California Legal Brief

The Rule of Garcia-Rojas v. Franchise Tax Board is that a nonresident sole proprietor engaging in only one business activity cannot constitute a "unitary business" for purposes of California taxation under regulation 17951-4(c), under circumstances where the taxpayer operates a single-activity sole proprietorship receiving compensation from one entity, even when that entity's clients are located both within and outside California.

Appeal from order granting summary judgment in Superior Court, City and County of San Francisco.

Plaintiff Appellants were Xavier Garcia-Rojas and Sana Garcia-Rojas — the nonresident radiologist seeking tax refund and his spouse.

Defendant Respondent was Franchise Tax Board — the state tax agency that assessed California income tax.

The suit sounded in tax refund seeking return of California income taxes paid for 2018-2020.

The key substantive facts leading to the suit were Garcia-Rojas, a Texas resident radiologist, worked as an independent contractor for StatRad reading medical images from his Texas home. StatRad sent him imaging studies from California and other states, and he submitted reports using StatRad's software. He was licensed in 28 states including California, with StatRad paying licensing fees and providing equipment, credentialing, and malpractice insurance. He earned over $1 million total from 2018-2020 and filed Schedule C forms as a sole proprietorship. The Board demanded California tax returns, which he filed and paid, then sought refunds.

The procedural result leading to the Appeal: The trial court granted the Board's motion for summary judgment, ruling that Garcia-Rojas "operated 'a sole proprietorship which carries on a unitary business'" and was subject to taxation under regulation 17951-4(c) because he "ran the same type of business or functionally integrated enterprise in California and elsewhere."

The key question(s) on Appeal: Whether Garcia-Rojas operated a "unitary business" such that he could be taxed under California Code of Regulations section 17951-4(c).

The Appellate Court held that the Board failed to demonstrate Garcia-Rojas operated a unitary business, where unitary business requires "two or more business entities that are commonly owned and integrated" or separate business activities to unite, but Garcia-Rojas operated at most a sole proprietorship engaging in one business activity.

The case is inapplicable when the sole proprietor operates multiple separate business activities or entities, when there are commonly owned affiliated business entities that transfer value among themselves, or when the Board seeks to tax under a different legal theory than regulation 17951-4(c).

The case leaves open whether the Board can tax Garcia-Rojas under a different legal theory, as the court expressly declined to address this issue, and questions regarding taxation of other business structures that might constitute unitary businesses.