California's tax nexus rules determine when businesses must register for sales tax, income tax, and employment taxes in the state. Companies domiciled or incorporated in California automatically have nexus and must register from formation, while out-of-state businesses trigger registration requirements by crossing specific thresholds.
Understanding these thresholds is crucial because crossing them creates immediate compliance obligations and potential penalties for non-registration. California uses different triggers for different tax types:
Each operates independently, so you could owe one type of tax without owing others.
California adjusts income tax factor thresholds annually for inflation, and the Franchise Tax Board publishes updated amounts each year. The $500,000 sales tax threshold remains fixed but could change through future legislation.
California establishes sales tax nexus through economic activity thresholds and physical presence triggers. The state's $500,000 threshold is among the highest in the nation, but once crossed, businesses face immediate registration and collection obligations with strict penalties for non-compliance.
California's economic nexus rule requires businesses with more than $500,000 in sales to California customers during either the current or previous calendar year to register and collect sales tax. This threshold applies to total sales of tangible personal property delivered into California, regardless of whether the business has any physical presence in the state.
The measurement period covers either calendar year, meaning businesses must monitor their California sales continuously throughout the year. Unlike many states, California includes marketplace sales in its personal threshold calculation—sales through Amazon, eBay, or other platforms count toward your $500,000 limit even when the marketplace collects tax on your behalf.
Once you exceed $500,000 in California sales, your obligation to collect sales tax begins immediately with your next California sale. The California Department of Tax and Fee Administration (CDTFA) expects registration before the next taxable transaction occurs.
Certain business activities create a physical nexus in California, establishing immediate tax obligations regardless of sales volume:
Physical presence creates sales tax nexus instantly, making the $500,000 economic threshold irrelevant for businesses with any California footprint.
Be sure to register for California sales tax before you need to start collecting tax. Registration occurs through the CDFTA, where businesses provide detailed information, including entity structure and the nature of goods or services sold.
California assigns filing frequency based on tax volume—typically monthly for larger sellers and quarterly or annually for smaller ones. Returns and payments are generally due by the last day of the month following the collection period.
California imposes income tax on corporations and LLCs electing corporate tax treatment when they meet "doing business" thresholds established under Revenue and Taxation Code Section 23101. The state uses inflation-adjusted factor tests that capture businesses with substantial California economic activity.
For tax year 2024, California establishes "doing business" nexus when:
The Franchise Tax Board adjusts these dollar thresholds annually for inflation, publishing updated amounts each December for the following tax year. The 25% rule captures smaller businesses whose California activity represents a significant portion of total operations, even if dollar amounts fall below the absolute threshold.
California imposes franchise tax obligations on all businesses "doing business" in the state, with a minimum franchise tax of $800 annually, regardless of income levels or profitability. This minimum applies from the first year of nexus and continues annually while nexus exists.
Federal law provides limited protection from California income tax for businesses that only solicit orders for tangible personal property approved and shipped from outside California. However, this protection disappears when you:
California interprets P.L. 86-272 narrowly, making protection unavailable for most modern business activities, including SaaS, consulting, and technology services.
Once income tax nexus is established, businesses must register with the Franchise Tax Board and file annual returns. Corporations file Form 100 (C corporations) or Form 100S (S corporations), while LLCs file Form 568. Filing deadlines are generally March 15 for corporations and April 15 for other entities.
Employment tax nexus in California is straightforward: hiring any employee who performs work physically within California creates immediate tax obligations, regardless of revenue or other activity levels.
Any employee working from a California location—whether full-time staff, part-timers, seasonal workers, or remote hires—establishes employment tax nexus. California applies strict standards in classifying employees versus contractors under the "ABC" Test established by AB5, with misclassification bringing additional compliance risks.
California's Assembly Bill 5 (AB5) established the "ABC Test" for worker classification, making it extremely difficult to classify workers as independent contractors. To qualify as contractors, workers must meet all three criteria:
Misclassification triggers significant penalties, back taxes, and potential wage and hour violations under California labor law.
Employment nexus requires registration with the California Employment Development Department (EDD) to handle payroll taxes, unemployment insurance, state disability insurance, and employment training tax. Businesses must register for employer payroll tax account numbers to remit payroll taxes and report wage details through quarterly filings.
Workers' compensation insurance coverage is required under California law for all employers, even with just one employee. Employers must also comply with California's minimum wage, anti-discrimination, paid sick leave, overtime, and other employment-related laws.
California's nexus framework addresses digital economy realities, capturing modern business activities while balancing compliance requirements across traditional and digital business models.
California's sales tax treatment of digital products creates compliance complexity:
The $500,000 economic nexus threshold applies to all taxable California sales, including any digital products determined to be subject to sales tax.
Remote employees working from California create immediate employment tax nexus and may trigger income tax nexus if California payroll exceeds factor thresholds or represents 25% of the total company payroll.
California's Marketplace Facilitator Act requires marketplace operators like Amazon or eBay to collect and remit sales tax on behalf of third-party sellers when total sales exceed $500,000. This transfers compliance responsibility from individual sellers to platform operators.
Affiliate marketing relationships or drop-shipping arrangements with California-based partners can create physical presence nexus requiring immediate registration, regardless of revenue levels.
Reaching tax or employment nexus in California may also result in the need for foreign registration with the Secretary of State. Although California doesn't have specific secretary of state nexus thresholds, states are more likely to consider a company as "doing business" if it's already paying taxes there. Understanding tax nexus thresholds helps identify when Secretary of State registration may also become necessary.
Once any California nexus threshold is crossed, immediate registration and ongoing compliance become mandatory, with penalties and interest accruing from the date nexus was established.
Here's the tax registration timeline:
California expects detailed documentation supporting nexus calculations. This includes:
California imposes penalties for late registration and non-compliance. Interest accrues from the date tax was originally due, and departments can assess back taxes for periods when nexus existed but registration was missing.
California offers voluntary disclosure programs that may limit lookback periods and reduce penalties for businesses proactively addressing past exposure before audit contact.
Discern provides comprehensive registered agent services and automated compliance tracking to ensure your California obligations are met without administrative burden. Our platform monitors compliance requirements across all jurisdictions where you operate, handling foreign registrations and ongoing filing requirements through a single dashboard.
Ready to streamline your California compliance requirements? Book a demo with Discern today.
.png){kind=small}