The California Office of Tax Appeals (OTA) recently issued its decision in the Appeal of L. Mazer and M. Mazer (Appeal of Mazer), holding that an individual taxpayer remained a California resident while working remotely in Malaysia because he maintained a California domicile and had merely left the state for a temporary or transitory purpose.1
The appellants in this matter, a husband and wife, historically filed joint California resident income tax returns prior to 2013. In February 2013, the husband relocated from California to Malaysia for the purpose of employment abroad. The initial term of the husband’s employment contract was for two years, with an open option for renewal. However, he returned to California after thirteen months as his employment arrangement had terminated. During the time he spent in Malaysia, his wife continued to live in their California home and remained a California domiciliary and resident. One-half of the husband’s wages earned in Malaysia was subtracted from the taxable income reflected on the couple’s joint 2013 California resident income tax return. The other half of the taxable income was reported as the wife’s community property share of her husband’s salary.2
On audit, the California Franchise Tax Board (FTB) assessed additional tax of $4,454 for the 2013 tax year, claiming that the taxpayers were both considered to be California residents taxable on all of their earned income. The taxpayers protested and, after the FTB affirmed its assessment, the OTA appeal followed.
The OTA began its analysis by focusing on California’s definition of a “resident,” which includes both: (i) every individual who is in California for other than a temporary or transitory purpose; or (ii) every individual domiciled in California who is outside California for a temporary or transitory purpose.3 To determine which of these alternative tests to apply, the OTA first considered whether the husband was domiciled in California.
Because it was undisputed that the husband’s domicile was California prior to his departure to Malaysia in 2013, California presumed that the husband’s domicile stayed in California, unless the taxpayers could demonstrate that it had changed. Citing the California Board of Equalization's decision in Appeal of Bragg,4 the OTA noted that in order to change domicile, a taxpayer must: (i) actually move to a new residence; and (ii) intend to remain there permanently or indefinitely.5 In applying these criteria, the OTA proceeded to analyze the husband’s actions through a consideration of the husband’s intent, focusing on his acts and declarations, rather than statements which could be more difficult to independently substantiate.
Upon review, the OTA concluded that the husband’s actions did not reflect an intent to abandon his California domicile and establish a new one in Malaysia. In particular, the OTA found it relevant that the marital abode was at all times maintained in California, and that the wife maintained her California residence with no indication of intent to join her husband in Malaysia. Further, the OTA found it probative that after his employment in Malaysia concluded earlier than anticipated, the husband returned to his California home.
Concluding that the husband was domiciled in California, the OTA proceeded to analyze whether he was outside of California for more than a temporary or transitory purpose under Cal. Rev. & Tax. Sec. 17014(a)(2). In particular, the OTA evaluated whether he took steps to substantially sever his connections to California and establish significant connections in Malaysia. Again, the OTA relied upon the non-exhaustive list of factors indicating residence which were provided in Appeal of Bragg, including an individual’s registrations and filings with a state or governmental agency, connections through personal and professional associations, and the location of the individual’s physical and intangible property. Specifically, the OTA concluded that the husband did not make significant connections in Malaysia or attempt to sever his California connections, and the husband did not intend to stay in Malaysia indefinitely.
Further, the OTA found no indication that the husband’s employment was for a permanent or indefinite term based on his optionally renewable contract. Thus, the OTA concluded that, based on the Bragg factors, there was insufficient evidence to support a conclusion that the husband was in Malaysia for a temporary or transitory purpose. Absent sufficient evidence that he substantially severed connections with the state of California, the OTA agreed with the FTB’s determination that the husband was a California resident during 2013 and subject to tax in California on his entire taxable income, including amounts earned in Malaysia.
To make its decision, the OTA in this case heavily relied upon the non-exclusive list of residency factors provided by the California Board of Equalization in Appeal of Bragg.6 In doing so, the Court affirmed that the location where an individual maintains their closest connection is fundamentally a facts and circumstances analysis. With this in mind, taxpayers who have left California for more than a temporary or transitory purpose should consider carefully documenting their facts to support this conclusion for California personal income tax purposes.
Notably, this decision comes at a time when individuals and businesses alike are re-evaluating how and where they do business. As a result of the COVID-19 pandemic, many are exploring the possibility of permanent or semi-permanent remote working arrangements which could have broad residency implications for individual taxpayers if they choose to work or move across state lines, along with nexus implications for the businesses for which the taxpayers work.7 As reproduced in Appeal of Mazer, Appeal of Bragg provided the following lists of nonexclusive factors for consideration when determining an individual’s closest connection, which the OTA divided into the following three categories:
- Homeowner’s property tax exemption
- Automobile registration
- Driver’s license
- Voter registration/participation history
- Address used and state of residence claimed on federal/state tax returns
- Children’s school
- Bank and savings accounts
- Memberships in social, religious, and professional organizations
- Use of professional services, such as doctors, dentists, accountants, and attorneys
- Maintenance/ownership of business interests
- Professional license(s)
- Ownership of investment real property
- Presence/connections/residency as indicated by third-party affidavits/declarations
- Location and approximate sizes and values of residential real property
- Where the taxpayer’s spouse and children reside
- Taxpayer’s telephone records (i.e., the origination point of taxpayer’s telephone calls)
- Origination point of the taxpayer’s checking account/credit card transactions
- Number/general purpose (vacation, business, etc.) of days the taxpayer spends in California versus other states
Individuals should carefully consider these and other factors when assessing the support for the cessation of their California residency. Further, businesses should be mindful of how a remote work environment may impact their state tax nexus footprint. Remote employees may have unintended nexus and tax consequences for employers that should continually be evaluated during the prolonged COVID-19 pandemic.
1 Appeal of L. Mazer and M. Mazer, No. 19064883, California Office of Tax Appeals (Jul. 23, 2020).
2 The OTA noted that when a married couple filing jointly has determined that only one spouse is a California resident, but the other is not, they must jointly file a California nonresident return.
3 CAL. REV. & TAX. CODE § 17014(a)(1)-(2).
4 Appeal of Bragg, No. 2003-SBE-002, Cal. St. Bd. Of Equal. (May 28, 2003). In this decision, the California Board of Equalization listed several nonexclusive factors to assist in residency determination.
5 Id. See also Noble v. Franchise Tax Bd., 118 Cal. App.4th 560 (2004).
6 No. 2003-SBE-002, Cal. St. Bd. Of Equal. (May 28, 2003).
7 In response to the pandemic, California Governor Gavin Newsom issued Executive Order N-33-20 on March 19, 2020, requiring all residents to stay at home in order to prevent the spread of the virus. More recently, the FTB has published frequently asked questions which provide guidance as to the possible California franchise tax implications to corporations that previously had no connections with California but now have an employee indefinitely teleworking from California as a result of the Executive Order. Generally, for the duration of the Order, California will not treat a corporation in that situation as doing business for purposes of the California corporation franchise tax.
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Joshua “Josh” is a State and Local Tax (“SALT”) Principal in the San Francisco office of Grant Thornton LLP. Mr. Grossman specializes as a subject matter expert in California Corporation Income or Franchise Tax matters.
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