Screenwriter Subject to California Tax Even Though All Work Done in Arizona

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The California Office of Tax Appeals in the Matter of the Appeal of Blair S. Bindley, OTA Case No. 18032402[1] ruled that an Arizona individual who had a contract for screenwriting services for two California LLCs had California source income on which he had to pay tax, even though all services were performed in Arizona.

California, like many other states, has moved to pure market-based sourcing for apportioning sales in a business setting.  Under California Revenue & Taxation Code (RT&C) §25128.7, apportionment for the vast majority of businesses with California operations is based solely on the sales factor.  RT&C §25136(a)(1) assigns a sale to California to the extent that the purchaser of a service received the benefit of the service in California.

In this case the taxpayer argued that he had performed all of the services in California Arizona, so he did not have a sufficient connection with California to trigger a requirement to file a return and report the income to the Franchise Tax Board.[2]

California imposes its tax on any nonresident carrying on a business within the state of California (RTC §18501(a)).  The OTA opinion notes that nothing in the statute requires that the taxpayer be physically present in the state of California.[3]  The Court found that the taxpayer received income from California LLCs, with he and his sole proprietorship deemed to be conducting business in California, making the proprietorship’s income subject to apportionment under California’s apportionment rules.[4]

So now the question becomes where did the taxpayer’s buyer receive the benefit of the services provided, not where the taxpayer performed such services.  Under Reg. §25136-2(c)(2) provides that where a business is the taxpayer’s customers, the place where the customer receives the benefit of the services is determined under the following rules:

(A)The location of the benefit of the service shall be presumed to be received in this state to the extent the contract between the taxpayer [i.e., appellant] and the taxpayer’s customer[s] [i.e., Mindbender and Lakeshow] or the taxpayer’s books and records kept in the normal course of business, notwithstanding the billing address of the taxpayer’s customer, indicate the benefit of the service is in this state. This presumption may be overcome by the taxpayer or [FTB] by showing, based on a preponderance of the evidence, that the location (or locations) indicated by the contract or the taxpayer’s books and records was not the actual location where the benefit of the service was received.

(B) If neither the contract nor the taxpayer’s books and records provide the location where the benefit of the service is received, or the presumption in subparagraph (A)is overcome, then the location (or locations) where the benefit is received shall be reasonably approximated.

(C) If the location where the benefit of the service is received cannot be determined under subparagraph (A) or reasonably approximated under subparagraph (B), then the location where the benefit of the service is received shall be presumed to be in this state if the location from which the taxpayer’s customer placed the order for the service is in this state.

(D)If the location where the benefit of the service is received cannot be determined pursuant to subparagraphs (A), (B), or (C), then the benefit of the service shall be in this state if the taxpayer’s customer’s billing address is in this state.

The OTA opinion applies these rules, coming to the determination that since the LLCs are registered and located in California, the second test is met, with the benefit received in California:

Public records from the California Secretary of State provided by FTB show that both Mindbender and Lakeshow are registered and located in California. Moreover, appellant’s contracts with Mindbender and Lakeshow both list California addresses. Appellant also concedes that Mindbender and Lakeshow are California LLCs. Based on the evidence in the appeal record, we find that it was both reasonable and rational for FTB to conclude that both LLCs received the benefit of appellant’s services within California. Because we have determined that the LLCs received the benefit of appellant’s services in California under Regulation section 25136-2(b)(2)(B), there is no need to discuss the remaining cascading rules.[5]

The opinion summarized the findings as follows:

In sum, pursuant to the provisions of the UDITPA relating to the sale of services and the regulations thereunder, appellant’s physical presence does not determine whether he had income derived from California, but rather it is determined by where the benefits of appellant’s services were received.[6]

[1], May 30, 2019

[2] Ibid, p. 4

[3] Ibid, pp. 4-5

[4] Ibid, pp. 5-7

[5] Ibid, p. 9

[6] Ibid

Tax Analysts Reports That Conformity Bill Has Been Signed Into Law

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Not there was much question about the issue, but State Tax Notes (“Arizona Enacts Remote Seller, IRC Conformity Law,” State Tax Notes, June 4, 2019) reported this morning that Governor Ducey signed the income tax conformity/nexus tax bill (HB 2757) into law. The law, now designated as Chapter 273, Session Laws, 54th Legislature, First Regular Session, will go into effect absent the highly unlikely situation that a referendum petition is taken out and is successful regarding this law.

