An out-of-state company creates California income tax nexus the moment it crosses any one of the state’s “doing business” thresholds, and the bar is lower than most companies expect. For the 2025 tax year, a business is doing business in California if its in-state sales reach $757,070, its in-state property reaches $75,707, or its in-state payroll reaches $75,707. Cross any single threshold and the Franchise Tax Board expects a return, an apportionment calculation, and at minimum the $800 annual franchise tax. The dollar figures adjust each year with the California Consumer Price Index, so 2026 numbers will be slightly higher once the FTB publishes them.1Franchise Tax Board. Doing Business in California
What Counts as Doing Business in California
Revenue and Taxation Code Section 23101 defines doing business as actively engaging in any transaction for financial gain or profit inside California.2California Legislative Information. California Code Revenue and Taxation Code 23101 – Doing Business The statute pairs that broad language with specific tests. Any one of the following creates nexus:
- The company is incorporated in California or has its commercial domicile in the state.
- California-sourced sales exceed $757,070 (2025) or 25 percent of the company’s total sales, whichever is less.
- Real and tangible personal property in California exceeds $75,707 (2025) or 25 percent of total property, whichever is less.
- Compensation paid to employees in California exceeds $75,707 (2025) or 25 percent of total compensation, whichever is less.
Pay attention to the “whichever is less” language. A small company with most of its sales going to California customers can hit nexus well below the headline dollar figure, because 25 percent of a modest total can be a much smaller number than $757,070.
Physical Presence Still Creates Nexus On Its Own
The factor thresholds are additions to, not replacements for, the older physical-presence rule. Owning or leasing office space, a warehouse, or a retail location in California creates nexus. Storing inventory in a California fulfillment center counts too, even when the goods sit with a third-party logistics provider and no one from the company ever visits.
People are the most common trigger. A single full-time or part-time employee working in California can establish a taxable connection for an out-of-state company. Independent contractors soliciting business or performing services in the state produce the same result. Sending technicians in for installations, repairs, or training reinforces the link even without a permanent office. If people are doing work for your business inside California, the state treats you as present.
Remote Workers Are a Live Trigger
One California-based remote employee can create corporate income tax nexus for an out-of-state employer. The FTB does not publish a minimum day-count or employee threshold. Its position is that a remote worker performing functions beyond soliciting sales of tangible goods establishes a taxable presence for the company that employs them.
This catches a lot of companies that hired during the pandemic without tracking where employees actually sit. A software engineer, customer support representative, or finance analyst logging in from Los Angeles creates nexus for an employer headquartered in Texas or Florida. The one potential shield is Public Law 86-272, and as explained below its scope is narrow enough that most service and technology companies cannot use it.
Public Law 86-272: The One Possible Shield
Public Law 86-272 is a federal statute that blocks states from imposing net income taxes on an out-of-state business whose only in-state activity is soliciting orders for tangible personal property, where the orders are sent outside the state for approval and shipped from outside the state.3Office of the Law Revision Counsel. 15 USC 381 – Imposition of Net Income Tax The protection applies to physical goods only. Companies selling services, software licenses, or digital subscriptions get nothing from it.
Even for sellers of tangible goods, the shield disappears as soon as in-state activity moves past solicitation. Repairs, collections, training, or any non-solicitation work by in-state staff breaks it. And the law does not waive the $800 minimum franchise tax. A protected company is exempt from the income-based tax but still counts as doing business and still owes the minimum.1Franchise Tax Board. Doing Business in California
Website Activity Can Break the Shield
The Multistate Tax Commission’s revised guidance lists internet activities it considers to exceed solicitation, and California has aligned with that position. Activities the FTB treats as unprotected include placing cookies on user devices to gather data for product development or market research, providing post-sale customer support through live chat or email, accepting job applications for non-sales positions through the website, and streaming media or delivering subscription digital services to in-state customers. Activities that generally remain protected include a static FAQ page, a searchable product catalog, and accepting electronic payment for orders of tangible goods.
In 2022 the FTB issued Technical Advice Memorandum 2022-01 formalizing this view. A California Superior Court struck it down in late 2023 as an “underground regulation” issued without the public rulemaking the Administrative Procedure Act requires. Companies report, however, that FTB auditors continue to apply the same principles during examinations. Until the FTB adopts new rules through formal rulemaking or a court addresses the substance, treat the digital-activity risk as live.
