Reported / Citable
Background
Xavier Garcia-Rojas is a Texas-based radiologist who worked as an independent contractor for a California medical-imaging corporation called StatRad. He read scans from his Texas home using StatRad’s hardware and software, was credentialed in 28 states (including California), and earned roughly $300,000 to $410,000 a year between 2018 and 2020 as a sole proprietor.
The California Franchise Tax Board demanded that Garcia-Rojas file California returns and pay California tax on a portion of his income. He paid and then sued for a refund in San Francisco Superior Court. The trial court granted summary judgment to the Board, ruling as a matter of law that Garcia-Rojas was operating a ‘unitary business’ under California Code of Regulations title 18, section 17951-4(c), which permits the state to apportion the income of nonresident sole proprietors who carry on such a business inside and outside California.
Garcia-Rojas appealed.
The Court’s Holding
The First District, Division Three, reversed. Reviewing the order de novo, the court held the Board never carried its burden of showing that Garcia-Rojas operated a ‘unitary business’ within the meaning of regulation 17951-4(c). The unitary business doctrine, the court explained, has a long-recognized meaning in California: it requires two or more business entities that are commonly owned and integrated in a way that transfers value among the affiliated entities. Every California Supreme Court and Court of Appeal case the Board cited involved either a multi-entity enterprise or a corporation with multiple geographically separate operations.
Garcia-Rojas, by contrast, was at most a sole proprietor engaged in one business activity (reading radiology images for one corporate client). The court emphasized that ‘there must be separate business activities to unite’ before the unitary doctrine can apply. The Board’s primary support — the Office of Tax Appeals’ decision in Appeal of Bindley — was both non-binding and based on an analysis the court found ‘unconvincing’ because it ignored that threshold requirement.
The court was careful to note it expressed no view on whether the Board could tax Garcia-Rojas under some different legal theory; it held only that summary judgment under regulation 17951-4(c) was improper.
Key Takeaways
- The ‘unitary business’ doctrine in California requires two or more business activities or entities — a single sole proprietor performing one line of work cannot be a unitary business as a matter of law.
- The Office of Tax Appeals decision in Appeal of Bindley (which had treated an out-of-state self-employed screenwriter as unitary) is not binding on California courts and is now openly disapproved by an appellate court.
- Nonresident contractors who work remotely for California-connected companies are not automatically subject to apportioned California income tax under regulation 17951-4(c). The FTB has to do more than show a working relationship with California clients.
- The Board may still pursue alternative theories of taxation on remand — the decision narrows one regulatory theory but doesn’t decide the broader question of whether the income is California-source.
Why It Matters
This is an important decision for the growing number of professionals who live outside California but provide remote services to California businesses. After the pandemic, the FTB has aggressively pursued nonresident sole proprietors on the theory that working remotely with California clients creates a ‘unitary business’ that California can tax on an apportioned basis. Garcia-Rojas shuts down the simplest version of that argument: you need at least two business activities before unity even comes into the picture.
For tax practitioners, the case also signals that Bindley, which has been cited repeatedly by the Board over the past several years, is on shaky ground. Expect the FTB to retool its approach — potentially shifting toward direct California-source-income theories under section 17951 itself rather than the apportionment regulation.