The California state flag flies alongside the U.S. flag.
SAN FRANCISCO — A state appeals panel has said the California Franchise Tax Board can’t reach beyond state borders to tax the earnings of a Texas radiologist by classifying him as operating a “unitary business” when he is working as an independent contractor for California-based customers.
Stat Radiology Medical Corporation began contracting with Xavier Garcia-Rojas in 2017. Under the agreement, StatRad sent image studies collected from California and elsewhere to Garcia-Rojas in Texas, where he analyzed the images and filed reports using the company’s software. Part of the deal required him to have medical licenses in 28 states, and StatRad paid for licensing fees in every state but Texas while also providing hospital privileges and credentials, computer hardware, a phone number and California malpractice insurance and contact information.
Court records indicate Garcia-Rojas told the IRS — while filing as a sole proprietorship — he earned more than $305,000 in 2018, $410,000 in 2019 and $382,000 in 2020. In July 2019 the Franchise Tax Board asked him to file a California tax return. He did so for those three years, paid what the board asked and then sought a refund, a request to which he said the board never responded.
Garcia-Rojas sued in May 2023, but in September 2024 San Francisco Superior Court Judge Richard Ulmer granted summary judgment to the board, finding Garcia-Rojas “operated ‘a sole proprietorship which carries on a unitary business’ ” because he “ran the same type of business or functionally integrated enterprise in California and elsewhere,” his “conduct within and without California was not so separate and distinct to qualify as separate business” and he “used StadRad’s software and other resources in the same manner notwithstanding which state report he worked on.”
That ruling prompted Garcia-Rojas to ask the California First District Appellate Court to agree Judge Ulmer erred because the board didn’t prove its unitary business claim. Justice Victor Rodríguez wrote the panel’s opinion, filed May 1; Justices Carin Fujisaki and Ioana Petrou concurred.
“The board did not cite any authority supporting its contention that a sole proprietor that engages in one business activity and receives compensation from one corporation — even when that corporation’s clients are found both in and outside of California — is a unitary business,” Rodríguez wrote. “Although it cites various cases, none apply the unitary business theory to a single person or sole proprietorship engaging in one business activity.”
The panel said the term "unitary business" in California has long been understood to describe at least two corporate entities with the same owner where integration is sufficient that value can be transferred between the entities. But while Garcia-Rojas can be said to operate a sole proprietorship, he is engaging in a single business activity.
“There must be separate business activities to unite,” Rodríguez wrote, adding the board failed to show those conditions existed. The panel reversed Judge Ulmer’s ruling and remanded the complaint, allowing Garcia-Rojas to recover the costs of preparing his appeal.
Because it resolved the appeal on that question, Rodríguez wrote, the panel didn’t address any remaining arguments from Garcia-Rojas.
Rodríguez further noted there may be other legal theories under which the board can tax Garcia-Rojas for the earnings derived from servicing California clients.
Garcia-Rojas is represented by Greenberg Traurig.
The Franchise Tax Board is represented by the California Attorney General’s Office.
