when are dividends "source income"?

Income from intangibles such as stocks, bonds, bank accounts, CDs, etc. has its source at the residence of the owner, unless the intangible has acquired a business situs somewhere else. Dividends and capital gains from stocks held as an investment by an individual are sourced at the individual's residence. See Calif. Rev. & Tax. Code Sec.

17952. So HP's dividends are not California source income to a nonresident; they have their source at the residence of the stockholder, which in your example is Illinois. Owning stock in General Motors will not make you a Michigan taxpayer. An intangible has a business situs if it is an asset of a trade or business carried on in a particular location. For example, interest from the bank accounts or accounts receivable of a business, e.g. a sole proprietorship or flowthrough entity, has its source at the business location. An S corporation is different, because the income passes through to the stockholder as if it had been earned by him or her. The source of that income is the place where the S corporation carries on its business. If the corporation does business in more than one state, the portion attributed to each state is determined by allocation and apportionment. If an S corporation pays a dividend, i.e., distributes earnings and profits that accumulated at a time when the corporation was a C corporation, the dividend has its source at the stockholder's residence. Distributions of S corporation income that has already been taxed at the stockholder level are not dividends and are not taxable. Katie in San Diego