An out-of-state company falls under California’s income tax nexus rules once it crosses a single activity or revenue line inside the state. For the 2025 tax year, that line is $757,070 in California sales, $75,707 in California property, or $75,707 in California payroll. Cross any one of those, or be incorporated in California, or have even one employee working there, and you owe a California corporate return plus at least the $800 minimum franchise tax. The Franchise Tax Board adjusts the dollar thresholds each year for inflation, so the 2026 figures will be slightly higher once published.
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 in the state.1California Legislative Information. California Code Revenue and Taxation Code 23101 – Doing Business The statute then sets four concrete tests, and tripping any one is enough:
- The company is incorporated in California or has its commercial domicile there.
- California-sourced sales exceed $757,070 (2025) or 25 percent of 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 California employees exceeds $75,707 (2025) or 25 percent of total compensation, whichever is less.
The FTB reindexes these dollar amounts each year to the California Consumer Price Index.2Franchise Tax Board. Doing Business in California Watch the 25 percent alternative: a small company doing most of its business in California can hit nexus at revenue well below the headline number.
Physical Presence and Employees
A physical footprint creates nexus on its own, no thresholds involved. Owning or leasing office space, a warehouse, or a retail location counts. Storing inventory in a California fulfillment center counts, even under a third-party logistics arrangement where nobody from the company sets foot in the building.
Employees are the most common trigger. A single full-time or part-time worker in California can establish a taxable connection for an out-of-state employer. Using independent contractors to solicit business or provide services produces 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 considers you present.
Remote Workers Are a Nexus Trigger
Hybrid and remote arrangements have turned this into a live problem for thousands of companies. One employee working from a California home office can create corporate income tax nexus for the employer. The FTB publishes no minimum day count and no minimum employee count. Its position is that a remote worker performing functions beyond soliciting sales of tangible goods establishes a taxable presence.
Companies that hired during the pandemic without tracking where new employees actually sit are the most exposed. A software engineer, support representative, or finance analyst logging in from Los Angeles creates nexus for a company headquartered in Texas or Florida. The one potential shield, Public Law 86-272, covers only solicitation of orders for physical goods, which excludes most service and technology businesses.
How Much California Can Tax Once You Have Nexus
Once nexus attaches, apportionment decides how much of your income California reaches. Under Revenue and Taxation Code Section 25128.7, most businesses use a single-sales-factor formula: total business income multiplied by California sales over total sales everywhere.3Franchise Tax Board. 2025 Instructions for Schedule R Apportionment and Allocation of Income Property and payroll no longer feed the formula for most industries. That simplifies the math and, for many companies, increases the bill.
California sources sales by market. Under Section 25136, a service sale lands in California if the customer received the benefit of the service in the state.4California 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 located there. A company with zero California employees and no California property can still owe substantial tax because its customers are in the state. The FTB approved amendments to its market-based sourcing regulations in 2025 that refine how specific service revenue is sourced on Schedule R.5Franchise Tax Board. Amended Market-Based Sourcing Rules
Public Law 86-272 and Its Limits
Public Law 86-272 is a federal statute that blocks states from imposing a net income tax on an out-of-state business whose only in-state activity is soliciting orders for tangible personal property, where orders are approved and shipped from outside the state.6Office of the Law Revision Counsel. 15 USC 381 – Imposition of Net Income Tax The protection is narrow by design. It covers physical goods only, so service, software, and digital subscription businesses get nothing from it.
Even for goods sellers, the shield falls the moment in-state activity moves past solicitation. Employees performing repairs, collecting overdue accounts, or providing training all cost the company its immunity. And the protection never covered the $800 minimum. A company protected under PL 86-272 is exempt from the income-based tax but still counts as doing business, and the minimum franchise tax still applies.2Franchise Tax Board. Doing Business in California
Digital Activities That Can Break Protection
The Multistate Tax Commission issued revised guidance identifying internet activities that exceed mere solicitation, and California has aligned with it. Activities that can strip PL 86-272 protection 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. A static FAQ page, a searchable product catalog, and electronic payment for tangible-goods orders generally remain protected.
