Example: A property management company collects rents from tenants for a nonresident California property owner. The property management company is required to withhold 7 percent of all payments associated with rents paid to nonresident owners when the payments are greater than $1,500 per calendar year. The property management company may deduct its management fees and then calculate the 7 percent withholding based on the amount to be sent to the property owner.
Method 1: Allocation By Payer in Accordance with Contract: If by contract an athlete or entertainer is required to perform services in California on behalf of a sponsor, the payments received on the contract are considered to be personal services income subject to tax by where the services are performed, which is California. The payer may make a reasonable allocation of the California source income based on the contract and in accordance with the actual number of California performances, and should withhold California tax on the California payment.
For instance, where a contract requires an athlete to appear at a California tournament wearing the sponsor's clothing bearing its logo or using a sponsor's golf clubs, that athlete has performed a service on behalf of the sponsor in California, and the income is subject to California tax. If the contract requires appearances in California and other states, a portion of the endorsement income is California source income and subject to California income tax. The payer-sponsor should make a reasonable allocation of the payment based on the facts and circumstances of each contract, and withhold California tax on the California payment.
Method 2. Nonresident Income Allocation Worksheet: The withholding agent may request that the payee complete FTB Form 587 to determine the amount of California source income subject to withholding. The withholding agent uses the information provided by the payee in FTB Form 587 to determine what portion of the payment is subject to withholding.
For instance, a withholding agent sends FTB Form 587 to an out-of-state independent contractor before making a payment for services. The total contract amount is $100,000. The nonresident contractor returns FTB Form 587, certifying that $60,000 is for services performed in California and $40,000 is for services performed in another state. The amount of withholding would be:
$60,000 California source income x 7 percent Withholding rate = $4,200. Note: If the amount subject to withholding ($60,000 in the example above) is equal to or less than $1,500 for the calendar year, withholding is optional.
Days spent acquiring knowledge, skills, or necessary experience are not considered work days. Professionals and others who bill by the hour should allocate compensation based on the number of billable hours worked in California to the total number of billable hours related to the particular service.
Except as set forth in California Code of Regulations, Title 18, sections 1506, 1521, 1524, 1523, 1546, 1548, 1549, 1550, 1551 and 1553, under California sales and use tax laws, charges for labor or services for installation are not subject to sales or use tax. Payments for installation are subject to withholding. Charges for designing, consulting, performing feasibility studies, evaluating bids, and providing training services are also considered service activities if they are separately stated and not part of the sale of tangible personal property. Payments for repairs are subject to withholding, except for parts that are separately stated on the invoice. As payments for mandatory maintenance contracts or warranties are subject to sales tax, even if the cost of the maintenance contract or warranty is separately stated, the payments are not subject to withholding. Payments for maintenance contracts or warranties not subject to sales tax are subject to withholding.
Cal. Code Regs. Tit. 18, § 18662-5
2. Renumbering from 18662-18810(g) filed 12-14-71; procedural amendment filed 12-16-71; effective upon filing (Register 71, No. 51).
3. Renumbering of Section 18662(g) to Section 18662(e) filed 4-9-81; designated effective 6-30-81 (Register 81, No. 15).
4. Renumbering and amendment of Section 18662(e) to Section 18662-5 filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34).
5. Editorial correction (Register 83, No. 19).
6. Change without regulatory effect renumbering and amending former section 18805-5 to section 18662-5 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
7. Repealer and new section heading and section and amendment of NOTE filed 3-10-2014; operative 7-1-2014 (Register 2014, No. 11).
8. Change without regulatory effect amending subsection (k)(2), adding subsection (k)(5)(D), repealing subsection (k)(5)(G), relettering subsections and amending newly designated subsection (k)(5)(G) and subsections (k)(6)-(7) filed 12-9-2014 pursuant to section 100, title 1, California Code of Regulations (Register 2014, No. 50).
9. Amendment of subsections (i)-(j), (k)(2) and (k)(6) filed 10-8-2019; operative 10-8-2019 pursuant to Government Code section 11343.4(b)(3) (Register 2019, No. 41).
Note: Authority cited: Section 19503, Revenue and Taxation Code. Reference: Section 18662, Revenue and Taxation Code.
2. Renumbering from 18662-18810(g) filed 12-14-71; procedural amendment filed 12-16-71; effective upon filing (Register 71, No. 51).
3. Renumbering of Section 18662(g) to Section 18662(e) filed 4-9-81; designated effective 6-30-81 (Register 81, No. 15).
4. Renumbering and amendment of Section 18662(e) to Section 18662-5 filed 8-19-82; effective thirtieth day thereafter (Register 82, No. 34).
5. Editorial correction (Register 83, No. 19).
6. Change without regulatory effect renumbering and amending former section 18805-5 to section 18662-5 filed 11-23-98 pursuant to section 100, title 1, California Code of Regulations (Register 98, No. 48).
7. Repealer and new section heading and section and amendment of Note filed 3-10-2014; operative 7-1-2014 (Register 2014, No. 11).
8. Change without regulatory effect amending subsection (k)(2), adding subsection (k)(5)(D), repealing subsection (k)(5)(G), relettering subsections and amending newly designated subsection (k)(5)(G) and subsections (k)(6)-(7) filed 12-9-2014 pursuant to section 100, title 1, California Code of Regulations (Register 2014, No. 50).
9. Amendment of subsections (i)-(j), (k)(2) and (k)(6) filed 10-8-2019; operative 10/8/2019 pursuant to Government Code section 11343.4(b)(3) (Register 2019, No. 41).