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You lived or made money in a community property state ??

lisae

I lived in CO all year and my wife lived in NY all year. Neither of us stepped foot in CA. We are doing Married Filing Separately.

I had some income from a CA source reported on a 1099-NEC, which I've found is taxable by CA. FreeTaxUSA is giving me a warning starting with "You lived or made money in a community property state" (ie, CA). Is this relevant in my case, since neither my wife nor I lived in CA, but I made money in CA? Or is "made money in" different than "made money from"?

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MatthewD

Hi lisae,

Even though that income reported on the 1099-NEC to be CA source income, generally you must work IN CA. In other words, you must be present in CA doing the work for it to count as CA source income.

You said you did not step foot in CA. It sounds like you are working remotely in CO and so the income is NOT reported on a CA return. So yes, "made money in" is very different than "made money from". Report all that income on your CO return.

lisae

Thanks for the input. I appreciate it.

But as far as I have been able to determine, CA is odd in that if you are working completely remotely, W-2 income from a CA company is NOT taxed by CA, but 1099-NEC income IS. Can someone who knows for sure, comment, along with your credentials, how you know, or an authoritative reference?

Any other opinions on the community property state question?

GeorgeM

Hello lisae:

Assuming you are a non-resident of CA, and do not physically work in CA, your W-2 wage income is not subject to taxation by CA. The fact that your W-2 wage income is paid by a company based in CA is not relevant. What is relevant, in terms of whether CA can tax your wage income, is the location where you perform your services. If you perform your services outside of CA, even though the company is based in CA, your wage income is not subject to taxation by CA.

As support for the above, take a look at the 2024 CA Franchise Tax Board Publication 1031 which provides the following regarding how W-2 wage income is taxed:

“Wages and salaries have a source where the services are performed. Neither the location of the employer, where the payment is issued, nor your location when you receive payment affect the source of this income…” (see page 6)

According to the CA Franchise Tax Board website, the 2025 version of FTB 1031 has yet to be issued, but will be available soon, see https://www.ftb.ca.gov/file/personal/residency-status/index.html#Am-I-a-resident?

Regarding the income reported on a 1099-NEC, such income is typically earned by an individual considered to be an independent contractor or self-employed person. As such, it is fairly characterized as income earned in connection with a business. As “business income” here again, it is necessary to determine the location where the services are actually performed in order to determine whether the income is properly taxable by CA.

Publication FTB 1031 treats business income essentially the same way it treats wage income in that if the person performing the services is a non-resident of CA, then only those services performed within CA are subject to tax by CA. Any services performed outside of CA, even though the company is based in CA, are not subject to tax by CA. In situations where services are performed both within CA and outside of CA, then the taxpayer needs to make the appropriate allocation.

Regarding the taxation of business income, FTB 1031 provides the following:

“A nonresident’s income from California sources includes income from a business, trade, or profession carried on in California. If the nonresident’s business, trade, or profession is carried on both within and outside California,
the income sourced to California may be based only on the business conducted within California, or may be determined by using the apportionment formula for corporations engaged in multi-state businesses…” (see page 7)

lisae

Thanks so much!! Now it sounds like none of my income would be taxable by CA!

I have to file a CA return to get withheld money back. So should I put $0 as CA-income for both wages and self-employment?

lisae

However… What about "the case of Bindley vs. FTB, 2019-OTA-179P. Blair Bindley was a screenwriter living in Arizona. He had no business presence in California, no employees in California, and never even set foot in the state. He did, however, provide screenwriting services to California companies. Based on that, California still claimed (and the appeal court upheld) that he owed CA tax on his income – because his screenplays were sold to companies in California."

This ruling says that if your business is unitary [sounds like mine is], the income derived from services is sourced to the place where the benefit of the service is received. As my work is similar to screenwriting in this sense, I'm back to owing tax on the 1099 income.

lisae

For anyone looking for information about the community property state question… I called the CA Tax Board and the customer service person said it was irrelevant in my case. It would apply only if at least one spouse lived in CA.

