Understanding California Nexus in 2026

Tax nexus refers to the connection between a business and a taxing jurisdiction that triggers compliance obligations. In California, nexus determines whether your company must register, file, and pay taxes in the state. Understanding California nexus is critical for any employer expanding operations, hiring remote workers, or selling to customers in the Golden State.

California uses multiple tests to establish nexus—and each type operates independently. You might owe sales tax without owing income tax, or trigger employment obligations without hitting sales thresholds. This California sales tax guide walks you through the different nexus types, current thresholds, and what each means for your business.

Key Takeaways

• California uses both physical presence and economic activity tests to determine tax obligations—you can trigger nexus without ever setting foot in the state.
• The $500,000 economic threshold applies to sales tax, while income/franchise tax uses inflation-adjusted factor thresholds ($757,070 in California sales for 2025).
• Hiring even one employee in California creates immediate employment tax nexus, requiring EDD registration before the first paycheck.
• Remote sellers and businesses with digital products face unique compliance considerations under California law.

California Nexus Thresholds at a Glance

The California Franchise Tax Board adjusts income tax factor thresholds annually for inflation. The 2025 thresholds are $757,070 for sales, $75,707 for property, and $75,707 for payroll—expect slight increases for 2026. Check the FTB website for the most current figures.

California Sales Tax Nexus Requirements

California uses both a physical test and an economic test to determine sales tax nexus. The physical test evaluates your company’s presence in the state, while the economic test relies on dollar figures. A business can qualify under either test—or both. Understanding these nexus rules helps you avoid unexpected sales tax obligations.

Physical Nexus

Physical nexus exists when your business has a tangible presence in California. This includes maintaining an office, warehouse, or store in the state. It also applies if you have an employee or contractor working there, even remotely. Inventory stored in California—including goods held in third-party fulfillment centers—creates physical nexus as well.

Once you establish physical nexus, you must collect and remit California sales tax regardless of your sales volume. There’s no minimum sales threshold to meet. Retail sales, wholesale transactions, and services all factor into your compliance obligations depending on what you sell.

Economic Nexus for Remote Sellers

The 2018 Supreme Court decision in South Dakota v. Wayfair fundamentally changed how states can tax out-of-state sellers. Following that ruling, California enacted Assembly Bill No. 147 to establish economic nexus for remote sellers with no physical presence in the state.

Under California’s economic nexus law, out-of-state retailers must register with the California Department of Tax and Fee Administration (CDTFA) and collect use tax if their total combined sales of tangible personal property delivered into California exceed $500,000 during the current or prior calendar year. Unlike Alaska, which has no state sales tax, California actively enforces its economic nexus provisions.

Several points matter for taxpayers calculating their sales threshold. First, the threshold applies to gross sales of tangible personal property—not just taxable transactions. Wholesale sales count toward the threshold, as do nontaxable sales. Second, marketplace transactions through platforms like Amazon count toward your personal threshold calculation, even when the marketplace collects tax on your behalf. Third, California does not use a number of transactions test—only the dollar threshold matters.

The message is clear: once you exceed $500,000 in California sales, your obligation to collect sales tax begins immediately. You’ll need to obtain a sales tax permit through the CDTFA before your next taxable transaction.

Obtaining a Sales Tax Permit

Registering for a California sales tax permit is straightforward but must happen promptly after you cross the economic nexus threshold. The CDTFA’s online registration system walks you through the process, asking about your business structure, the types of products or services you sell, and your expected transaction volume.

After registration, you’ll receive information about your filing frequency and due dates for tax returns. Keep detailed records of all California transactions—both taxable and exempt—in case of future audits.

Digital Products and Services

California’s treatment of digital products and services creates some compliance complexity. SaaS products delivered remotely are generally exempt from sales tax because no tangible personal property transfers. The same applies to most digital downloads, streaming services, and cloud-based software.

