The Remote Economy: A Two-Way Street
The internet economy, ecommerce and constant connectivity has allowed increasing numbers of nonresidents to provide remote services to California businesses without setting foot here. As long as those nonresidents meticulously follow the rules, they can work remotely free from California income taxes. Or at least they can minimize the amount they do have to pay. But the remote economy is a two-way street. The technology that lets a Colorado resident work for a Los Angeles firm from his offices in Boulder, also allows him to run his Colorado business while vacationing at a Southern California beach house. More and more nonresident business owners and key employees are doing just that. And that can lead to California tax problems.
This isn’t a theoretical issue. The idea of taking a vacation of any significant length without doing any work is obsolete. Research shows over 50% of employees work while on vacation, and as to business owners, the figure is around 85%. Moreover, since business owners have the increasing ability to operate a company from anywhere, including a California vacation home, the lines between an extended vacation and running a business remotely are becoming blurred. Whether this is a good or bad development, it can result in unexpected and unpleasant tax consequences for nonresidents.
Why It Matters
Just to review, California generally taxes all the taxable income of residents, from whatever source. California taxes nonresidents only to the extent that their taxable income is sourced specifically to California.