California Income & Tax for eCommerce Businesses
💡 California Note: California has two separate tax frameworks for eCommerce businesses: (1) Income/Franchise Tax and (2) Sales & Use Tax. This article covers income and franchise tax nexus. Sales tax rules are different — and equally important. Stay tuned for our upcoming State Sales Tax service at Tall Oak Advisors.
Understanding Nexus in California
"Nexus" is the legal term for the connection between your business and a state that gives that state the right to tax you. In California, nexus can be established in two ways:
Physical Nexus
An actual physical connection to the state — offices, employees, or inventory stored in California (including in Amazon FBA fulfillment centers).
Economic Nexus
A sufficient level of economic activity in California, even with zero physical presence.
What Is the California Franchise Tax?
California imposes a franchise tax on every corporation and LLC that is "doing business" in the state. This is administered by the California Franchise Tax Board (FTB). What makes California especially important for eCommerce sellers is the minimum franchise tax:
Every LLC or corporation doing business in California owes a minimum of $800 per year in franchise tax — even if your business generates zero profit in the state.
Beyond the minimum, the tax rates are 8.84% for C corporations and 1.5% for S corporations (with the $800 minimum as a floor). LLCs file separately on Form 568.
What Triggers "Doing Business" in California?
California's definition of "doing business" (Revenue and Taxation Code §23101) has two layers — and both are relevant to eCommerce sellers:
Layer 1: The Broad Standard (§23101(a))
Under the broad standard, "doing business" means actively engaging in any transaction for the purpose of financial gain or profit in California. The key word is "any" — California courts have interpreted this broadly. A single sale to a California customer, combined with inventory in the state, may be sufficient.
Real-world example (2025): In October 2025, the California Office of Tax Appeals ruled that Diet Standards LLC — a Florida-based company using Amazon FBA — was "doing business" in California and owed the $800 franchise tax, even though its California sales, property, and payroll were all below the statutory thresholds. Why? Because it owned inventory stored in Amazon's California warehouses and made sales to California customers. This is a significant warning for FBA sellers.
Layer 2: The Factor Thresholds (§23101(b))
Even if you don't meet the broad standard above, you are still considered to be doing business in California if, during the tax year, any of the following apply:
Your California sales exceed $757,070 (2025) OR represent more than 25% of your total sales;
Your California property exceeds $75,707 (2025) OR represents more than 25% of your total property; OR
Your California payroll exceeds $75,707 (2025) OR represents more than 25% of your total payroll.
These thresholds are adjusted annually for inflation by the FTB. The 25% rule is particularly important for smaller eCommerce businesses — even if your dollar amounts are modest, if California represents a large share of your total business activity, you may still have a filing obligation.
The Amazon FBA Warning: What Every Seller Should Know
If you use Amazon FBA, your inventory may be stored in California's fulfillment centers — entirely outside your control. Amazon does not notify you when your products are moved to a California warehouse. But California considers that stored inventory as a physical presence in the state.
What makes this especially risky: California has a data-sharing arrangement with Amazon. The FTB has access to seller data from the California Department of Tax and Fee Administration (CDTFA), and can — and does — send notices to sellers who have not registered but appear to have California activity. Based on reported patterns, businesses that start selling in 2025 may receive a notice as late as 2029, with penalties and interest accrued over that entire period.
Bottom line for FBA sellers: California is not a state where you can take a "wait and see" approach. Proactive compliance is far less costly than a retroactive assessment.
Does Pub. L. 86-272 Protect Me?
Federal Public Law 86-272 provides some protection from state income taxes for businesses whose only in-state activity is the solicitation of orders for tangible personal property that are approved and shipped from outside the state. If you qualify, California cannot impose income tax based on net income.
However, there are two critical limitations in California:
The $800 minimum franchise tax still applies even if you qualify for PL 86-272 protection. You may be exempt from income-based tax, but not from the minimum tax itself.
California interprets PL 86-272 very narrowly. Activities that can void your protection include: having employees work remotely from California (even occasionally), placing non-essential cookies on California customers' devices, providing post-sale technical support or customer service from within the state, or selling digital products or services (as opposed to tangible goods).
For most modern eCommerce businesses — especially those with Shopify stores, customer chat support, or digital product components — PL 86-272 may offer limited protection. A thorough review of your activities is essential.
If You Have Nexus in California: Next Steps
If you determine (or suspect) that you have nexus in California, here's what is generally required:
Register with the California Franchise Tax Board (FTB) and, if applicable, the Secretary of State for foreign qualification.
Appoint a registered agent in California.
File your annual franchise tax return (Form 100 for C corps, Form 100S for S corps, Form 568 for LLCs). Filing deadlines are generally March 15 for corporations and April 15 for other entities.
Pay at minimum the $800 annual franchise tax.
If you have past exposure, consider California's Voluntary Disclosure Program, which may limit the lookback period and reduce penalties — but only if you act before the FTB makes contact.
What About California Sales Tax?
California's sales and use tax rules are a separate — and equally complex — topic. The short version: California has a $500,000 economic nexus threshold for sales tax (no transaction count required), administered by the California Department of Tax and Fee Administration (CDTFA). The base state rate is 7.25%, but local district rates can push the effective rate significantly higher depending on where your customer is located.
At Tall Oak Advisors, we put together this guide as a resource for our eCommerce community. Tax rules vary significantly from state to state, and we want sellers to have the information they need to make informed decisions. More info at talloakadvisors.com
Disclaimer: The information in this article is for general informational purposes only and does not constitute legal or tax advice. Tax laws change frequently. Please consult a qualified tax advisor or CPA regarding your specific situation.
Sources: California Revenue & Taxation Code §23101; California Franchise Tax Board; CA Office of Tax Appeals, Diet Standards LLC (Oct. 2025); Pub. L. No. 86-272; Assembly Bill No. 147 (2019).
