California nonresident income tax: A pivotal case

A California appellate court recently rejected the Franchise Tax Board’s (FTB) attempt to tax the 1099 income of a radiologist who performed all of his work remotely from Texas. Xavier Garcia-Rojas et al. v. Franchise Tax Board. The court’s rationale was that the radiologist’s sole proprietorship did not necessarily conduct a unitary business within and outside California simply because he provided services connected to California.

The May 1, 2026 decision could be helpful to other California nonresident professionals who work remotely from locations outside California but have customers or business relationships in California. Even though it does not mean that California can never tax the 1099 income of nonresident professionals, it does limit California’s ability to automatically tax nonresident professionals’ 1099 income by apportioning it there.

The California Supreme Court granted review of the Garcia-Rojas case on September 3, 2026, to decide whether a nonresident’s business can be treated as a multistate unitary business when it consists of a single sole proprietorship. Even though the case remains pending, California nonresident professionals who have previously paid personal income tax to the state on an apportioned share of their 1099 income should consider filing protective refund claims for older years in case Garcia-Rojas is upheld.

Why the distinction between sourcing and apportionment matters

The dispute centered on California’s rules for assigning a nonresident’s income from a trade or business, and those rules are important because a nonresident individual is generally taxed by California only on income from California sources.

When a nonresident’s income is not from a trade or business, the rules California uses to source it depend upon what kind of income it is. For example, income from wages is generally assigned to the physical location of the underlying work and income from the sale of intangibles such as stock is generally assigned to the individual seller’s state of residence.

When a nonresident’s income is from a “unitary” business conducted within and outside of California, then the state assigns that income to California by apportioning it.

What Garcia-Rojas means for nonresident service providers

California’s recent Garcia-Rojas decision adds an important development to this analysis. Even though the trial court had found that the taxpayer’s sole proprietorship carried on a “unitary business” within and outside California because he “ran the same type of business or functionally integrated enterprise in California and elsewhere”, the Appeals Court held that the “unitary business” doctrine could only apply to activities conducted by multiple commonly owned or integrated businesses, not to a single individual engaged in a single professional service activity.

At the same time, pay attention to the nuances of the decision. The court did not hold that California can never tax a nonresident service provider with California-sourced receipts. Rather, it concluded that the state had not proven the particular unitary business theory at issue in the case. As a result, taxpayers should view Garcia-Rojas as a potentially helpful authority, not a blanket exemption from California filing or tax obligations.

Recommended next steps

To evaluate whether the Garcia-Rojas case may save you California income tax, individuals should consider the following steps:

1. Confirm the taxpayer and business structure:

Determine whether the activity is reported directly by a sole proprietor or conducted through a partnership, S corporation or other entity. Garcia-Rojas involved a single Schedule C activity (reported on Form 1099) and should not be automatically applied to a different structure.

2. Identify the FTB’s legal theory:

Determine whether California’s efforts to tax a nonresident are relying on the physical location of the taxpayer’s activities, a specific source-income rule or the unitary-business and apportionment provisions of 18 Cal. Code Regs. section 17951-4(c).

3. Develop the relevant facts:

Preserve contracts, work logs, customer communications, billing records, licensing information and records showing where services were physically performed, where customers received the benefit and what California-based resources or support were used.

4. Review open years and pending matters carefully:

Consider whether the case may affect an examination, assessment, administrative protest or refund claim. Any protective filing should account for applicable limitation periods, the basis of the original return position and the pending California Supreme Court review.

5. Monitor further developments.

The California Supreme Court’s decision may affirm, narrow or reject the Court of Appeal’s reasoning. Filing and reserve positions should be revisited as the case develops and as the taxpayer’s facts change.

Bottom line thoughts

Garcia-Rojas is best understood as a procedural and doctrinal limit on the FTB’s use of a specific unitary-business theory at summary judgment — not as a holding that the radiologist’s income was exempt from California tax.

The decision may be relevant to a nonresident sole proprietor engaged in a single professional activity, but its application depends on the taxpayer’s structure, California contacts and the precise sourcing provision asserted by the FTB.

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