A Texas radiologist, operating as a sole proprietor, who received revenue from a medical corporation for reading x-rays sent from California medical facilities was not operating a “unitary business” and therefore was not subject to California taxation. (Garcia-Rojas v. FTB(May 1, 2026) Cal. Ct. of App., First App. Dist., Case No. A172054) The court specifically rejected the Office of Tax Appeal’s (OTA) holding in its precedential opinion Appeal of Bindley, 2019-OTA-179P. In Bindley, the OTA held that an out-of-state screenwriter who sold scripts to a California business was operating a “unitary business” and therefore was required to apportion his business income to California under 18 Cal. Code Regs. §17951-4(c).
Note: Out-of-state sole proprietors are not subject to market-based sourcing rules, which only apply to other types of business entities. Rather, sole proprietors are subject to the personal income tax sourcing rules under 18 Cal. Code Regs. §17951-4(c).
The appellate court in Garcia-Rojas held that a sole proprietor that engages in one business activity and receives compensation from one corporation is not a unitary business because the unitary business concept requires that there be two or more businesses. This is true even though the business’s clients are both inside and outside California.
However, the court did note that it “expresses no opinion as to whether the Board [FTB] can tax Garcia-Rojas under a different legal theory.”
Tax professionals with non-California sole proprietor clients, who have paid tax to California based on the FTB’s unitary theory, should consider filing refund claims or protective refund claims for all open tax years based on the court’s ruling.
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