Let’s assume we’re a solopreneur in Virginia or Arizona or Montana (or some other state).

And, we’ve picked up a great little contract from FlyHighBiotech in San Diego.  And, another from IoT4U in Sunnyvale.   (In case you don’t know, both of these cities are in California.)  And, neither entity is expecting us to show up at their offices to share our results- everything will be done via Microsoft Teams, Skype, Whiteboard, and eMail.

Well, here’s a little wrinkle in our plans.

We are going to have to file income tax returns in California.  (We may need to go one step better, depending upon how much revenue we are going to accrue from California and what percentage of our overall revenue will that constitute.  But, that’s a discussion to have if you become our client.  [Sorry, there’s some information we just don’t share for free!])

And, while we’re at it, we should consider these rules if we have contracts like that in other states.  Admittedly, most not are as aggressive as California- yet… with the exception of Washington, DC, and perhaps, New York, but- forewarned is forearmed.

Now, most of us know that when we travel to various states and generate sales, we are subject to paying them sales tax.  Fewer of us know (but that doesn’t obviate our obligation) that when we make a certain number of sales, or a certain dollar amount of sales in a given state (without once setting foot in that state), we can be found guilty of tax evasion , should we not pay that state’s sales taxes.

Fewer of us know that when we spend somewhere between 3 and 8 days in a state, prospecting for revenue or attending a convention (or, possibly if we attend a technical or scientific program in that state), we must pay income taxes on the revenue we make in that state.   And, again, California is the most aggressive of states making sure they get a piece of our pie.

Now, let’s consider this most recent tax case.  Blair S. Bindley, Office of Tax Appeals (Franchise Tax Board), Case 18032402.  This case, decided on 30 May 2019, determined that Mr. Bindley, a solopreneur, did indeed perform all his services while NOT once stepping foot in the State of California.  But, it turns out that Mr. Bindley was a most unique solopreneur- he wrote screenplays.  In the great state of Arizona.  But, he sold his services to “Hollywood”, among which were firms that were registered as California businesses, with headquarters in the state.  Oh- and Mr. Bindley never filed a state income tax in California.

(Why is that important?  Since he never filed a state tax return, the statute of limitations never begins.  Which means, should California decide you owe taxes from 1933 [way after it became a state in 1850, but back when income taxes were first imposed], they can theoretically go back that far.)

Nevertheless, the Office of Tax Appeals ruled that the solopreneur was operating a “unitary” business.  This meant he was obligated to pay taxes to California under their apportionment rules.

Furthermore, if the contract does not stipulate the location where the benefit is received (for example, our contracts stipulate that all work on this effort shall be effected in another state [e.g., Virginia, Georgia, Pennsylvania]), then California has the right to determine where the benefit is received.  And, since Bindley’s contracts didn’t stipulate a locale, the Franchise Tax Board held that the companies in California received the benefit and Bindley was subject to taxation by California.

(These sort of rules already have been applied to small businesses.  This was the first extension to solopreneurs or Schedule C companies.)

The take-away? Make sure your contracts get you off the hook- or prepare to pay a portion of your income to the State of California.  (Or other such enterprising states.)

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