How California Taxes the Income Once You Have Nexus
Having nexus is the first question. The second is how much income California can reach. Most industries use a single-sales-factor formula under Revenue and Taxation Code Section 25128.7: multiply total business income by the ratio of California sales to total sales everywhere.4Franchise Tax Board. 2025 Instructions for Schedule R Apportionment and Allocation of Income Property and payroll no longer enter the formula for most industries. That simplifies the math and increases the burden for companies with heavy California sales and little in-state infrastructure.
California uses market-based sourcing to decide where a sale lands. Under Section 25136, a service sale goes to California if the customer receives the benefit of the service there.5California Legislative Information. California Code Revenue and Taxation Code 25136 Tangible goods are sourced to the delivery location. Digital subscriptions, SaaS, and streaming revenue generally count as California sales when the customer is in California. A company with no employees and no property in the state can still owe tax on a meaningful share of its income because its customers are there. The FTB amended its market-based sourcing regulations in 2025, so companies selling services into California should confirm their sourcing method on Schedule R matches the current rules.6Franchise Tax Board. Amended Market-Based Sourcing Rules
Rates and the $800 Minimum
The California corporate franchise tax rate is 8.84 percent of net income for C corporations and 1.5 percent for S corporations. Banks and financial institutions pay 10.84 percent (C corporation) or 3.5 percent (S corporation).7Franchise Tax Board. Business Tax Rates
Every corporation doing business in California owes at least $800 per year as a minimum franchise tax, regardless of profitability or California-source income.8California Legislative Information. California Revenue and Taxation Code 23153 The minimum applies to both C corporations and S corporations.9Franchise Tax Board. S Corporations Corporations incorporated or qualified in California on or after January 1, 2020 are exempt in their first taxable year only.10Franchise Tax Board. Corporations
Forms, Deadlines, and Estimated Payments
C corporations file Form 100, S corporations file Form 100S, and corporations using water’s-edge reporting file Form 100W.11Franchise Tax Board. Forms You Can E-File for Businesses Each return requires a gross receipts breakdown, California-sourced income, and the apportionment calculation on Schedule R.
The original due date is the 15th day of the fourth month after the close of the taxable year — April 15 for calendar-year filers.12Franchise Tax Board. C Corporations California grants an automatic seven-month extension to file, moving the deadline to November 15 for calendar-year corporations.13Franchise Tax Board. C Corporation Extended Filing Due Date The extension covers the return, not the payment. Tax is still due by the original April date, and interest runs from that date on any unpaid balance.
Estimated tax is paid in four installments during the taxable year, due on the 15th day of the 4th, 6th, 9th, and 12th months.14Franchise Tax Board. 2025 Instructions for Form 100-ES Corporation Estimated Tax The schedule is not even: 30 percent with the first, 40 percent with the second, nothing with the third, and 30 percent with the fourth. If estimated tax does not exceed the $800 minimum, the full amount is due with the first installment on April 15. Underpayment triggers an estimated tax penalty at the FTB’s current interest rate.
Penalties and Interest
A late return triggers a penalty of 5 percent of the unpaid tax for each month or partial month overdue, capped at 25 percent.15Franchise Tax Board. Common Penalties and Fees The penalty is calculated after payments made by the original due date, so a partial payment reduces the base it accrues on.
Interest runs on top. From July 2025 through June 2026, the FTB charges 7 percent on corporate underpayments.16Franchise Tax Board. Interest and Estimate Penalty Rates It accrues from the original due date until the balance clears, which is why the automatic filing extension without a payment can cost real money. The FTB’s MyFTB portal and Web Pay allow direct bank transfers, the fastest way to stop interest from compounding further.
Records to Keep
The FTB can audit years after a return is filed, so the records that support your nexus and apportionment positions need to survive that long. Keep California-sourced sales broken down by customer location, payroll allocated to California employees and contractors, and the value of any property held in the state. Those three categories map directly to the doing-business thresholds and to Schedule R.
If you rely on PL 86-272, hold on to proof that in-state activity stayed inside the solicitation line: logs of what employees did in California, confirmation that orders were approved and shipped from outside the state, and records of website features aimed at California customers. If the FTB challenges the position, the burden is on you to show the activity qualified.
Also keep proof of income taxes paid to other states on the same income. California allows credits, but claiming them requires documentation. Sales invoices, shipping records, and customer addresses back up market-based sourcing if the FTB questions how revenue was assigned.