California doing-business tests and apportionment
Two separate questions decide what an out-of-state business owes California. First: are you “doing business” there at all? If yes, you owe at least the $800 minimum. Second: how much of your income belongs to California? That is apportionment, and for most businesses it depends only on where your customers are.
Question 1: are you doing business in California?
Under R&TC § 23101 you are doing business in California if any one of these is true for the tax year:
- You actively engage in any transaction in California for financial or pecuniary gain.
- You are organized or commercially domiciled in California.
- Your California sales, property, or payroll exceed the dollar thresholds below, or 25% of your total sales, property, or payroll.
| Factor | Dollar test (2025) | 25% test |
| Sales | $757,070 | CA sales > 25% of total |
| Property | $75,707 | CA property > 25% of total |
| Payroll | $75,707 | CA payroll > 25% of total |
The FTB indexes these amounts every year for inflation. Figures shown are for tax year 2025; check the FTB's doing-business page for later years.
The thresholds are not a safe harbor
Many founders read the dollar amounts as a floor: stay below them and California can't touch you. The Office of Tax Appeals has rejected that reading. In Diet Standards, an out-of-state LLC with California activity below every threshold was still held to be doing business under the “transacting for gain” test and owed the $800 annual tax plus penalties. The classic example is an owner who manages a Wyoming LLC from a Los Angeles apartment: the LLC is doing business in California regardless of its sales.
Pass-through amounts count too. If your LLC owns an interest in a partnership or LLC that does business in California, your share of that entity's California sales, property, and payroll is added to your own when applying the tests.
Question 2: how much income is Californian?
Most businesses apportion income to California using a single sales factor: California sales divided by total sales, multiplied by business income. Property and payroll no longer enter the formula for most taxpayers (they still matter for the doing-business test above, and some industries (agriculture, extraction, savings and loan, and certain others) use different rules).
- Sales of goods go to the state where they are delivered. If you ship into a state where you are not taxable, California can “throw back” the sale to California when it ships from here.
- Services use market-based sourcing: a sale counts in California to the extent the customer receives the benefit here.
- Intangibles and software licenses are sourced to where the intangible is used.
Worked example
A Delaware SaaS C-corp has $3,000,000 of total sales, $900,000 to California customers, and $500,000 of business income. It is doing business in California (sales above $757,070 and 30% of the total). Its apportionment is $900,000 ÷ $3,000,000 = 30%, so $150,000 of income is Californian. At 8.84% that is $13,260 of California tax: well above the $800 minimum. See the 8.84% guide, and test your own facts in the nexus checker.
Once you are doing business in California, you must also register with the Secretary of State.