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ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – OUT OF STATE RESIDENT MAY BE REQUIRED TO F ILE A CALIFORNIA INCOME TAX RETURN – THE BINDLEY CASE

By Robert S. Schriebman

2019

Introduction

Let's take a hypothetical situation: You do not reside in California. During the year 2018, you did not visit California for any purpose. Your occupation is a screen writer for movies and television. During 2018 you contracted with two small California-based production companies to write scripts for them. Each company fully paid you for your services. You took each check and deposited it into your local bank. This bank is a small bank that is not affiliated with any bank operating in California.

You have just received a letter from the Franchise Tax Board (FTB) assessing you $1,000 in California income tax and $150 in late filing and late payment penalties and informing you that these assessments were made because you failed to file a California Personal Income Tax Return.

Does the State of California have the right to demand that an out-of-state resident, who was never in California during the year in issue, file an income tax return and pay California income taxes?

In the strange case of Bindley, the appeals board ruled against him and affirmed the assessment of the tax and the penalty. Let's review this case. (Decided May 30, 2019)

The Strange Case of Bindley

Mr. Bindley resided in Arizona. He is a self-employed screenplay writer, providing services to companies producing films and television shows. Two California-based production companies, on two separate occasions, engaged him to write screenplays. After the screenplays were produced, each production company paid Mr. Bindley. He did all of work in Arizona and never set foot in California during the year in issue. After depositing his checks in a local bank, Bindley received a Notice of Proposed Assessment (NPA) from the FTB assessing him both income taxes and penalties for failing to file a return and timely paying personal income taxes. Bindley filed an appeal before the Office of Tax Appeals in Sacramento to contest the assessment. Logically, he figured, California had no business taxing him because his money was earned and received outside of California. Mr. Bindley lost!

Here is what the Office of Tax Appeals held (all references will be to the California Revenue and Taxation Code R&TC):

  • R&TC section 18501 requires every individual subject to the Personal Income Tax Law to make and file a return when they have California based income.
  • If no return is filed, the FTB is allowed to base an assessment on an estimation. The taxpayer has the burden of proving that the estimation was too high.
  • California imposes a tax on the entire taxable income of a non-resident, such as Mr. Bindley, to the extent it is derived from sources within the state (R&TC Code 17041 and 17951).
  • The key cases are the McColgan and Myers. (Todd v. McColgan (19489) 89 Cal. App2d 509, 514; Appeal of Myers (2001-SBR-001) 2019 WL 1187160).
  • Mr. Bindley argued that during the entire year in issue, he was domiciled in Arizona and never set foot in California. Therefore, he is not subject to FTB taxation.
  • According to California Regulation Title 18 § 17951-2, a person can be subjected to California income taxes without having a physical presence in the state.
  • The Office of Tax Appeals found that Bindley, as a self-employed screen writer, was carrying on a trade or business "both within and without California." In other words, you can run but you can't hide.
  • Bindley wrote screenplays for two California-based companies. He, thus, conducted a one-service business which only he controlled and managed. His income was derived from California sources.

The Office of Tax Appeals concluded with the following statement: "...appellant's (Bindley'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."

Conclusion

While the Bindley case makes no logical sense, California law is very clear that if you receive income from California based sources, you may be required to file a California return and pay the FTB. It's interesting to speculate how the FTB found poor Mr. Bindley. He certainly kept a low profile. I would speculate that the FTB matched 1099s received from both companies to Bindley's Social Security Number, to find his identity and address Perhaps if Bindley operated as a small corporation or LLC, no 1099 would have been required. Again, when it comes to the FTB, you can run but you can't hide.

***

Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, "IRS Tax Collection Procedures - A Manual for Practitioners" published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See "California Tax Collection Practice and Procedures" and "California Taxation Practice and Procedure," both published by Commerce Clearing House.

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