Economic Nexus Threshold

After South Dakota v. Wayfair (2018), California adopted economic nexus rules that require registration once your business crosses $500,000 in total California sales during the current or previous calendar year. Unlike many states, California does not impose a separate transaction count threshold—gross sales alone determine the obligation.

This threshold applies to all sales into California, including taxable and nontaxable transactions, wholesale and retail. If your business hits $500K, you must register with the California Department of Tax and Fee Administration (CDTFA) even if you have no physical presence in the state.

Physical Presence Creates Immediate Nexus

California's physical presence rules predate economic nexus and remain in effect. If your business has any physical footprint in California—inventory stored in a warehouse, employees working remotely from the state, contractors fulfilling orders, or a registered office—you have nexus immediately, regardless of sales volume.

For ecommerce sellers using Amazon FBA, Fulfillment by Amazon's California warehouses create physical presence. Amazon acts as a marketplace facilitator and collects tax on your behalf for marketplace sales, but if you also sell direct through your own website or other channels, that inventory creates direct nexus for those transactions.

Common physical presence triggers include:

• Inventory stored in California warehouses (including FBA, third-party logistics)
• Employees or contractors working from California addresses
• Rented office space or coworking memberships
• Attendance at California trade shows where you take orders
• Drop-shipping arrangements where a California-based vendor fulfills on your behalf

Marketplace Facilitator Rules

California requires marketplace facilitators (platforms like Amazon, eBay, Etsy, Shopify's managed fulfillment) to collect and remit sales tax on behalf of sellers once the facilitator's total California sales exceed $500K. This shifts the collection burden away from individual sellers for transactions processed through the platform.

However, if you sell through multiple channels—marketplace sales plus direct website sales, for example—you must track each channel separately. Marketplace facilitators handle their platform's transactions, but you remain responsible for direct sales that occur outside the marketplace. If your combined activity crosses the economic nexus threshold, registration is required even if most sales flow through a facilitator.

Sellers should request Form 1099-K or equivalent sales reports from marketplace facilitators to verify which transactions were handled and which remain your responsibility.

SaaS and Digital Goods Taxability

California taxes software as a service (SaaS) when delivered electronically if the software is treated as tangible personal property transferred to the customer. This creates ambiguity: remotely accessed cloud software without a transfer of code may not be taxable, but downloadable software, electronically delivered games, or digital content subscriptions typically are.

Sellers of SaaS, digital goods, or streaming services should review California's Regulation 1502 for specific guidance, or consult with a tax professional to determine taxability based on the nature of the product and how it's accessed. Misclassification can lead to unexpected audit exposure.

When to Register

Register with the CDTFA as soon as you meet either the economic nexus threshold ($500K in sales) or establish physical presence in California. Registration is required before making the first taxable sale that triggers nexus. Retroactive registration after months of unreported sales creates liability, penalties, and interest.

California does not offer a voluntary disclosure program with the same level of penalty relief as some states, so proactive registration is the safest approach. If you've already crossed the threshold and haven't registered, consult a tax advisor before filing—voluntary disclosure may still reduce exposure compared to waiting for an audit.

Evidence to Retain

California audits can request documentation going back multiple years. Retain the following records to support your nexus determination and sales tax reporting:

• Sales records by state showing total California revenue and taxable sales
• Marketplace facilitator statements (1099-K, monthly reports) documenting platform-collected tax
• Inventory location logs showing where products were stored and fulfilled
• Payroll and contractor records identifying California-based workers
• Exemption certificates for wholesale or resale transactions
• Invoices and receipts for taxable and exempt sales

Retain these records for at least four years from the date of the transaction, per CDTFA guidance. Missing documentation during an audit shifts the burden of proof to the seller and can result in estimated tax assessments.