Doing Business in California: Why Falling Below Economic Nexus Thresholds May Still Trigger California Tax Obligations
One of the most common — and costly — misconceptions we see among business owners is the belief that staying below California’s economic nexus thresholds automatically means no California tax filing is required. Unfortunately, recent California Office of Tax Appeals (OTA) decisions continue to confirm that this assumption is incorrect.
California’s “doing business” rules are broader than many taxpayers realize. Even minimal activity in California can be enough to trigger filing requirements, minimum franchise taxes, and penalties — especially for online businesses, creators, ecommerce sellers, and out-of-state companies with any California connection.
At Velin & Associates, Inc., we regularly help clients untangle these rules before small California activity turns into expensive compliance issues.
Understanding California’s Two-Part “Doing Business” Test
For California franchise tax purposes, a business entity is considered to be “doing business” in California if either of the following applies under R&TC Section 23101:
- Financial or Pecuniary Gain Test (Section 23101(a))
A business is doing business in California if it is actively engaging in any transaction for the purpose of financial or pecuniary gain or profit in the state — regardless of size.
There is no minimum dollar threshold for this test.
- Economic Nexus Thresholds (Section 23101(b))
A business is also doing business in California if it meets any of the following economic thresholds for the 2025 tax year:
- Organized or commercially domiciled in California
⠀ - California sales exceed the lesser of:
- $757,070, or
- 25% of total sales
⠀
- California real and tangible personal property exceed the lesser of:
- $75,707, or
- 25% of total property
⠀
- California compensation paid exceeds the lesser of:
- $75,707, or
- 25% of total compensation
Many taxpayers mistakenly assume that staying below these thresholds provides a “safe harbor.” It does not.
Why the Economic Nexus Thresholds Are Not a Safe Harbor
Recent OTA rulings have reinforced that falling below the economic nexus thresholds does not protect a business from being treated as doing business in California if the financial or pecuniary gain test is met.
Example: Amazon FBA Seller (Online Commerce)
Consider an Amazon Business owner based outside California who uses Amazon’s Fulfillment by Amazon (FBA) program. Even if the seller:
- Has less than $14,000 in California sales
- Maintains only a few thousand dollars of inventory stored in California warehouses
OTA rulings show that this level of activity can still qualify as actively engaging in transactions for profit in California.
For ecommerce clients — including CPA for Amazon Business, CPA for Online Commerce, and Shopify Store CPA clients — this often means:
- A required California return
- The $800 annual minimum franchise tax
- Potential late-filing penalties if ignored
Example: Shopify Store Owner with Minimal California Activity
A Shopify store owner operating from another state may believe they are safe because:
- California sales are well below $757,070
- No employees are physically located in California
However, if the business uses:
- California-based fulfillment centers
- California-based contractors
- Dropshipping arrangements involving California inventory
That activity alone may satisfy the financial or pecuniary gain test, triggering California filing obligations.
This scenario is increasingly common for CPA for Shopify Store and CPA for Creators clients who sell nationwide.
Payroll Is Not Required to Trigger Nexus
Another surprising point reinforced by OTA decisions is that very small payroll amounts can establish California nexus.
Example: Out-of-State Business with One California Worker
An out-of-state company that pays even a small amount of compensation to a California-based worker — including a temporary or part-time employee — may be deemed to be doing business in California.
In one OTA case, compensation of just $121 paid to a California resident was sufficient to establish nexus under the financial or pecuniary gain test.
This is especially relevant for:
- Content creators with California-based editors or assistants
- Filmmakers hiring California freelancers
- Online businesses using remote California workers
What This Means for LLCs, S Corporations, and Partnerships
Once a business is considered to be doing business in California, the consequences can include:
- Filing a California return
⠀ - Paying the $800 minimum franchise or annual tax
⠀
- LLC gross receipts fees (if applicable)
⠀ - Per-partner or per-shareholder penalties for late or missing filings
For S corporations and LLCs, these penalties can escalate quickly — even when actual California income is minimal.
Why These Rules Matter for the Clients We Serve
These issues most often affect:
- YouTubers, TikTok creators, and filmmakers earning platform-based income
- Shopify and Amazon sellers using third-party fulfillment
- Online commerce businesses selling nationwide
- Doctors and dentists expanding practices or investing in out-of-state entities
- High net worth individuals with ownership interests in multi-state businesses
At Velin & Associates, we routinely review nexus exposure for clients who were unaware that California filing requirements had already been triggered.
Strategic Planning Is Essential — Not Optional
Because California’s financial or pecuniary gain test is broad, reactive compliance is risky and expensive. Proactive planning allows us to:
- Identify California nexus early
- Determine correct filing positions
- Minimize penalties and interest
- Structure operations to reduce unnecessary exposure
- Ensure compliance without overpaying tax
Failing to file when required often leads to notices, assessments, and compounding penalties — even for businesses that believed they were “too small” to matter.
How Velin & Associates, Inc. Helps
We assist clients with:
- California nexus analysis
- Franchise tax and LLC fee compliance
- Multi-state filing strategies
- Audit defense and notice resolution
- Structuring online and remote businesses efficiently
Understanding California’s rules is no longer optional for modern businesses. If your company has any California connection, it’s critical to evaluate your exposure before penalties accumulate.
For more information about our tax planning services, contact us today: visit our website.
Velin & Associates, Inc
8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org
CPA for YouTubers | CPA for Shopify Store | CPA for Online Commerce | CPA for Creators | Shopify Store CPA | CPA for Filmmakers | CPA for Amazon Business | Amazon Business CPA | CPA for Dental Practice | Dentist CPA | Dental Business CPA | CPA for TikTokers | CPA for Doctors | CPA for Medical Practice | CPA for High Net Worth Individuals
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.