When do you hit California economic nexus
You hit California economic nexus when your sales of physical goods delivered into California, together with those of every related person, exceed $500,000 in the current or the preceding calendar year.
From that moment you must register with the California Department of Tax and Fee Administration (CDTFA), collect California use tax from your customers and file returns. The test never asks whether you have an office, staff or stock in the state.
| $80.2bn CALIFORNIA SALES AND USE TAX REVENUE, FISCAL YEAR 2024-25 (CDTFA) | $248.5bn TAXABLE SALES IN Q2 2026 ALONE (CDTFA, PRELIMINARY) | $500,000 DELIVERED GOODS SALES THAT TRIGGER THE DUTY |
California is one of the two biggest prizes on the map. Its sales and use tax program raised $80.2 billion in fiscal year 2024-25, up 1.05 percent on the year before. That figure includes the local and district taxes CDTFA passes on to cities, counties and special districts, so it is wider than a state-only number. On the state-level comparison used by the US Census Bureau, only two states collected more than $75 billion in sales and gross receipts taxes in state fiscal year 2025: Texas with $77.9 billion and California with $75.4 billion. Florida was third at $51.0 billion.
How the $500,000 test works
- The rule: Revenue and Taxation Code section 6203, as amended by AB 147, has applied since 1 April 2019. It followed the US Supreme Court’s Wayfair decision, which let states make remote sellers collect tax on the strength of their sales alone, without a physical presence.
- Dollars only: CDTFA sets no minimum number of orders. Some other states add a transaction count; California does not.
- Who is counted: you, plus every person related to you under section 267(b) of the Internal Revenue Code. List every company, owner and family member who sells into California.
- Which period: either the current or the preceding calendar year. Exceeding the line in one of them is enough. Exactly $500,000 does not trigger the duty.
- No seasonal exception: a holiday-only seller is covered. Seasonal sellers can apply for a temporary permit.
| SALE TYPE | COUNTS TOWARD $500,000? |
| Retail sales of goods delivered in California | Yes |
| Exempt goods, such as most food for human consumption | Yes |
| Sales for resale to other retailers | Yes |
| Marketplace sales, even when the marketplace collects the tax | Yes |
| Sales made by related persons | Yes, added to yours |
| Charges for services | No |
The day you cross the line
Register on the day your running total for the year passes $500,000. You do not have to collect tax on the order that tips you over, or on earlier orders. Your customers still owe use tax on those purchases. Collection starts with your next taxable retail sale. Illustration: a seller has $495,000 of California deliveries by 30 September. A $6,000 order on 4 October lifts the total to $501,000. The seller registers that day and collects from the next taxable sale. This relief assumes no earlier connection to California, such as stock or staff.
The preceding-year rule keeps you in. A seller over the line in 2026 stays covered through 2027, even if sales fall. Once neither year is over the line and nothing else ties you to California, the sales test stops applying. Your account does not close by itself, though. Closing it means notifying CDTFA and filing a final return, so ask CDTFA in writing before you stop collecting.
Other routes in, with no sales minimum
- Physical presence: stock, an office, representatives taking orders or making deliveries, and leased equipment such as a server each create the duty by themselves.
- Fulfilment centres: storing stock in a California fulfilment centre makes you engaged in business there. Mixed stock leads to a Certificate of Registration – Use Tax. Dedicated stock kept apart from others’ goods may need a seller’s permit.
- Marketplaces: marketplace sales count toward the line. If every California sale goes through a registered marketplace that acts as the retailer, you need not register. If you are over the line and make even one direct sale, for example on your own website, you must register. You then report all sales and deduct the marketplace-collected ones as “other”.
- Drop shipping: over the line, you are treated as the retailer when you ship to a California consumer for an unregistered seller. Tax is measured on the price that seller charged, or on your price plus a 10 percent mark-up.
Registering with CDTFA, step by step
- Total your sales. Add up delivered sales by month and delivery address, including related persons and marketplace sales.
- Open CDTFA Online Services. Scroll to Registration, choose Register for a Permit, License, or Account, and follow the prompts. Registration is free.
- Know your account type. With no California location or dedicated stock, you get a Certificate of Registration – Use Tax. With either, you get a seller’s permit.
- Add fee accounts if needed. They apply to new tires, covered electronic devices, lead-acid batteries and lumber products.
- Collect at the delivery address rate. The statewide base is 7.25 percent: 6 percent state and 1.25 percent local. Over the line, you are engaged in business in every district, so add any district tax. CDTFA offers a rate-by-address tool and an API for checkouts.
- File and pay on CDTFA’s schedule. If you should have registered earlier, ask about the Voluntary Disclosure Program. If you qualify, it can cut the look-back period from eight years to three.
A watch-out for software sellers
From 1 January 2027, SB 122 brings prewritten software, including SaaS, into California sales and use tax by treating it as tangible personal property (from 2027, including prewritten software). Digital audio, video, books, games and infrastructure services (IaaS/PaaS) are excluded. Because the $500,000 test counts sales of tangible personal property, software sales will likely count toward it. CDTFA has not confirmed this yet, so get its answer in writing. Its implementing regulations are still in draft.