However, bundled offerings that combine taxable and nontaxable components may trigger partial taxation. Professional services, consulting, and most business-to-business services remain exempt from California sales tax, though they may still count toward income tax nexus calculations. If your business sells digital products or services, review your specific offerings against CDTFA guidance or consult a tax professional with specific questions.

California Income Tax Nexus and Franchise Tax Compliance

Beyond sales tax, California imposes income and franchise tax obligations on businesses “doing business” in the state. The California Franchise Tax Board uses factor presence thresholds to make this determination. Income tax nexus operates under different rules than sales tax nexus, so you could owe one without the other.

Economic Nexus Thresholds for Income Tax

California considers your company to be doing business in the state—and therefore subject to income and franchise tax—if your California sales, property, or payroll exceeds either:

1. The FTB-determined threshold amounts (adjusted annually for inflation), or
2. 25% of your business’s total in that category

For 2025, the thresholds were:

• California sales exceeding $757,070
• California property exceeding $75,707
• California payroll exceeding $75,707

If you own a partnership, LLC treated as a partnership, or S Corporation, include your distributive share of property, payroll, and sales from those entities when calculating your totals. Meeting any single factor triggers income tax nexus and filing requirements.

The $800 Minimum Franchise Tax

Every LLC or corporation doing business in California owes a minimum franchise tax of $800 annually, regardless of income or profitability. This applies from the first year you establish economic nexus and continues until you properly dissolve or withdraw from the state. Missing this payment can trigger penalties and put your entity at risk of suspension under state law.

Public Law 86-272 Protections

Federal Public Law 86-272 provides limited protection from California income tax for companies whose only in-state activity is soliciting orders for tangible personal property. If you qualify, California cannot impose taxes based on net income.

However, California interprets these protections narrowly. Activities that exceed PL 86-272 protections include having employees telecommuting from California (even occasionally), placing cookies on California customers’ devices for purposes beyond order solicitation, and providing post-sale technical support or customer services. The FTB’s Technical Advice Memorandum 2022-01 details which internet-based activities do and don’t qualify for protection.

Companies relying on PL 86-272 should document their California activities carefully. FTB audits frequently examine whether businesses truly limited their in-state activities to protected solicitation of sales for tangible personal property.

Employment Tax Nexus Requirements

For companies hiring across state lines, employment nexus often triggers compliance obligations before sales or income tax thresholds come into play. Hiring even one employee who works in California—whether at your office or from their home—creates immediate employment tax nexus.

Registration Requirements

Employment nexus requires registration with the California Employment Development Department (EDD). You’ll need an employer payroll tax account number to remit state income tax withholding, unemployment insurance contributions, state disability insurance, and employment training tax. Registration must happen before you issue the first paycheck.

California also requires workers’ compensation insurance coverage for all employers, even those with just one employee. Coverage must be in place before employees begin work. These requirements apply regardless of the services your employees perform or how many transactions your business processes.

Worker Classification Under AB5

California’s Assembly Bill 5 established the “ABC Test” for worker classification, making it difficult to classify workers as independent contractors. To qualify as a contractor rather than an employee, workers must meet all three criteria:

• A: Free from the company’s control and direction in performing work
• B: Performing work outside the company’s usual course of business
• C: Customarily engaged in an independently established trade, occupation, or business

Misclassification carries significant consequences—back taxes, penalties, and potential wage and hour violations under California labor law. A tax audit examining worker classification can result in assessments covering multiple tax years of unpaid employment taxes, plus interest and penalties. When in doubt, treat workers as employees.

Remote Work Implications

Remote employees working from California create immediate employment tax nexus, regardless of where your company is headquartered. If California payroll exceeds the factor threshold ($75,707 for 2025) or represents 25% of your total payroll, you may also trigger income tax nexus.

This matters for companies in the United States that have embraced remote work. An employee who relocates to California—or who you hire there—can trigger multiple compliance obligations simultaneously: EDD registration, workers’ comp coverage, foreign qualification with the Secretary of State, and potentially income tax filing.

What Happens After You Establish California Nexus

Once you’ve crossed any California nexus threshold, immediate registration and ongoing compliance become mandatory. Here’s what each nexus type requires.