JMSSGV

~~Colorado is also a community property state.~~

I use the mnemonic device TWINCLAN (plus Wisconsin) and for some reason I thought there were 2 'C's. Oops.

lisae

The IRS and other sources say the community property states are

Arizona.
California.
Idaho.
Louisiana.
Nevada.
New Mexico.
Texas.
Washington.
Wisconsin.

(https://www.irs.gov/publications/p555)

JMSSGV

Sorry - yes, you're right.

TaxMorgan

Hello lisae,

Ultimately, it is up to you whether or not you want to report the income from that 1099-NEC as California income or not. There can be different interpretations of what is considered CA source income.

TitoPogi

I am a retired tax attorney, and my specialty was state & local tax. All of my clients were businesses, but there is a lot of overlap with personal income tax, such as in this question.

First, TaxMorgan is correct that how you report the income is up to you, but to clarify, I think what TaxMorgan is saying is that this particular question is not a slam dunk for either conclusion.

Next, it's important to understand what a precedential decision from the OTA (Office of Tax Appeals) means. It's basically binding on future OTA decisions (the OTA could reverse a previous holding, but it very rare, certainly when the previous decision is somewhat recent). But taxpayers can appeal OTA decisions to California Superior Court, which review such decisions de novo. That means the court does not give any weight to the OTA's decision. It reviews the case "fresh."

I read the Bindley case carefully. It was written by Pat Kusiak, a former California Franchise Tax Board attorney who was very helpful throughout the years (I called him probably a half-dozen times during my 30-year career), but I really disagree with Pat's opinion in Bindley. The key part of the decision was "appellant received income for his services as a self-employed screenwriter from Mindbender and Lakeshow, which are both California LLCs." and "He also received $40,000 of gross income from his services as a self-employed screenwriter from California customers. Consequently, appellant’s trade or business as a self-employed screenwriter was carried on within and without the state. We find appellant was carrying on a business within and without California."

Pat correctly cited Reg. 17951-2 for the proposition that California source income includes "income from a business, trade or profession carried on within this state," and then he wrote: "Indeed, the statutory provisions make no mention that a nonresident must have a physical presence in the state for California to impose a tax." But the statute also does not say that California may impose a tax when the nonresident has no physical presence in CA. So, when a statute is silent on a matter, courts use the ordinary meanings of the English language to interpret the statutes that do exist. I would argue to a court: How in the heck can an individual "carry on a business within ... California" when that business generated income by performing personal services and the person performing them never set foot in California?
Mr. Kusiak should have relied upon the ordinary definition of the word "within." Miriam Webster says "within" means "inside." The taxpayer wasn't inside California and his business activities (personal services) were not "inside" California. Even though the sourcing rules look to where the benefit is received, we never get to the sourcing rules because the taxpayer's trade or business was not carried on "within and without" California. It was carried on without California.

I have emailed my old boss (retired state & local tax partner at Big 4 accounting firm, now a college professor) to see whether he agrees with me. I am awaiting his response.

TitoPogi

My former boss (college professor, former state & local tax partner at a Big 4 accounting firm) agreed with my analysis: California nonresidents who didn't travel to CA during the year to solicit business and who performed personal services entirely outside of California and were compensated as independent contractors, but who received a 1099 showing "California" income, have a tax return filing position to report that income as not California source income. Obviously it would be preferable to contact the issuer of the 1099 and have them correct it so that it does not show "California" as the source of the income, but the company may not be willing to re-issue it. It would be easier to negotiate for this treatment before the deal with the customer is reached, or at least before the 1099 is initially issued (but they may refuse). You cannot win the issue before the Office of Tax Appeals (OTA), because it's bound by its own precedential decisions (Bindley, Bass, etc.) but a California Superior Court will look at the issue de novo and may side with the taxpayer, not with the FTB. But it's not a "slam dunk." My analysis is contained in my prior comment. Good luck!

MatthewD

Hello TitoPogi,

Thank you for your contributions on this topic. This will be very helpful for the community.