Many employees receive stock options as compensation from their employers. When receiving this type of compensation, the state tax implications may not be at the forefront of the employees’ minds, especially where it may be years between when the options are granted and when the options actually result in recognized income. However, failure to consider the state tax implications when stock options are granted may lead to unanticipated and sometimes costly consequences in this unsettled area of law. A recent opinion from the California Office of Tax Appeals (“OTA”) illustrates this point. Matter of Hall, 2025-OTA-113 (Cal. OTA Issued Dec. 13, 2024).

The Facts: Appellant served as president of Monster Beverage Company (“MBC”) from 2007 to 2013 and as chief brand officer of MBC in 2014. From 2009 to 2013, while Appellant was a resident of California, MBC granted Appellant non-qualified stock options (“NSOs”) and restricted stock units (“RSUs”). In December 2013, Appellant moved to Hawaii. Thereafter, in September 2014, the RSUs that Appellant received vested, and Appellant exercised his NSOs.

On Appellant’s 2014 California nonresident return, he reported none of the income that he recognized from the exercised NSOs and vested RSUs as California source income. Three years later, California commenced an examination of Appellant’s returns, during which it determined that the exercised NSOs and vested RSUs resulted in California source income because they were attributable to personal services performed by Appellant in the State. To determine the amount of income sourced to the State, California applied a ratio of California working days to total working days – resulting in a total tax assessment of $674,452 plus interest. Appellant appealed the assessment. 

The Decision: In a nonprecedential opinion, the OTA first reviewed the taxability of NSOs and RSUs, identifying three critical points under California law: (i) income earned from the exercise of NSOs and the vesting of RSUs is treated as compensation for services; (ii) if an NSO does not have an ascertainable fair market value at grant, the grantee recognizes income in the taxable year the option is exercised; and (iii) taxable income from RSUs is generally taxable in the year the RSUs vest. Applying these points of law to Appellant, the OTA found “no dispute” that Appellant recognized income from the exercised NSOs and vested RSUs. Thus, the only issues remaining were: (1) whether the income Appellant recognized was subject to California income tax if Appellant was a nonresident at the time of exercise/vesting; and (2) if so, whether the State’s working day sourcing methodology was reasonable.

The OTA determined that it was “immaterial” that Appellant ceased being a California resident in 2014 because “the income from the NSOs and RSUs is treated as compensation for personal services… performed in California” between 2009 and 2013. Further, the OTA determined that the income at issue was reasonably sourced using the standard methodology of California working days to total working days – a methodology which the Appellant failed to argue, or show was incorrect.

Last, the OTA addressed Appellant’s claim that he was denied procedural and substantive due process because his ability to claim a credit for taxes paid in Hawaii was foreclosed because the statute of limitations to file such a claim in Hawaii had expired. The OTA determined it lacked jurisdiction over this claim, finding as a general rule that its jurisdiction is “limited to determining the correct amount of a taxpayer’s California [tax liability].” 

The Takeaway: The Appellant would have benefited from considering the state tax implications and broader multistate issues of receiving stock options at the time of grant. If such consideration had been given, the Appellant could have at least tracked working days closely to avoid over-allocation to California and potentially timely sought a credit from Hawaii. 

The importance of considering the state tax implications of stock options as compensation cannot be overstated, especially when considering that tax treatment varies by state. For example, when determining the portion of income from NSOs earned by nonresidents that is subject to tax, California looks to the taxpayer’s activities during the period from the grant of the NSOs to when they are exercised, while New York looks to the period from the grant to when the NSOs vest. 

Taxpayers filing in various jurisdictions should take care to track their stock options, their working days, and consider credits for taxes paid in the various jurisdictions in a timely manner.