A person’s “residence” under California law is the key to understanding their state income tax liability. For this reason, the California Franchise Tax Board (FTB) conducts residency audits that will determine a person’s residency.
Generally, three outcomes are possible; a taxpayer may be found to be a resident of California, in which case they are taxed on income from all sources, including income from sources outside of California. A taxpayer may be found to be a nonresident of California, in which case they are taxed only on income from California sources. Finally, a taxpayer may be found to be a part-year resident, and taxed on all income received while a resident and only from California sources while a nonresident.
California residency law defines the class of persons that are expected to contribute tax revenue to the state. California’s Revenue and Tax Code (R&TC) § 17014 includes every person in the state of California except for those in California for “a temporary or transitory purpose.” Cal. Rev. & Tax. Code § 17014 (West). It is important to note that this definition of residency is very broad, and includes everyone currently in the state except for those remaining in the state for a temporary or transitory purpose. It also includes those people domiciled in the state of California but currently outside the state for a temporary or transitory purpose.
Much of the residency determination depends upon the definition of “a temporary or transitory purpose.” California Code of Regulations (CCR) § 17014(b) defines in great detail what “temporary or transitory purpose” means. It states that visitors in the state for a short period of time for both business and pleasure are in the state for “a temporary or transitory purpose,” and as such are to be taxed as California residents. On the other hand, those domiciled outside the state, but staying within the state for business, medical or retirement purposes that are long-term and indefinite in time will not be considered in the state for “a temporary or transitory purpose,” and will be subject to the state tax.
For situations other than those mentioned, one has to rely on the various guidance provided by administrative bodies. For example, the Board of Equalization has set forth a list of non-exhaustive factors. See generally Appeal of Stephen D. Bragg 2003-SBE-002, 2003 WL 21403264 (Cal.St.Bd.Eq.) (May 28, 2003).
The residence calculation can be detail-oriented and confusing, and one should consult an experienced attorney that can help in tackling tax issues such as these. For further California residency audit related questions, please contact your California Residency Audit Attorneys today.