The Ultimate Guide to Multistate Taxation in California

Nexus is the connection between a business and a state that justifies that state taxing the business. Two main forms: (1) Physical nexus — property, employees, or inventory in the state. (2) Economic nexus — sales or transaction volume that crosses statutory thresholds. The Supreme Court's 2018 decision in South Dakota v. Wayfair eliminated the physical-presence rule for sales tax, allowing states to impose economic nexus thresholds. Most states now have one.

P.L. 86-272 (15 U.S.C. §§381-384) prohibits a state from imposing income tax on a business whose only activity in the state is solicitation of orders for tangible personal property, with orders accepted and filled from outside the state. It applies only to income tax (not sales tax, not franchise tax) and only to tangible goods (not services or intangibles). California has narrowed its P.L. 86-272 interpretation for digital activity — the FTB takes the position that interactive website features beyond passive display create unprotected activity.

For sales tax: $500,000 in California sales in the current or preceding calendar year creates use-tax-collection nexus under R&T §6203(c)(4). For income tax: the FTB applies an economic nexus standard under R&T §23101(b) — $500,000 of California sales, $50,000 of California property, or $50,000 of California payroll, or 25% of total sales, property, or payroll in California. Both thresholds adjust for inflation periodically.

California uses a single-sales-factor apportionment formula under R&T §25128.7 — multistate business income is apportioned based on the ratio of California sales to total sales. This was a 2013 reform from the prior three-factor formula. Sales are sourced using market-based sourcing under R&T §25136 — for sales of services, the source is where the customer received the benefit. For sales of tangible goods, the source is the delivery destination. The apportionment math is technical and produces results sensitive to sourcing assumptions.

If you exceed $500,000 in California sales annually, yes — and you're required to collect and remit California use tax on sales to California customers. The registration is via Form CDTFA-410-S (out-of-state seller's permit). The CDTFA can assess prior periods if you exceeded the threshold and didn't register; the Voluntary Disclosure Program caps the look-back at three years for businesses that proactively come forward before contact.

Sales tax nexus is governed by Wayfair's economic-presence standard plus each state's statutory threshold — focused on customer destination. Income tax nexus involves both physical presence and economic-nexus standards (varies by state), is subject to P.L. 86-272 protection for tangible goods, and uses apportionment to allocate the multistate business income across the relevant states. A business can have sales-tax nexus without income-tax nexus and vice versa. The compliance analysis runs separately for each tax type.

Yes — under economic nexus rules for both income tax and sales tax, physical presence is no longer required. A business that exceeds California's $500,000 sales threshold, has California customers it serves remotely, or generates California-source income through digital activity can owe California tax without ever having a physical California presence. This is a major change from the pre-Wayfair, pre-economic-nexus regime that many small businesses have not adjusted to.

South Dakota v. Wayfair (2018) overturned Quill Corp. v. North Dakota and eliminated the physical-presence requirement for sales tax. California responded with R&T §6203(c)(4) — the $500,000 economic-nexus threshold for sales tax — and aggressive enforcement against marketplace sellers. Marketplace facilitators (Amazon, eBay, Etsy) now collect and remit California sales tax on third-party seller transactions, but sellers may still have direct registration obligations for non-marketplace sales.