Source-state taxation

Source-state taxation is the constitutional basis for a state to tax non-residents on income earned from activities within that state. For wages and deferred compensation including equity vests, the source is generally the state in which the services were performed. A former resident who earned RSUs while working in California and later vests those RSUs as a Texas resident still owes California tax on the California-sourced portion. Reciprocity agreements between certain states simplify payroll, but no such agreements exist between California, New York, and most other states.

Example: a senior engineer worked at a San Francisco office for two of the four years of an RSU grant, then worked remotely from Austin for the final two. The vest spanning that period is 50% California-source. California taxes that half at up to 13.3%.

Common mistake: assuming that moving mid-grant shifts all subsequent vests to the new state. Only the post-move workdays escape the original state.

Source-state taxation matters at relocation, at remote-work arrangements that straddle state lines, at divorce involving division of equity, and at estate planning for deferred comp payments.