THIS WEEK'S STORY
A New Court Case Pushes Back on California’s Tax Reach
I was talking with Lisa, who works with clients in different states.
She asked me a question I hear all the time.
“Samy, if I do work outside California, but the customer is connected to California, can California tax me?”
My answer was simple.
Maybe. But not just because California says so.
That is why the Garcia-Rojas v. Franchise Tax Board case matters.
A Texas radiologist was reading X-rays for a medical corporation. Some of those X-rays came from California medical facilities. California tried to tax part of his income by saying he was operating a “unitary business.”
The court said no. That matters.
California had been leaning on an earlier case called Bindley, where an out-of-state screenwriter sold scripts to a California business. The state used that case to support a broader tax position against out-of-state sole proprietors.
But in Garcia-Rojas, the court pushed back.
The court said a sole proprietor doing one business activity, and getting paid by one corporation, is not automatically a unitary business.
That is not a small technical detail. That is the whole fight.
Because sole proprietors do not follow the same sourcing rules as corporations, partnerships, or LLCs. California cannot just grab the corporate-style market sourcing playbook and apply it to everyone.
Now, let’s be clear. This does not mean California can never tax the income. The court left that door open.
But it does mean California’s “you touched California, so you owe California” argument took a real hit.
So here is the practical move.
If you are an out-of-state sole proprietor with California customers, or you paid California tax under this theory, review your open years.
Look at how the income was sourced. Sometimes the money is not made in a new tax strategy.
Sometimes it is found by asking, “Did we overpay?”
