California taxes a Texas radiologist who works from home

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Dr. Xavier Garcia-Rojas (Rojas), a lifetime resident of Texas, is a radiologist who interprets imaging studies, for example, CT scans and MRIs, entirely from his home office in Texas. Rojas earned income through an independent contractor agreement he signed with a California-based national radiology company. Rojas was assigned various imaging studies from hospitals nationwide, including from California and 27 other jurisdictions. Rojas never worked in California.

Unitary business theory

Despite Rojas having never set foot in California during the tax years at issue, the California Franchise Tax Board invoked its “unitary business” tax doctrine (the Unitary Doctrine) to tax Rojas. Under the Unitary Doctrine, certain multistate businesses that operate as an integrated enterprise may be classified as “unitary,” and when this occurs, the related businesses are not taxed separately based on their individual state activities. Rather, the unitary business income is apportioned across multiple states, and each state taxes its proportionate share of the total income.

To invoke the Unitary Doctrine, the FTB determined that Rojas was a sole proprietorship and that together, he and his sole proprietorship could be combined to constitute a unitary business. As a unitary business conducted within and without California, the FTB asserted that it could tax Rojas because some patients whose images he interpreted happen to reside in California.

Counter argument

Rojas disagreed with the FTB by asserting that it cannot tax an individual who is a non-resident of California merely because a client or patient of a taxpayer resides in California. Further, Rojas argued that the Unitary Doctrine has always been applied to multistate enterprises with more than one business segment, division or geographic location, and, thus, apportionment is appropriate. But the Unitary Doctrine has never been applied to a single individual engaged in a single line of work from a single location outside of California.

If the FTB’s position is accepted, Rojas claims that it would subject every professional who is a non-resident of California, for example, lawyers, accountants or physicians, to California taxation when they serve a California resident remotely, no matter where the service is actually performed. Rojas noted that although he is licensed to practice medicine in multiple states, including California, no state, other than California, has attempted to tax him.

A trial court agreed with the FTB’s position in Garcia-Rojas v. California Franchise Tax Board, and Rojas is now challenging that ruling on appeal.

Barry F. Rosen leads the Health Care Practice Group at Gordon Feinblatt LLC, and he can be reached at 410-576-4224 or [email protected]. Douglas T. Coats leads the Tax Practice Group at Gordon Feinblatt LLC, and he can be reached at 410-576-4002 or [email protected].