DesertRat wrote: 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.