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Sole proprietors located outside of California may be subject to California income tax although they never set foot in California 

The bottom line in the article:

“.....when sole proprietorships have customers in California, receiving the benefit of the services here, the sole proprietorships are carrying on business in California, under the plain meaning of that phrase. Their work in their home states shows they are conducting business there, too. This interrelationship of the in-state and out-of-state activities indicates that the taxpayers have California source income.”

Entire article:

Market-based rules and the tax effects on the sole proprietorship

Under California Code of Regulations, title 18, Section 17951-4 (Regulation 17951-4), subparagraph (c), if a sole proprietorship carries on a unitary business within and without California, its income is sourced in accordance with Revenue and Taxation Code (R&TC) Sections 25120 to 25139, the apportionment rules of the Uniform Division of Income for Tax Purposes Act (UDITPA). Previously, pursuant to California's UDITPA's rules, business income was generally sourced based on doubled-weighted sales, property and payroll factor methodology. More specifically, sales of services were sourced based on a "cost of performance" methodology. However, with the passage of Proposition 39 in 2012, for tax years beginning January 1, 2013, business income is generally now sourced based on a single sales factor methodology. Moreover, sales of services are sourced based on a market approach, which means that the sales of services are sourced to the jurisdiction where the benefit of the service was received. 

With respect to nonresidents that carry on a unitary business within and without California, if the nonresident performs services from her or his home state, but the benefit is received in California, pursuant to the market-based apportionment rules, the nonresident will have California source income that must be reported. 

It is important to emphasize that Regulation 17951-4 uses the terms "carrying on" and "conducting" to describe the California business activity for sourcing. This is distinct from the "doing business" standard set forth in R&TC Section 23101, which is used for franchise tax purposes. For income tax sourcing purposes, the regulation uses these two common words interchangeably to indicate that the colloquial understanding of the phrases is to be applied.

Additionally, to understand the meaning of the term "unitary" as used in Regulation 17951-4, a careful reading of subparagraph (b) is helpful. That subparagraph provides a framework for the use of the term "unitary" for purposes of this regulation only. Specifically subparagraph (b) defines what is not unitary, leaving the other subparagraphs to describe the taxation of unitary businesses. Businesses which are not unitary are "so separate and distinct from and unconnected with the part without the state such that the respective business activities are not part of a unitary business, trade or profession." (Emphasis added.) In other words, unitary businesses are those businesses where there is an interrelationship between in-state and out-of-state activities. Further, a taxpayer need not be present to derive income from California sources, as confirmed by the phrase in subparagraph (b) "if a nonresident owns a hotel in California… and is not significantly involved in the management of the hotel, only the net income from the hotel in California is derived from sources within this state."

Therefore, when sole proprietorships have customers in California, receiving the benefit of the services here, the sole proprietorships are carrying on business in California, under the plain meaning of that phrase. Their work in their home states shows they are conducting business there, too. This interrelationship of the in-state and out-of-state activities indicates that the taxpayers have California source income.

Link to article: https://www.ftb.ca.gov/professionals/taxnews/Editions/2019/January/Chief-Counsel.shtml

steve@stevesimsea.com