California source income?

All of the responses here have been greatly appreciated.
One aspect of her employment was not correct in the OP. I stated that she 'worked for' the CA company. She actually is contracted to a large recruiting firm (headquartered in MA) and supplies IT services for that CA company. Her services have not, so far, been supplied to the general public. If intent is material, she would like to continue her relationship with the recruiting firm, with whatever company they place her.

She actually is contracted to a large recruiting firm (headquartered in MA) and supplies IT services for that CA company

Who paid her, subject to California withholding? I would guess a national recruiting company is likely to be correct about individual state laws. Now that we know it was for IT services in California it looks even more like the example of Jill. She was physically in her office in Arizona, but the client didn't care about that because she was linked to the company's computer in California. I'm not sure why "the general public" is an issue in this scenario, but I wouldn't say having a single client means an independent contractor is not providing services to the public.

An interesting point in original post is that Arizona does not allow residents a credit for income tax paid to California.

I stated that she 'worked for' the CA company. She actually is contracted to a large recruiting firm (headquartered in MA) and supplies IT services for that CA company.

Check me on it, but I think CA’s market-based sourcing rule might even extend to the customer’s customer…a bit of a stretch if you ask me. Anyway, I think Dave Fogel’s comments about “service” and offering said services to the public are on point. These market-based rules involve more questions than answers. Consider your guy, whose work might be part of a bigger project that might end up being used by some big corporation that operates in all 50 states and maybe in some foreign countries. Your guy’s IT work will be deployed across those places. Is the benefit really received by the customer (or the customer’s customer) in California alone? Not really, truth be told. (Although I’ll readily admit I don’t know the actual nature of your guy’s work, but often, with these IT big project guys, the way I describe it is the way it works).

In your case, though, even if we have CA source income under the CA statute, won’t we be dealing with the reverse credit situation in the case of AZ/CA, with CA giving a credit on the non-resident CA return? If that is the case, I suppose the guy might end up paying some CA tax on the Schedule C income attributed to CA because of the CA/AZ tax rate differential and because of CA’s market-based sourcing rules. This, of course, is a real crock.

And don’t forget that MA is a market-based state as well. If MA doesn’t have a look through rule to the customer’s customer, but CA does, maybe we have MA, CA and AZ income all at the same time.

She is paid by the 'recruiter'. Yes, CA allows a credit for tax paid to AZ and, yes, there is a differential.
{I'm leaving for eye surgery in about 20 minutes and probably won't be back at a computer for a couple of days. Thanks again for the great discussion}

Ok, we’ll see you later…

Check me on it, but I think CA’s market-based sourcing rule might even extend to the customer’s customer…a bit of a stretch if you ask me.

"The FTB ruled that, when a taxpayer receives income from subcontracting services that its customers would otherwise be required to perform themselves for ultimate end-user customers, the benefit is received by the taxpayer’s direct customer and not the ultimate customer. "

https://www.grantthornton.com/~/media/c ... 09-14.ashx