Where TAM 2022-01 Stands
In 2022 the FTB issued Technical Advice Memorandum 2022-01 spelling out how it would apply PL 86-272 to internet activities, tracking the MTC guidance. In late 2023 a California Superior Court struck down TAM 2022-01 and the FTB’s revised Publication 1050 as “underground regulations” that violated the state’s Administrative Procedure Act, holding that the FTB had issued binding rules without the required notice-and-comment process. Businesses report that FTB auditors continue to apply the same principles during examinations. Until the FTB either adopts formal regulations or a court rules on the substance, companies operating interactive websites directed at California customers should expect scrutiny of any PL 86-272 position.
Rates and the Minimum Franchise Tax
C corporations pay 8.84 percent of net income. S corporations pay 1.5 percent. Banks and financial institutions pay more: 10.84 percent for C corporation banks, 3.5 percent for S corporation banks.7Franchise Tax Board. Business Tax Rates
Every corporation doing business in California owes at least $800 a year as a minimum franchise tax, even at a loss and even with no California-source income.8California Legislative Information. California Revenue and Taxation Code 23153 The floor applies to both C corporations and S corporations.9Franchise Tax Board. S Corporations One exception: corporations incorporated or qualified in California on or after January 1, 2020, are exempt from the minimum in their first taxable year.10Franchise Tax Board. Corporations
Forms, Deadlines, and Estimated Payments
C corporations file Form 100. S corporations file Form 100S. Corporations using water’s-edge reporting file Form 100W.11Franchise Tax Board. Forms You Can E-File for Businesses All three require gross receipts, California-sourced income, and an apportionment calculation on Schedule R.
The original return is due the 15th day of the fourth month after year-end. For calendar-year filers, that’s April 15.12Franchise Tax Board. C Corporations California grants an automatic seven-month filing extension, pushing calendar-year returns to November 15.13Franchise Tax Board. C Corporation Extended Filing Due Date The extension is for filing only. Tax is still due April 15, and interest accrues on any unpaid balance from that date.
Corporations prepay through estimated installments due the 15th day of the 4th, 6th, 9th, and 12th months of the taxable year (April 15, June 15, September 15, and December 15 for calendar-year filers).14Franchise Tax Board. 2025 Instructions for Form 100-ES Corporation Estimated Tax Installments are not level: 30 percent with the first, 40 percent with the second, nothing with the third, 30 percent with the fourth. If total estimated tax doesn’t exceed the $800 minimum, the whole amount is due with the first installment by April 15. Underpayment triggers an estimated tax penalty at the FTB’s current interest rate.
Late Penalties and Interest
Filing late triggers a penalty of 5 percent of the unpaid tax for each month or partial month the return is overdue, up to 25 percent.15Franchise Tax Board. Common Penalties and Fees The penalty is computed after payments made by the original due date, so a partial payment shrinks the base.
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 Interest starts on the original due date and stops only when the balance is paid, so taking the seven-month extension without paying carries a real cost. MyFTB and Web Pay accept direct bank transfers, which is the fastest way to stop the clock.
Records to Keep
The FTB can audit years after a return is filed, so records should track California-sourced sales by customer location, payroll assigned to California employees and contractors, and the value of any property held in the state. Those three categories feed both the doing-business tests and the Schedule R apportionment.
Companies leaning on PL 86-272 need documentation showing in-state activity stayed inside the solicitation lane: logs of what employees actually did in California, proof that orders were approved and shipped from out of state, and records of any website features directed at California customers. If the FTB challenges the position, the burden of proof sits with the taxpayer. Keep proof of taxes paid to other states on the same income too, since California’s credit for taxes paid elsewhere requires documentation. Sales invoices, shipping records, and customer addresses back up market-based sourcing positions if the FTB questions Schedule R.