Tax Net Widens: Ruling Puts Out-of-state Service Providers at Risk.

AuthorKlasing, David W.

Blair Bindley, a script writer who worked exclusively and was domiciled in Arizona during 2015, was in the business of developing works for television and film producers on a contract basis. During the tax period at issue. Bindley was commissioned by Mindbender Enterprises. LLC (Mindbender), as well as Lakeshow Films. LLC (Lakeshow) to produce scripts on a "work-for-hire" basis, meaning that the rights to the works created would belong to Mindbender and Lakeshow, respectively. Both Mindbender and Lakeshow were and are California companies.

During the California FTB's automated review process--where documents received by employers and other payors are matched with tax returns from employees and service providers--the FTB determined that Bindley did not file a tax return for 2015, despite having received $25.000 from Mindbender and $15,000 from Lakeshow. The FTB sent a letter to Brindley requesting he either file a California tax return for 2015, or explain why he was not required to file such return.

After correspondence from Bindley to the FTB asserting that he was not obligated to file a California tax return because he did not have California source income, the FTB sent Bindley a Notice of Proposed Assessment (NPA). After a timely protest of the NPA, protest proceedings and the upholding of the assessment by the FTB, an appeal was lodged with the California Office of Tax Appeals (OTA).

In ruling in favor of the FTB's proposed assessment, Administrative Law Judge Patrick Kusiak wrote for the concurring panel. Kusiak organized the OTA's analysis into three parts consistent with determining whether a nonresident is subject to California's income apportionment rules:

  1. Whether the taxpayer was carrying on a business within California, outside California or both within and outside California:

  2. The type of entity conducting the business at issue; and

  3. Whether or not the business was "unitary" in nature.

The OTA panel determined that Bindley was engaged in business both within and outside of California. The court relied on the fact that although he was domiciled and performed all of the work related to drafting, editing and delivering the scripts in Arizona, payments received for work that Bindley performed orginated in California.

The second prong of the court's analysis was not at issue. Bindley was engaged in a sole proprietorship and was not an employee of another organization.

The third prong required the court to determine whether...

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