Sales Tax Compliance

If you establish California sales tax nexus, you must:

1. Register for a seller’s permit with the CDTFA
2. Collect the appropriate state and local tax on taxable transactions (the base rate is 7.25%, plus district tax rates that vary by location)
3. File returns and remit collected tax according to your assigned frequency

The CDTFA assigns filing frequency—monthly, quarterly, or annually—based on your reported or anticipated sales volume. Most businesses with significant California retail sales file monthly. All taxable transactions, exempt transactions, and sales of tangible personal property must be tracked and reported accurately.

Income and Franchise Tax Compliance

Businesses doing business in California must:

1. Register with the Franchise Tax Board
2. File annual tax returns (Form 100 for C corporations, Form 100S for S corporations, Form 568 for LLCs)
3. Pay the minimum $800 franchise tax plus any additional tax owed

The California income tax rate for S corporations is 1.5%, while most C corporations pay 8.84%. The FTB maintains a complete tax rate table by entity type. Keep thorough records of all California-sourced income, transactions, and services revenue to support your filings in case of audits.

Employment Tax Compliance

Employment nexus requires ongoing compliance with California’s extensive labor laws, including minimum wage requirements, overtime rules, paid sick leave, and employee handbook provisions. Beyond EDD registration and workers’ comp coverage, employers must stay current with California’s frequently changing employment regulations.

Navigating California Nexus With Mosey

Figuring out where you have nexus can be tricky—and once you figure out where you have it, you’ll need to navigate the implications to maintain compliance. Mosey can help you determine where you owe taxes and automate the process of opening tax accounts, making it easy to pay your taxes and stay compliant.

Mosey is a complete compliance solution for multi-state businesses. Once you import your company information, our platform automatically determines your requirements across HR, payroll, tax, registration, and more. Our always-on monitoring system alerts you to upcoming deadlines, tasks, and new legislation.

Ready to simplify your California compliance? Schedule a demo with Mosey today.

FAQ

What’s California’s Economic Nexus Law for Out-of-State Businesses?

California’s economic nexus law requires out-of-state businesses to collect and remit sales tax if they exceed $500,000 in sales of tangible personal property delivered into California during the current or prior calendar year. This threshold applies regardless of whether the business has any physical presence in California, meaning remote sellers must monitor their California sales transactions and register once they cross the limit.

What Is California’s Economic Nexus Threshold?

California’s economic nexus threshold for sales tax is $500,000 in total sales of tangible personal property. For income and franchise tax, California uses factor presence thresholds that adjust annually—for 2025, businesses are considered “doing business” in California if their state sales exceed $757,070 or represent more than 25% of total sales.

When Did California’s Economic Nexus Law Go Into Effect?

California’s economic nexus law for sales tax took effect on April 1, 2019, following Assembly Bill No. 147. The original threshold was $100,000 in sales or 200 transactions, but California quickly revised this to the current $500,000 sales-only threshold effective April 26, 2019.

What Are Businesses Supposed to Do if They Meet California’s Economic Nexus Threshold?

Businesses that meet California’s economic nexus threshold must register for a seller’s permit with the California Department of Tax and Fee Administration before their next taxable sale. After registration, they must collect California sales tax on all taxable transactions, maintain records of California sales, and file returns according to their assigned frequency. Failure to register can result in back taxes, penalties, and interest assessed from the date nexus was established.

Read more from Mosey:

• What Is FUTA? How to Comply With the Federal Income Tax Act
• How to Change Registered Agents in 3 Easy Steps
• Why Incorporate in Delaware? Pros and Cons for Startups
• What Is a Registered Agent & Why Would You Need One?
• LLC Annual Report: What It Is, What’s Included & How to File
• With Paid Family and Medical Leave: 2023 Guide
• Employee vs. Contractor: Understanding the Difference
• What Is Local Tax? States with Local Income Taxes in 2023
• Cell Phone & Internet Reimbursement Laws by State