Arizona Legislature Passes IRC Conformity Bill, Awaits Governor’s Signature

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Although it took much longer than normal, and there was much uncertainty about what the Legislature would ultimately do in the end, the Legislature managed to pass an IRC conformity bill as part of the budget process.

HB 2757 scraped through both chambers with the bare minimum number of votes to clear each chamber.  It is expected that the Governor will sign this bill.[1]

Continue reading “Arizona Legislature Passes IRC Conformity Bill, Awaits Governor’s Signature”

iPad As A PDF Device For Continuing Education

I wrote last year about using the Kindle DX in CPE presentations. The DX was the a device that allowed full page viewing of PDFs, which eliminated the need for me to carry around printed manuals. It also suggested that participants might eventually have devices available that would allow the elimination of printed manuals without requiring having electric outlets available for each class participant

Continue reading “iPad As A PDF Device For Continuing Education”

Kindles and CPE Presentations – Some Thoughts

A bit of a Twitter conversation got started on using the Kindle for continuing education materials for CPAs. As I’m a CPE instructor that is actually using a Kindle DX for the presentations I give, I thought a share a few additional thoughts in a forum that allowed more than 140 characters.

I use the Kindle DX to hold the manuals I use during a full day CPE presentation. The Kindle 2, which is a smaller form factor like the original Kindle, does not show PDF files in their native format. That poses a major problem for me, since participants often want a reference to the page in their printed copy. Since the participants are still using a paper manual, I need a device that will let me see exactly what the participants see.

As well, any fancy formatting (such as tables or government forms) won’t tend to survive the reformatting when sent to the smaller device. Considering that one of Amazon’s target markets for the larger Kindle DX is the textbook market, it seems clear that, at least today, it’s the more reasonable device from a features standpoint.

That said, the support for PDF is not as robust as the support for standard Kindle books. You cannot create notes to attach to PDF files, and the Kindle reader doesn’t pay attention to bookmarks in the PDF file for navigation. As well, there is no built in zoom function. The best that a user can do is turn the device sideways, when it will go from showing a full page to showing the page full width in landscape mode. The device is built to automatically sense when the device is turned sideways, but it only reacts to such turns very slowly-at times so slowly as to make a user believe the device won’t recognize the rotation.

For participants the device would pose a couple of problems. A key one is that the Kindle DX costs $489-a significant cost that someone would have to absorb. Aside from use for CPE style textbooks, most CPAs would not have a reason to acquire the DX rather than the smaller (and cheaper) device. The Kindle 2 sells for $190 less than the DX.

As well, it’s probably only reasonable to use the Kindle for distributing CPE materials if all participants are using a Kindle. I doubt it would be practical for some participants to be using a Kindle and others to use a paper manual, at least unless the Kindle was a DX showing PDFs.

Getting materials on the Kindle also would be a bit troublesome with the current structure. There’s no easy way to “push” materials to a Kindle-remember it was designed by Amazon as a way to buy books from them. Materials that don’t originate with Amazon have to be loaded manually onto the Kindle either by emailing them to the user’s special address (for which there will be a charge) or by copying the file to the device after hooking it to the computer.

Copying a file is simple, but I doubt it will be obvious how to do it for users that aren’t computer savvy. You have to mount the Kindle as a drive using a USB connection. On Windows that means it will end up being given a drive letter that can’t be easily predicted, making “pure” step by step instructions impossible to write (on a Mac it will show up as a drive named Kindle in the Finder). As well, the PDF or Amazon book formatted file has to be copied into the documents directory on that drive.

I suspect that CPE administrators would end up spending considerable time, with the current structure, supporting participants who could not get the manual loaded onto their Kindle (presuming we’ve somehow solved the problem of getting them a device). Hopefully Amazon will come up with a “simplified” method for pushing out such materials, but for now it won’t be easy.

That said, the Kindle is a far superior device for viewing texts than a laptop. First, and most important, it doesn’t run out of power five hours after a full charge. A Kindle, because it uses e-ink, only chews up power when you turn a page-keeping a page displayed burns no power. Thus you don’t need power outlets at each desk.

