California’s economic nexus rules live in two separate places, and an out-of-state business can trip one without tripping the other. The California Department of Tax and Fee Administration (CDTFA) requires you to collect sales tax once your sales of tangible personal property delivered into California exceed $500,000 in the current or preceding calendar year. The Franchise Tax Board (FTB) requires you to file a California income or franchise tax return at much lower thresholds, measured against sales, property, or payroll in the state. Different agencies, different numbers, different filings.
The $500,000 Sales Tax Threshold
A remote seller establishes sales tax nexus when total sales of tangible personal property delivered into California exceed $500,000 during the current or preceding calendar year.1California Department of Tax and Fee Administration. California Revenue and Taxation Code 6203 There is no transaction-count test. California uses the highest dollar threshold of any state, and it does not care how many orders it took to get there.
The calculation is broader than many sellers expect. All sales of tangible personal property delivered into California count, whether or not the individual sale is taxable. Sales of items that are generally exempt, such as most non-prepared food, still count toward the $500,000. Sales by related persons under Internal Revenue Code Section 267(b) are combined for threshold purposes.1California Department of Tax and Fee Administration. California Revenue and Taxation Code 6203
Two timing rules matter. If you exceeded $500,000 in the preceding calendar year, you owe collection for the entire current year. If you cross the threshold mid-year, the collection duty starts on the date you cross, not the next quarter or the next January.2California Department of Tax and Fee Administration. Frequently Asked Questions – Use Tax Collection Requirements Based on Sales into California Once triggered, you register with the CDTFA for a seller’s permit and begin collecting state and local use tax, including applicable district taxes, on taxable sales shipped to California customers.
When a Marketplace Handles It for You
California’s Marketplace Facilitator Act took effect October 1, 2019 and shifted the collection duty to the platform for sales made through it.3California Department of Tax and Fee Administration. Sales and Use Tax Law – Chapter 1.7 A marketplace facilitator that meets the $500,000 threshold is treated as the retailer for every sale it facilitates and is responsible for collecting, reporting, and remitting the tax. Amazon, Etsy, eBay, and similar platforms handle this for their sellers.
If your only California sales run through a registered marketplace facilitator, you do not need to register with the CDTFA at all.4California Department of Tax and Fee Administration. Online Seller Flowchart – Registration and Local Tax Allocation You need your own seller’s permit only for sales made directly to California customers outside a marketplace.3California Department of Tax and Fee Administration. Sales and Use Tax Law – Chapter 1.7
Marketplace sales still count toward your own $500,000 threshold. A seller doing $400,000 through Amazon and $150,000 through its own site has exceeded $500,000 and must register for the direct sales, even though Amazon is handling the marketplace portion.
The FTB’s Income Tax Thresholds
The Franchise Tax Board treats an out-of-state corporation as “doing business” in California if it is organized or commercially domiciled here, or if it meets any one of three factor tests. These numbers adjust annually for inflation. For the 2025 tax year, the current published figures are:5State of California Franchise Tax Board. Doing Business in California
- California sales exceeding $757,070, or 25% of total sales, whichever is less
- California real and tangible personal property exceeding $75,707, or 25% of total property, whichever is less
- California compensation exceeding $75,707, or 25% of total payroll, whichever is less
Exceeding any single factor triggers a filing obligation. The corporate franchise tax rate is 8.84% of net income, with banks and financial corporations at 10.84%.6State of California Franchise Tax Board. Business Tax Rates Every corporation incorporated, registered, or doing business in California owes a minimum franchise tax of $800 per year. Newly incorporated or newly qualified corporations are exempt from the minimum in their first taxable year.7State of California Franchise Tax Board. Corporations
Public Law 86-272 and Why It May Not Save You
Federal Public Law 86-272 prohibits states from imposing net income taxes on a corporation whose only in-state activity is soliciting orders for tangible personal property, where the orders are approved and shipped from outside the state.5State of California Franchise Tax Board. Doing Business in California On paper this shields many remote sellers from California’s 8.84% corporate income tax. In practice, the protection is narrower than most businesses assume.
