A. Taxation of California Residents and Nonresidents
1. California residents are subject to California income taxation on their worldwide business and non-business income. The California tax on taxable income is a graduated tax ranging from 0% to 10.3% (imposed on income in excess of $1 million).
2. Nonresidents are only subject to California income taxation on their California source business and non-business income.
a. The California income tax for each nonresident is computed by multiplying (i) the California income tax which would be owed if the nonresident were a California resident by (ii) a fraction the numerator of which is the nonresident’s adjusted gross income from California sources and the denominator of which is the nonresident’s worldwide adjusted gross income.
B. Determination of Residence for California Income Tax Purposes
1. California has not adopted the federal income tax rules (IRC § 7701(b)) for determining resident status for California income tax purposes.
2. Under the California Revenue and Taxation Code (“R&T”) and the regulations thereunder, an individual is a resident of California for California income tax purposes if such individual is:
a. present in California for other than a “transitory or temporary purpose”; or
b. domiciled in California and leaves California for a “temporary or transitory purpose.” See R&T Code § 17014(a); and Reg. 17014(a).
3. Temporary or transitory purpose test is satisfied if an individual is present in California:
a. For a brief rest or vacation (i.e. definite short stay). See R&T Reg. § 17014(a);
i. Not a California resident if (i) here not more than six months and while here person is only on vacation to rest, or as a guest, but does not conduct any business and (ii) maintains a permanent abode at place of domicile. See R&T Reg. 17014(b);
ii. Presumption. Individual is a resident if here more than nine months. See R&T Reg. 17016;
b. Or, to perform a contract or engagement (i.e., complete a particular transaction or engagement with a short duration). See R&T Reg. § 17014(a).
4. Temporary or transitory purpose is not satisfied if an individual is present in California:
a. To improve such person’s health and person has an illness which requires long recuperation;
b. To retire;
c. For business purpose which will last for a long or indefinite period.
C. Factors which are relevant in determining residence: (close connection or contacts)
1. Length of physical presence in California.
a. Physical presence in California is the most persuasive indicator of residence. The longer the taxpayer remains in California, the more likely that the taxpayer will be found to be a California resident for tax purposes.
b. A taxpayer is presumed to be California resident if the taxpayer is present in California for at least nine months. The presumption is a statutory presumption which is rebutted by satisfactory evidence that the taxpayer is present in California for temporary or transitory purposes.
2. Employment in California.
a. Employment in California is a very important determining residency in California. A presence in California to complete a particular transaction, complete a particular contract or fulfill a particular engagement constitutes presence for a temporary or transitory purpose. On the hand, indefinite employment in California, or employment for a long period of time constitutes presence which is not for a temporary or transitory purpose.
3. Contacts with California.
a. A taxpayer’s contacts with California are very important in determining residency. A taxpayer with significant contacts in California is considered a California resident. Under these circumstances, the magnitude of the taxpayer’s contacts indicates that the taxpayer’s presence in California is not temporary or transitory.
b. The taxpayer’s contacts in California are compared with the taxpayer’s contracts in other states or countries to determine which place the taxpayer has the closest connections to.
c. Factors which indicate that the taxpayer is a California resident are:
i. He actively seeks and acquires a business in California;
ii. He is present in California for a business project requiring a long period to complete; or
iii. He incorporates a business in California even though the business is transacted outside of California;
iv. Maintenance of home in California;
v. Banking and checking accounts in California;
vi. Social clubs and other activities in California;
vii. Business in California;
viii. Family relationships in California including spouse and children.
d. Place where person votes, files tax returns or donates to charity are relevant for determining domicile not residence.
D. Proof of Nonresidence. R&T Reg. § 17014(d).
Proof of Nonresidence can be established through testimony or affidavits from individual, friends, employer, etc. that individual is in California for permissive purpose described in IIB above and for short duration.