Second, the display is much easier on the eyes than staring at a backlit laptop display all day for reading. Eye fatigue is a major problem when reading from backlit displays for a long period of time.

Third, the display does not wash out in bright light. Rather, it is virtually like paper in how it reacts to light-and, of course, the rooms currently being used for courses have to be ones in which paper manuals are readable.

We also have to remember that not all CPAs have laptop computers, even today. So even if texts were provided in computer friendly formats, there would be some participants that would not be able to “bring along” their computer to the course. Even for those with laptops, some are clearly not very portable. A power outlet has to be provided to each participant.

In Phoenix, another side effect that would not necessarily be very positive, is that a room full of laptops is going to generate a bunch of extra heat in the room (just touch the bottom of your laptop to see what I mean). Kindles don’t do that.

I suspect some sort of ebook reader is likely the future of all training materials. But I’m not sure we’ve yet hit the point where we have a fully workable solution-but it is one that those of us involved in CPE probably need to keep our eyes on.

We may soon, however, be at the point where it might be possible to offer an ebook manual as an option for participants. That is, they could optionally get a PDF manual in lieu of paper. The advantage to participants is they could have the material before class. And, for the organizations presenting, the advantage would be eliminating the cost of printing a physical manual.

I’m certainly not going back to hauling paper manuals in suitcases for when I am traveling to give CPE presentations. But I doubt I’ll be staring at a room full of CPAs holding Kindles looking back at me anytime soon.

CCH and Browser Requirements

Had an interesting back and forth with CCH on the browser requirements with their new tax research software. Their system requirements page lists as required Windows 98/2000/XP/Vista and Internet Explorer 6/7. If those were truly the requirements I would have to cancel out my CCH subscription.

Why? I have a policy in my office of not allowing users generally to run Internet Explorer due to the huge security problem that has been (and to some extent continues to be) ActiveX. The concept is so fundamentally flawed that it simply, in my view, rules out the use of IE by anyone not highly technically skilled.

That is, my users can’t reliably make the call on whehter or not it’s OK to allow an ActiveX control to be installed. As well, the fact that virtually any DLL will be loaded up by IE as an ActiveX control is a big security hole–hackers discover problems in programs that were never meant to be run as an ActiveX control and then use IE to run those programs and exploit their weaknesses.

As well, I do tax research on my portable devices (iPod Touch and Blackberry)–and those don’t run Internet Explorer, but they are rather dominant business portable devices. Losing that access would frankly be totally unacceptable.

I wrote CCH about this requirement and discovered, as I suspected, this was just a “suggestion” and that, in fact, Firefox runs it just fine. That’s not suprising, since the current CCH research system requirements exclude Vista. But it is disquieting, since it means CCH has reserved the right to simply foist blame on Firefox for any of their glitches, rather than recognizing that a significant and growing component of the market uses Firefox.

Of course, given the history they can (and likely would) do the same thing with Windows 7 and Internet Explorer 8, even though those will likley be the standard Microsoft shipping setup shortly after they’ve rolled out the new software.

Producing a Weekly Church Podcast

I’ve been involved impossible assembling up the weekly podcast at Prince of Peace Lutheran Church in Phoenix for the last couple of years and I thought it might be useful for others thinking of doing this to see what we do.

We look to publish only the sermon since that avoids all the issues involved with rights for music. As well, it’s a lot tougher to properly record music as opposed to spoken words.

The sermon is recorded off the church’s standard audio output. We now have a dedicated digital audio recorder but until recently we were just taking a plain audio out line to a laptop computer with Audacity handling the recording itself. The old method actually worked surprisingly well though the unshielded output does pick up buzzes from time to time. But that problem is relatively easily fixed in final production.

The first step in final production is to clean up the audio. I use a combination of the open source Audacity editor, the Conversations Network’s Levelator and the commercial program SoundSoap 2 for noise removal. Audacity actually can handle noise removal on its own and while I have a slight preference for Sound Soap’s quality, if I didn’t need it for other nonchurch work I’d likely stick with Audacity alone.

The raw recording is first cut to include only the sermon using Audacity. I then export to a WAV file and give it to the Levelator. That program helps assure we get a more consistent volume throughout the sermon, even if the speaker doesn’t keep a constant distance from the mike.

