California Income Tax Nexus and Public Law 86-272: What Irvine Businesses Owe Out of State
Sales tax nexus and income tax nexus are two different tests, and an Irvine business can clear one while failing the other. A company can be under a state's sales tax threshold and still owe an income tax return there — or be over the sales tax threshold and shielded from income tax by a federal statute passed in 1959. Pathfinding Consultants provides business tax preparation Irvine businesses rely on to evaluate both tests separately rather than assuming one answers the other.
IRS DISCLAIMER: This article is for general informational purposes only and is not tax, legal, or accounting advice. Income tax nexus determinations are facts-and-circumstances based and depend on current state guidance and case law. Always consult a qualified tax professional, Enrolled Agent, CPA, or attorney before relying on this guide for a specific filing decision. Pathfinding Consultants encourages every Irvine business owner to seek personalized guidance for their own business. |
Two Different Tests, Two Different Answers
California income tax nexus is governed by an entirely separate standard from sales tax nexus. The sales tax rule is a bright line: $500,000 in California sales of tangible personal property in the current or preceding calendar year. California income tax nexus works differently, under the "doing business" standard in Revenue and Taxation Code Section 23101.
The practical consequence is that an out-of-state company can be required to register with one California agency and not the other, or with both under different tests. Treating a single threshold as the answer to both questions is one of the most common multistate errors for growing Irvine businesses expanding across state lines, and for out-of-state companies selling into California.
The Factor Presence Thresholds
Under Revenue and Taxation Code Section 23101(b), an entity is doing business in California if its California sales exceed the lesser of an inflation-adjusted dollar amount or 25% of its total sales, with separate smaller thresholds for property and payroll. For 2025 those figures were $757,070 for sales and $75,707 each for property and payroll, adjusted annually for inflation (source: California Franchise Tax Board; RTC Section 23101).
Meeting any single factor triggers the doing business standard. The 25% test is what surprises smaller companies: the FTB's own example describes an out-of-state corporation with $400,000 of California sales out of $1,000,000 total — below the dollar threshold, but 40% of total sales, which exceeds 25% and creates nexus. Owners of a partnership, LLC treated as a partnership, or S corporation must include their distributive share of that entity's property, payroll, and sales when calculating their own totals.
The Thresholds Are Not a Safe Harbor
A critical point about the factor presence thresholds is what they do not provide. California income tax nexus is ultimately determined by the broader facts-and-circumstances doing business standard under RTC Section 23101(a), and the California Office of Tax Appeals has found nexus to exist for taxpayers who did not meet the factor presence numbers at all.
The factor presence figures therefore function as a floor above which nexus clearly exists, not a ceiling below which a business is protected. A company with employees actively engaging in transactions for profit in California is doing business there under the general standard regardless of whether any dollar threshold is met — an outcome the FTB illustrates directly in its own guidance on partnerships operating through in-state employees.
Expanding into new states from Irvine this year?
Pathfinding Consultants — Business Tax Preparation, Irvine & Orange County, CA
(949) 620-1036 | pathfindingconsultants.com
What Public Law 86-272 Protects
Federal Public Law 86-272 provides limited protection from state income tax for companies whose only in-state activity is soliciting orders for tangible personal property, where those orders are approved and fulfilled from outside the state. Public Law 86-272 protection is genuinely useful, but it is narrower than most business owners assume.
The limits are specific. Public Law 86-272 applies only to sellers of tangible personal property — a service provider or a software-as-a-service business has no protection under it, because services and licenses are not tangible personal property. Public Law 86-272 also does not protect against taxes that are not measured by net income, which is why a protected corporation can still owe California's $800 minimum franchise tax and still be required to file a California return.
Activities That Exceed the Protection
California has interpreted Public Law 86-272 protection narrowly. The FTB's position, set out in Technical Advice Memorandum 2022-01, treated a range of internet-based activities as exceeding protected solicitation — including providing post-sale technical support through in-state channels and placing cookies on customers' devices for purposes beyond order solicitation. Employees telecommuting from California have also been treated as exceeding protection.
That interpretation has been contested. A San Francisco Superior Court declared TAM 2022-01 and the related publication void on procedural grounds in December 2023 in American Catalog Mailers Association v. FTB. The FTB and the Office of Tax Appeals have nonetheless continued applying factor presence alongside the broader doing business standard, which means a company relying on Public Law 86-272 protection should document its California activities carefully rather than assume the litigation resolved the exposure.
Why Remote Employees Are the Most Common Trigger
Business consulting near me searches from Irvine business owners spike after a single remote hire in another state creates an unexpected filing obligation there. A remote employee can simultaneously create income tax nexus requiring an apportioned return, payroll registration and withholding obligations, and in many cases sales tax nexus through physical presence — three separate obligations from one hiring decision.
Pathfinding Consultants is an Enrolled Agent firm providing business tax preparation Irvine businesses have relied on to evaluate multistate tax nexus before a remote hire is made or a new state is entered. Business tax preparation Irvine businesses need on this topic is a nexus review triggered by events — a hire, a warehouse, a threshold crossing — rather than an annual look back. A business consulting near me conversation before the offer letter goes out is what keeps the analysis proactive. Owners evaluating structure alongside nexus may also want our guide to entity restructuring for tax efficiency and our reasonable compensation guide for S-Corp owner.
Common Mistakes with Income Tax Nexus
Assuming a sales tax threshold answers the California income tax nexus question, when the two tests are entirely separate
Treating the factor presence thresholds as a safe harbor, when nexus can exist under the broader doing business standard without meeting them
Overlooking the 25% test, which can create nexus at sales levels well below the dollar threshold
Relying on Public Law 86-272 protection while selling services or SaaS, which the statute does not cover
Assuming Public Law 86-272 protection eliminates the California filing requirement and the $800 minimum franchise tax, when it protects only net-income-based tax
Every one of these mistakes is avoidable when multistate tax nexus is reviewed as an event-driven question — triggered by hires, inventory placement, and threshold crossings — rather than revisited once a year at filing time. A business consulting near me search before an expansion decision is when a multistate tax nexus review actually changes the outcome.
Get your multistate income tax nexus reviewed before your next hire or expansion.
Pathfinding Consultants — Business Tax Preparation, Irvine & Orange County, CA
(949) 620-1036 | pathfindingconsultants.com
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