Non-residents and resident individuals eligible for the other state tax credit who have income or loss from a trade or business activity conducted within and outside California generally must apportion their income in accordance with the provisions of R&TC Sections 25120 through 25141 (see Cal. Code Regs., tit. 18 section 17951-4). Items of income or loss that would be treated as no business income under those sections if earned by a corporation should be sourced using the normal sourcing rules that apply to individuals under R&TC Sections 17951 through 17955, and reported on the appropriate line of Schedule CA (540) or Schedule CA (540NR). Individuals complete only Schedule R-1, R-2, and lines 17, 18a, and 18b on Schedule R. Enter on line 17 the total income from the trade or business after any adjustment for federal and state differences. Non-residents or part-year residents should enter the amount from line 18b on Schedule CA (540NR), Part II line 12 or line 17, column E. Note: In completing these schedules, the term “corporation” should be read as “apportioning business activity.”

If an apportioning trade or business is (1) operating as a sole proprietorship owned by a non-resident individual or (2) operating as a single-member disregarded LLC owned by a non-resident individual and therefore treated as a sole proprietorship, for income arising from activities that occur both within and outside California, the single-sales factor formula must be used to determine the California source income of the individual on Schedule R-1. For more information, see Cal. Code Regs., tit. 18 section 17951-4(c)(2).

Non-resident individuals with service or intangible income from a trade or business or profession may have California source income if they have income from California as result of market assignment. See market assignment information in the General Information section of the Schedule R instructions for more information:

The following is an excerpt from an article in FTB Tax News, November 2019.

Under the market-based sourcing rules that went into effect January 1, 2013, a non-resident independent contractor's income is sourced to the location where the customer received the "benefit of the services." If the non-resident performs services from her or his home state, and the benefit is received in California, an independent contractor operating as a sole proprietor will have California source income under California Code of Regulations (CCR), title 18, Section 17951-4(c), when the business is unitary.

The independent contractor who operates as a sole proprietor has a unitary business within and without California when there is an interrelationship between in-state and out-of-state activities. A business is deemed unitary by satisfying one of two tests to determine whether the activities in and out-of-state are sufficiently interrelated, dependent upon, or contributory to one another. First, under the 3-unities test there must be unity of:

Under the alternative contribution or dependency test, a business is unitary if the operation of the business within California depended upon or contributed to the operation of the business outside of the state.

For example, a non-resident writer who lives in Arizona and contracts to write screenplays for California LLCs is operating a unitary business within and without California as the owner of a sole proprietorship. (Appeal of Blair S. Bindley, 2019-OTA-179P, May 30, 2019.)

Benefit of the Service - Once the sole proprietor qualifies as operating a unitary business, the amount of income sourced to California depends upon where the purchaser of the service receives the benefit of it, according to R&TC Section 25136-2(a)(1). Regulation 25136-2(a)(1) provides instructions and examples for determining the location of the benefit of the service.

 For information about when a corporation or a business entity is the independent contractor’s customer, see the rest of the Tax News article, which can be found at: https://www.ftb.ca.gov/about-ftb/newsroom/tax-news/november2019/index.html