California follows Multistate Tax Commission guidance treating several routine internet activities as exceeding mere solicitation. Providing post-sale customer support through online chat, selling extended warranty plans through your website, accepting online job applications for non-sales positions, and using customer browsing data to adjust production or inventory are all activities the FTB views as breaking the protection. If your website does any of these, the shield is gone.
Even where P.L. 86-272 does apply, it only blocks the net income tax. A qualifying corporation is still considered doing business in California and still owes the $800 annual minimum.5State of California Franchise Tax Board. Doing Business in California P.L. 86-272 does not touch sales tax, so a corporation can be immune from income tax and still fully on the hook for sales tax collection.
LLCs: The $800 Tax Plus a Graduated Fee
Every LLC doing business or organized in California owes an annual tax of $800 regardless of income. On top of that, California imposes a graduated fee based on total California income:8State of California Franchise Tax Board. Limited Liability Company
- $250,000 to $499,999: $900
- $500,000 to $999,999: $2,500
- $1,000,000 to $4,999,999: $6,000
- $5,000,000 or more: $11,790
The fee is owed in addition to the $800 tax and must be estimated and paid by the 15th day of the 6th month of the current tax year. An LLC earning $5 million in California income owes $12,590 in combined annual tax and fee before any income tax on the members’ returns. The $800 minimum catches many out-of-state LLCs off guard in years with little California revenue.
Registering and Filing Once You’re Over
Sales tax registration happens through the CDTFA’s online portal for a California Seller’s Permit.9California Department of Tax and Fee Administration. California Department of Tax and Fee Administration Homepage The CDTFA uses your estimated volume to assign a filing frequency of monthly, quarterly, or yearly. Businesses averaging $17,000 or more in monthly tax liability must make prepayments during each quarter, covering at least 90% of the actual liability for each monthly period.10California Department of Tax and Fee Administration. California Revenue and Taxation Code 6471 – Prepayment Returns are due every period, even if you collected zero tax. Skipping a zero return is a common and avoidable mistake.
Income tax has no separate nexus permit. If you meet an FTB threshold, the obligation is to file the appropriate return, which establishes your account with the FTB.
The CDTFA imposes a 10% penalty for failing to file on time and a separate 10% penalty for failing to pay on time. When both apply to the same return, the combined penalty is capped at 10% of the tax due for that period.11California Department of Tax and Fee Administration. Trouble Paying Taxes? Interest runs immediately on any late payment. The CDTFA can assess back taxes for up to eight years of unregistered activity, and that is where the real exposure sits for a business that should have been collecting all along.
If You Should Have Been Filing All Along
If your business crossed a threshold years ago and never registered, both agencies run voluntary disclosure programs that produce meaningfully better outcomes than being found in an audit.
The CDTFA’s out-of-state voluntary disclosure program limits the look-back to three years, compared to the eight-year window available in an audit. Late filing and late payment penalties can be waived. The CDTFA also allows applicants to describe their situation anonymously and get a written opinion on approval before committing.12California Department of Tax and Fee Administration. Voluntary Disclosure Agreement (Publication 178) That anonymous step lowers the risk of coming forward considerably.
The FTB’s program covers corporations, S corporations, LLCs, partnerships, and trusts that have never filed a California return and have not already been contacted by the FTB about a potential liability. Qualifying applicants receive a six-year look-back and waivers of penalties for failure to file, failure to pay, underpayment of estimated tax, and several other categories.13State of California Franchise Tax Board. FTB 4925 – Application for a Voluntary Disclosure Agreement Entities organized under California law are not eligible; the program is built for out-of-state entities that should have been filing. You must make a full and accurate statement of your California activities for the six preceding years, and partial disclosure disqualifies you.
For a business that has been operating in California unregistered for years, the difference between a three- or six-year look-back with penalty waivers and an eight-year assessment with full penalties runs into tens of thousands of dollars. Coming forward is nearly always cheaper than being found.