State taxable?

[Drizzle]

Client is sole employee/shareholder of sub S in resident state. Sub S receives all income as a sub-contractor to a firm in Canada. Firm in Canada derives income from contracts which client services located in California, Las Vegas, Puerto Rico,...national and international-you get the idea.

Is the individual OR his sub-S subject to state taxes? My interpretation is that his income is not "sourced" in the states but is sourced from the Canadian firm. The Canadian firm may have state tax issues, but not my client. But I'd like to nail it down with a cite.

Any researched opinions on this?

Drizzle

[jainen]

He seems to be a resident

He seems to be a resident of a particular state and so is the corporation. If it's a state with income tax he would be subject to state tax on his world-wide income and so would the corporation.

I researched this by reading your post, which is also my citation.

[OldJack]

I agree with Jainen that he is a resident of the USA and performed taxable services in the USA, so it is US taxable income. If it is taxable by the state it would be in accordance with how the state determines income earned in other states. It could be that he has a state tax return to file in 2 states. You would have to research the particular states involved and you did not mention the resident state.

[Drizzle]

Further info

The resident state is WA, which has no state income tax, so that is not an issue. Perhaps my question was not clear.

The Canadian firm contracts for services in various states and employs whomever it can find to fulfill these services. One of those contracted to provide support was my client's S-corp, for whom my client is employed.

It is clear that the Canadian firm's revenue are "sourced" from, say, California. Does that "sourcing" for state tax liability purposes follow down successive levels to my client's S and to my client? Neither of the latter parties have any contract with a CA entity, nor, in my opinion do they "do business" with anyone in CA. No nexus for state (e.g. CA) tax liability that I can clearly determine

Drizzle

[jainen]

Riddles

Riddles don't make a good post. Could you please ask your question in plain language? How are they performing "services" in California without working in California?

[OldJack]

I think that one of the key points here is that the location of the company that is paying for the service is not the deciding factor regarding state taxes.

[Drizzle]

Nonresident taxation

Sorry Jainen, I do not mean to be unclear. I am just trying to determine whether a client is clearly liable for filing and paying state taxes as a nonresident for perhaps several states. You may see this as clear, but I do not, based on reading the states' instructions for nonresident filers.

OldJack, looking at page 11 of the California 540NR instructions (we started on CA as an example, so I'll use that), para 1 says that "California taxes all income you received while you were a resident of California and the income you received from California sources while a nonresident." My client was a nonresident, so the last part of that sentence about the source of the income is at issue.

Is the source of his personal income California, Washington, where his S-corp resides, or Canada? What is the source of his S-corp's income-his Canadian employer or a California entity with which his corp has no instant business contract or relation?

If the income the S-corp receives from the Canadian contract is not reported or classified when paid by "source", what should be his position on state and even local jurisdiction taxes?

[BOB W]

Drizzle..........

You are making this far more complicated than it needs to be.

First of all, Canada has nothing to do with your reporting responsibilities. Where you get paid from is inmaterial, just where you do the work.

Now, what questions do you have? And Keep it simple.................

[Drizzle]

Source not an issue

Bob W,

Ok, thanks. Then you and OldJack are in agreement that the source of the payments is not material for state tax liability, contrary to the wording of the CA 540NR instructions (in this case).

Perhaps the instructions for other states' NR returns are clearer, and don't muddle things up with the issue of source of payment. I'll check NY's next. Although my client did not work there, the NY language may be more precise as to the general principle involved here.

(I've probably been hanging around attorneys too much lately)

Drizzle

[BOB W]

Around and Around.....

"OldJack, looking at page 11 of the California 540NR instructions (we started on CA as an example, so I'll use that), para 1 says that "California taxes all income you received while you were a resident of California and the income you received from California sources while a nonresident." My client was a nonresident, so the last part of that sentence about the source of the income is at issue."

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Your client has nothing to do with the location of the Canadian firm's territory, it is only work in states where your SCorp client does work. If your client does work in CA he needs to be registered as a foreign corp doing business in CA since he is a WA based SCorp. Your SCorp client needs to do an Allocation of Income to report sales in each foreign state that YOUR SCorp client does work in. If all work done by your SCorp client was in WA only, you have no issue with any other state............................

You are mis-interperting the meaning of non-resident and the word source. Source means the result of your efforts, not the source of the funds.

You live WA but you may have interest income from a broker in NY. Your way of thinking means that you need to file a return for NY.

It is that straight forward.

[Snaggletooth]

Drizzle

In all honesty, it appears you are scouring all 50 states with the objective of finding a reason to file in as many as you can. I'll guarantee that if you continue, many of these states will incredibly reach out to accommodate this quest for out-of-state tax revenue.

Firstly, your client's corporation is (I'm assuming) domestic to Washington, and your client is doing substantially all his work based in Washington, right? This is all that matters, period. If the corporation has a customer in Canada, and this customer does work in other states, all the state taxation issues fraught therewith are the problems of this Canadian company, and not your Sub S.

This is all there are to it. If the Sub S begins a California operation, or Illinois operation, or Michigan operation, then you can resurrect this question of out-of-state revenue. The fact that his Canadian customer has a presence in these states is not what would create the problem. The fact that your client may travel to those states to service the Canadian customer does not by itself constitute a presence by his S Corp, so long he remains based in Washington and does not begin an operation in another state.

[Drizzle]

Thanks

Thanks for the further info, folks. Actually my hope is that my client and his corp do NOT have to worry about state taxes, since even though he has a WA S-corp, he moves all over the US and internationally servicing the contract of this Canadian company that then pays his S-corp.

Virtually none of his income in the last two years has been in the resident state. The revenues of the S-corp are sprinkled all over the place, if they were somehow classified by geography. That's why I am wanting to resolve the issue of when these state tax liabilities arise.

It sure makes me glad to be in a non-income tax state....

Drizzle

[BOB W]

Wait a minute......................

.............. you said nothing about your client working in different states?????? Your client must file State corp tax returns in each state he does work in and he must be registered in each state as a foriegn corporation, as I stated in a previous hypetheritical post.

[OldJack]

"OldJack, looking at page 11 of the California 540NR instructions (we started on CA as an example, so I'll use that), para 1 says that "California taxes all income you received while you were a resident of California and the income you received from California sources while a nonresident." My client was a nonresident, so the last part of that sentence about the source of the income is at issue."


You live WA but you may have interest income from a broker in NY. Your way of thinking means that you need to file a return for NY.

Bob, I have only done a couple of CA tax returns in my years of tax work so I don't know much about CA laws. I agree with you last statement regarding WA and NY that NY tax return is "not" required. I would expect that if the company has nexus (connection or link) with CA that a state tax return would be due. If no nexus the income would just be taxable in the resident state.

[jainen]

Drizzle

Drizzle, it would really help if you would speak plainly. What exactly do you mean by "contracts which client services"?

Is he doing telemarketing, restocking office supplies for the Canadian's accounts? That would be sourced to his home in Washington. Or is he an electrician, installing security cameras all over the country? That would be sourced to the various states.