Once the levels are set, I think run the file through SoundSource to eliminate relatively constant background noise. It gives a bit of “cleaner” sound to the resulting audio.

We have a standard intro and closing that we have already recorded for each podcast, and those exist as an Audacity “project” file we use as the starting point for each Sunday’s podcast. We have the intro and closings as separate tracks in Audacity and they can be moved independently–useful since no two sermons are exactly the same length.

I then use the import function in Audacity to bring the sermon into the week’s project file. At that point it’s simply a matter of moving the segments into proper position. Once that is done we are ready to export to MP3.

One additional piece of software has to be obtained to export to MP3 from Audacity–but it’s free. You need to get the Lame MP3 encoder and then tell Audacity in its preferences where the file is located (it’s a licensing issue, which is why Audacity can’t ship with it). We export our MP3 at 64Kbps mono, which will give the same sound quality as 128K stereo (what became the defacto standard for music until recently).

The completed file is brought into iTunes to add a graphic that appears on iPods, and you can insert the other information (name of the week’s podcast, name of the podcast, the speaker’s name, etc.) in iTunes as well. You do that by simply starting to play the file in iTunes, stop the play and then hit either Control-i (Windows) or Command-i (OSX). You can then add the appropriate “extra” information.

We use Liberated Syndication to host our podcast. They offer relatively low cost plans that don’t have a bandwidth cap (a key advantage if one podcast episode suddenly get linked to by a popular site). Their $5 per month plan is more than sufficient for a weekly sermon. The cap they do impose is on data stored for the current month–outside one month, even the storage is unlimited.

A Computer Inventory

Decided it was time to inventory the PCs around me–and noticed we’ve accumulated a number of Macs these days.

My office actually has more Macs than anything else, which is a bit unusual for a CPA firm. We run Windows in virtual machines on them, but it allows us to use OSX for browsing and the like, while using Windows for the tax applications.

My partners and our full time staff have iMacs. I have a MacBook Pro and we have a MacBook that we use as a road machine. In addition we have some more “traditional” CPA firm computers–we have three Dells desktops around for various purposes.

At home and on the road I most often have the MacBook Pro with me. In addition we have a bit of a collection–one iMac, two Mac Minis (one Intel based and one PowerPC), an aluminum MacBook and two iBooks. As well, I have the Asus eeePC netbook running Linux.

The mix of computers means I run a bunch of operating systems, bouncing constantly between OSX (Leopard and Tiger), Windows XP, Windows Vista, Windows 7 and, on the eeePC, Xandros Linux. Each one has things it excels at, and items for which it is less than optimal.

The one real constant across the OSs I run is Firefox–it is my browser of choice in each of them.

Traveling with a Netbook

One of the most useful little technology tools I’ve picked up this past year is the Asus Eee PC, an early netbook. I have the Eee PC 4G Surf, which runs a variant of Linux (Xandros modified by Asus) which comes with a whopping 4 gigabyte flash “hard” drive, a 7″ screen and a similarly small keyboard.

I actually can live with the keyboard, and the screen has proven to work for me as well. I have used before (the office suite on the system) and so didn’t have a learing curve there–and I always use Firefox (I do not run Internet Explorer on my systems for anything except things like Windows Update–ActiveX is simply too dangerous for me to work with it–and there’s nothing like NoScript for IE) so the browser wasn’t a problem.

The size is a huge advantage on an airplane where I can easily edit a document or spreadsheet and still have lots of room on the tray in front of me.  It also got along well with my Verizon 3G USB cellular modem after a little digging using Google–it actually took less time to set up than the same modem did under OSX and Windows.

Amazon has it right now for around $285, which makes it relatively cheap. It also has been quite the conversation starter.  While the limited space means it won’t work as a primary PC, it’s more than powerful enough for the type of office work most of us need to do–and especially what I need to do on a plane.

It fills a niche between the iPod Touch (great web browser) and Blackberry (great email tool) and the full laptop–when I need more power or flexibility than the small devices provide but don’t want to deal with the overhead of the larger devices–especially since the Eee PC boots in seconds, while OSX and, especially, Windows take a lot longer to be ready to go.