of-State Residents Could be Surprised to Learn They Could Owe Large Sums of California Income Taxes to the Franchise Tax Board (FTB)

The Franchise Tax Board (FTB) administers California income tax regulations for individuals and corporations. If you are a resident of California, you must generally file with the FTB a California state income tax return (Form 540), in addition to your annual federal income tax return (Form 1040). What you might not realize is that you could owe income taxes to the state of California – even if you live somewhere else. Appellant Blair S. Bindley, an Arizona resident, recently discovered this the hard way after an Office of Tax Appeals (OTA) panel, upholding a proposed FTB tax assessment, rejected the appellant’s argument against being held liable for California state income taxes, even though Bindley did not live in California. If you are a non-California resident with an FTB tax dispute, the California tax lawyers and FTB audit attorneys at the Tax Law Office of David W. Klasing can help you find an efficient resolution.

 

Not a California Resident? You Could Still Owe California State Income Taxes

The basic facts of the case are as follows: Blair S. Bindley, a screenwriter, was a resident of Arizona during the 2015 tax year. The same year, Bindley earned approximately $40,000 of income: $15,000 from the entity Lakeshow Films, LLC and $25,000 from the entity Mindbender Enterprises, LLC, both of which – critically – “were headquartered and registered in California.”

As the OTA’s factual findings noted, “The FTB annually matches income records obtained from various reporting sources against filed returns,” enabling the Franchise Tax Board to accurately identify taxpayers with unfiled California income tax returns. This explains how the income tax filings of an Arizona taxpayer could come to the attention of a California tax agency.

The Franchise Tax Board determined that, although not physically a California resident, Bindley was nonetheless liable for state income taxes because he received California-source income. (As noted above, the entities which provided Bindley with income were both based in California.)

Bindley, who failed to file a California income tax return for the 2015 tax year, disagreed. On appeal, Bindley asserted “that he… did not have a filing requirement because he was domiciled in, and was a resident of, Arizona during the tax year at issue,” according to court records.

The OTA panel, comprised of three administrative law judges (ALJs), sided with the FTB’s original findings, rejecting Bindley’s argument “that because he performed all the work in Arizona, his income… [for the 2015 tax year was] not taxable by California.” In support of its reasoning, the OTA cited factors including Bindley’s status as a sole proprietor who “was carrying on a business within and without California,” along with the fact that Bindley was engaged in a “unitary business,” meaning a business which passes either (1) the “three unities test” established in Butler Bros. v. McColgan (1941), or (2) the “contribution or dependency test” established in Edison California Stores, Inc. v. McColgan (1947).

The OTA also highlighted “California’s market-based sales factor sourcing provisions,” noting the need for compliance with UDITPA regulations concerning apportionment of business income. As the panel explained, “Pursuant to the provisions of the UDITPA relating to the sale of services and the regulations thereunder, [the] appellant’s physical presence does not determine whether he had income derived from California, but rather it is determined by where the benefits of appellant’s services were received” (italics our emphasis). The acronym “UDITPA” refers to the Uniform Division of Income for Tax Purposes Act, which was passed in California during the 1960s.

 

California Tax Compliance + FTB Audit Defense Attorneys for Businesses and Individuals

If you are an out-of-state resident with California-source income, such as a remote worker or independent contractor, you may be responsible for filing and paying California income taxes. Business entities, including online businesses, may also be liable for California income tax, along with sales tax, employment taxes, and other state taxes. For a reduced-rate consultation about California tax compliance, a California state tax audit, or other state tax issues, contact the Tax Law Office of David W. Klasing online. You can also reach us 24 hours by calling our main office in Irvine at (800) 681-1295.

Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San BernardinoSanta BarbaraPanorama CityOxnardSan DiegoBakersfieldSan Jose, San FranciscoOakland and Sacramento.

Note: If you have concerns about the privacy of our initial or subsequent communication and are unable to easily travel to our Irvine / Orange County Main Office, consider scheduling a GoToMeeting to safely and securely establish an initial or maintain an existing attorney client relationship.  With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link.   Call our office and request a GoToMeeting if you are an existing client. We are generally happy to travel to any of our appointment only satellite offices for a subsequent meeting in appropriate circumstances once a relationship is established via a signed engagement letter and the payment of an initial retainer or where enough retainer is available where a current client to cover the reasonable travel time and time required for the meeting.

Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company?  Absolutely not!  See our policies that address this issue here