Texas-based teleradiologist wins court battle over California income taxes

A Texas teleradiologist recently won a key court battle with broader implications after California attempted to charge him income taxes over imaging reads he provided for patients in the state. 

Xavier Garcia-Rojas, MD, PhD, MBA, earned income through an independent contractor agreement with a California-based national imaging firm. He has provided interpretation services for hospitals nationwide, including California and 27 other jurisdictions, legal experts noted in a recent summary of the case. 

However, despite the radiologist having “never stepped foot” in California during the tax years in question, the state invoked the “unitary business” doctrine to try and tax him. An appeals court quashed this line of thinking on May 1, siding with the radiologist and against the Golden State. 

“This decision reinforces important limits on California's ability to stretch the unitary business doctrine beyond its intended scope," attorneys Bradley R. Marsh and Jennifer A. Vincent, with law firm Greenberg Traurig, which represented the rad in the case, said in a joint statement issued May 5. "The appeals court made clear that a nonresident providing remote professional services does not automatically become part of a unitary business that is then subject to California taxation."

The doctrine charges that certain multistate businesses operating as integrated enterprises can be classified as “unitary,” according to law firm Gordon Feinblatt. With this, related businesses aren’t taxed separately based on their individual state activities, but instead the income is apportioned across multiple states. Each state would then tax their proportionate share of a business’s total income. 

The California Franchise Tax Board had charged that Garcia-Rojas and his sole proprietorship could be combined to constitute a unitary business, Gordon Feinblatt noted. With this, the state believed it could tax the radiologist since some patients whose images he interpreted happened to reside in California. 

However, the California Court of Appeal rejected these arguments, charging that the Franchise Tax Board failed to establish that the rad operated a unitary business both within and outside of the state. A unitary business is typically made up of multiple parts and segments that are “closely connected and work together, rather than separate, independent operations,” Greenberg Traurig noted. The appeals court agreed with the rad’s representatives that a taxpayer conducting a single activity cannot be a unitary business. 

With the decision, the appellate court reversed a previous summary judgment granted in favor of the state, thus remanding the matter back to a San Francisco Superior Court. 

“In [Garcia‑Rojas v. Franchise Tax Board], by rejecting the FTB's attempt to apply the unitary business doctrine to a single‑person, single‑activity practice, the court has now limited California's ability to automatically apportion income earned by out‑of‑state service providers,” Greenberg Traurig noted in its news announcement. 

Garcia-Rojas was doing contract work for San Diego-based StatRad at the time of the tax years in question (2018 to 2020). The radiologist had paid about $48,000 in taxes, penalties and interest to the California tax authority. In April 2020, he filed a refund claim, asserting he didn’t owe anything related to his contract work for StatRad, the Metropolitan News-Enterprise reported May 4. 

However, after the FTB failed to respond to his claim, he subsequently filed a complaint against the board in 2023 seeking a refund. A San Francisco Superior Court judge deemed the doc’s income was properly taxed in 2024, later leading to this month’s appeal decision.