The Long Arm of the California Franchise Tax Board: California Taxation of Individuals Living Outside the State

Have you been contacted by the California Franchise Tax Board, even though you no longer live or work in California? You may have worked at one point for a technology company in Silicon Valley and then relocated to Texas or even overseas to Europe. If the Franchise Tax Board has sent you a notice indicating a balance due on your account, chances are the Franchise Tax Board may still think you are a California resident, and if so, the burden is on you to produce contemporary, documentary evidence of departing California. The taxing authority is a document driven agency, meaning resolving the case lies with the documents, not a taxpayer’s self-serving, and unsupported testimony.

Another possibility is that you are a nonresident (e.g., the Franchise Tax Board does not dispute that you moved to Nevada), but the Franchise Tax Board takes the position that you have California source income and owe the tax.

Just like reading a detailed map or playing the old-fashioned game Clue, solving a tax controversy case is all about the details. It is important to read the Franchise Tax Board correspondence and notices because they indicate what has happened to date, and importantly, where you are in the process today (e.g., audit, protest, or collection). Often, the notices provide deadlines to respond, and so it's key to read the fine print and act timely. Sometimes, tax professionals are brought in late in the game, and the case must be worked backwards to obtain relief, which can be harder and a slower process. Getting in at the audit level (the start of the case) has the advantage of working with a clean slate where the taxpayer has not made an admission or taken a position, which the Franchise Tax Board later can be used against you. Even so, a taxpayer may have to file a written protest and go to the next stage (Protest) to obtain a favorable result, if the case presents complex or unique issues.

Eventually, if the case goes on long enough, the Franchise Tax Board will assess the taxes, and it becomes a collection case. At that point, the Franchise Tax Board may file a Notice of State Tax Lien to perfects its interest. Importantly, the Franchise Tax Board collection statue is 20 years. (Cal. Rev. & Tax Code § 19255.) The Franchise Tax Board plays the long game, unlike the IRS which only has a 10-year collection statute of limitations period. (I.R.C. §6502.) A taxpayer may outlive the IRS debt, but this may not be true with the Franchise Tax Board. And the debt survives after death because the Franchise Tax Board becomes a creditor of the person's estate, which your heirs or beneficiaries will have to deal with. The Franchise Tax Board actively searches for open probate cases and files creditor claims seeking payment. Some things are just not easy.

Leaving California doesn't always take you out of the Franchise Tax Board's reach. California taxes residents on their worldwide income (regardless of source) and nonresidents only on income from California sources. (Cal. Rev. & Tax Code §§ 17041 & 17951.) Part-year residents are taxed on their income earned while a resident of this state, as well as all income derived from a California source. (Cal. Rev. & Tax Code §§ 17041(b) & (i).)

For a nonresident, the Franchise Tax Board will focus on two questions.

1. Are you actually a nonresident? California treats you as a resident if you're in the state for anything more than a "temporary or transitory purpose," or if you're domiciled there and away only temporarily (Cal. Rev. & Tax. §17014.) An example of a nonresident is a person simply passing through the state, here for a brief rest or vacation, or here for a short period of time to complete a job, transaction or contact work.

The Franchise Tax Board decides this by weighing your "closest connections": where your home, family, driver's license, voter registration, bank accounts, doctors and professional licenses are. Moving your mailing address isn't enough. Taxpayers must check off enough factors to qualify for non-residency status, and the analysis is surprisingly strict because California does not want to lose an important tax base. The state in which the client has the closest connections during the tax year is their state of residence. (Appeal of Stephen D. Bragg, 03-SBE-002, May 28, 2003.) Each tax year stands on its own, so a taxpayer can be a California resident in one year not another.

Often, clients have houses in more than one state, such as California and Oregon or possibly Texas. Another important concept to understand is domicile, and there is a difference between domicile and residency. A taxpayer's domicile is "the place where an individual has his true, fixed, permanent home and principal establishment, and to which place he has, whenever he is absent, the intention of returning." A person can have more than one residence only one domicile at a time. (Cal. Code Regs., tit. 18, §17014(c).) The incidents of taxation turn on a person's domicile.

You are presumed to be a California resident if you spend more than nine months in the state for a non-temporary purpose. (Cal. Code Regs., tit. 18, §17014(c).) Residency is determined on a year-by-year basis. Often, taxpayers will track their "time" on an excel worksheet or google calendar in an attempt to outwit the Franchise Tax Board, but the it digs deeper and will ask for credit card statements and bank statements. Then the Franchise Tax Board does a bank deposit analysis to examine your daily charges to track your days spent in California (e.g., how many times you bought coffee at Starbucks in Silicon Valley). It’s a sneaky way to build up a case but it works. At that point, the client's "excel worksheet" may become a false document, which can turn the case push it into settlement.

California Franchise Tax audits, especially residency audits, are not fun, and unless the taxpayer has a clear winner, the cases are often resolved at the Franchise Tax Board Settlement Bureau where the taxpayer makes a settlement offer. Do not expect the Franchise Tax Board to give up easy on a residency audit because both sides point to different Bragg factors to prove their case. If you want to avoid an Franchise Tax Board audit, the short answer is to get out of California.

2. Is the income from a California source? Cal. Rev. & Tax Code § 17951 provides, for purposes of computing taxable income, nonresidents need only include gross income from sources within this state. The regulations thereunder specify the rules for determining when an item of income shall be determined to be sourced to California. For example:

• Compensation for personal services (e.g., wages) are sourced to where the services are performed. (Cal. Code Regs., tit. 18, § 17951-5(b).)   

  
  

• Restricted stock options (RSUs) earned partly while you lived or worked in California may be allocated to California. (See e.g., Appeal of J. Otting and Y. Otting (2026-OTA-403P) (RSUs earned by former CEO who moved to Nevada were California source income where RSUs earned through work performed in California.))

Practical takeaway: Document your move clearly, keep a day-count log of any work done in California, and plan the timing of equity and deferred compensation before you leave.

This is general information, not legal advice for any particular situation.