Texas teleradiologist wins California income tax appeal

A Texas-based radiologist has won an appeal in a California income tax dispute tied to remote interpretation of imaging studies

The California Court of Appeal reversed a San Francisco Superior Court judgment that had granted summary judgment to the California Franchise Tax Board. The appellate court held that the board had not shown Xavier Garcia-Rojas, MD, operated a unitary business within and outside California.

Garcia-Rojas lives in Texas and provided radiology interpretation services remotely as an independent contractor for a national radiology services company. The court opinion states that he interpreted studies from his home using software and resources provided by the company, including studies for hospitals in California and other states.

At issue was California’s use of the unitary business doctrine. Under California regulation 17951-4(c), a nonresident sole proprietor carrying on a unitary business within and outside the state may have California-source net income determined under apportionment rules.

The Franchise Tax Board argued that Garcia-Rojas’ work constituted a unitary business because he performed the same type of service across state lines and used the same company systems regardless of where the patient or facility was located. A trial court accepted that argument in 2024.

The appellate court disagreed. It said the unitary business theory has historically applied to multiple commonly owned and integrated business entities, not to a single sole proprietor performing one business activity.

Greenberg Traurig, which represented Garcia-Rojas, said the decision limits California’s ability to apply the unitary business doctrine to nonresidents who provide professional services remotely.

“This decision reinforces important limits on California’s ability to stretch the unitary business doctrine beyond its intended scope,” Greenberg Traurig attorneys Bradley R. Marsh and Jennifer A. Vincent said in a joint statement.

The ruling does not fully end the dispute. The appellate court reversed the summary judgment and remanded the case for further proceedings. It also said it expressed no opinion on whether the Franchise Tax Board could tax Garcia-Rojas under a different legal theory.

Tax advisers have described the decision as important for remote professionals. Spidell Publishing noted that the court held a sole proprietor engaged in one business activity and compensated by one corporation was not a unitary business, even if clients were located both inside and outside California.