California — Corporate Income / Franchise Tax

California imposes a franchise tax on every corporation incorporated in California, qualified to transact intrastate business in California, or doing business in California. "Doing business" means actively engaging in any transaction for the purpose of financial or pecuniary gain or profit. The franchise tax applies from the date of incorporation, qualification, or commencement of doing business until the effective date of dissolution or withdrawal (or later, when the corporation ceases doing business). Banks and financial corporations are subject to separate rules under Chapter 2.5.

Source: Cal. Rev. & Tax. Code § 23153 and Cal. Rev. & Tax. Code § 23101

California imposes an annual franchise tax on corporations doing business in the state equal to 8.84% of net income or a minimum franchise tax of $800, whichever is greater. General C corporations pay the 8.84% rate; S corporations are taxed at 1.5% of net income but remain subject to the $800 minimum. For taxable years beginning on or after January 1, 2000, the tax is measured by net income for the taxable year.

First-year minimum franchise tax exemption

Under Cal. Rev. & Tax. Code § 23153(f)(1), every corporation that incorporates or qualifies to do business in California on or after January 1, 2000 is not required to pay the $800 minimum franchise tax in its first taxable year, but remains subject to the income-based tax (the 8.84% rate applied to net income, or 1.5% for S corporations). This first-year exemption applies only to the minimum franchise tax; a corporation with net income in its first taxable year still owes the percentage-based franchise tax on that income.

The statutory provision is codified in subdivision (f)(1) of Section 23153 and cross-referenced in subdivision (f)(1) of Section 23151, which governs the computation of tax for the first taxable year beginning on or after January 1, 2000. Section 23151(f)(1)(B) provides that the tax for the first taxable year shall be computed at the 8.84% rate upon the basis of net income for that year, "but not less than the minimum tax specified in Section 23153," and Section 23153(d)(1) provides that the minimum tax shall be $800 "[e]xcept as provided in … paragraph (1) of subdivision (f) of Section 23151." The interaction of these cross-references implements the first-year exemption from the $800 minimum while preserving the percentage-based tax on any net income earned during the first year.

Corporations that incorporated or qualified to do business before January 1, 2000, were not eligible for the first-year exemption and were required to pay the $800 minimum franchise tax from the date of incorporation, qualification, or commencement of doing business in the state. Practitioners reviewing historical tax periods must confirm the incorporation or qualification date to determine whether the first-year exemption was available.

The first-year exemption under subdivision (f)(1) does not apply to limited partnerships, limited liability companies, limited liability partnerships, charitable organizations, regulated investment companies, real estate investment trusts, real estate mortgage investment conduits, or qualified Subchapter S subsidiaries. Cal. Rev. & Tax. Code § 23153(f)(2).

Source: Cal. Rev. & Tax. Code § 23153 Source: Cal. Rev. & Tax. Code § 23151

California requires corporations with business income from sources both within and outside the state to apportion business income using a single-sales-factor formula for tax years beginning on or after January 1, 2013. Business income is apportioned to California by multiplying total business income by the sales factor (California sales divided by total sales). The exception is corporations deriving more than 50% of their gross business receipts from qualified business activities, which must use an equally weighted three-factor formula (property, payroll, and sales). For tax years beginning on or after January 1, 2025, banking and financial business activities are no longer qualified business activities and must use the single-sales-factor formula.

Source: Cal. Rev. & Tax. Code § 25128.7 and FTB Apportionment & Allocation

California defines "doing business" under two independent tests. Under Section 23101(a), a corporation is doing business if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California. Under Section 23101(b), effective for taxable years beginning on or after January 1, 2011, a corporation is also doing business if it satisfies any of the following: organized or commercially domiciled in California; California sales exceeding the lesser of $500,000 or 25% of total sales; California real or tangible personal property exceeding $50,000 or 25% of total property; or California payroll exceeding $50,000 or 25% of total compensation.

Indexed thresholds

The $500,000 sales threshold and the $50,000 property and payroll thresholds are adjusted annually for inflation under Revenue and Taxation Code Section 23101(c). For taxable years beginning in 2025, the indexed thresholds are $757,070 for sales, $75,707 for property, and $75,707 for payroll. The Franchise Tax Board publishes the current year's indexed amounts in the instructions for Schedule R (Apportionment and Allocation of Income), in the instructions for Form 100, and on the FTB's "Doing Business in California" web pages. See the section titled "Annual inflation adjustment of doing-business thresholds" elsewhere in this guide for a detailed explanation of the indexing mechanism, the publication schedule, and the application of indexed thresholds to pass-through entity interests.

Independent tests

Meeting either the qualitative test in subsection (a) or any single quantitative threshold in subsection (b) establishes doing-business status and subjects the corporation to franchise tax, including the $800 minimum. The quantitative thresholds in subsection (b) are not a safe harbor. Recent Office of Tax Appeals decisions (including Matter of GEF Operating, Inc., 2020-OTA-045P, and Matter of Diet Standards LLC, Case No. 230613542) have held that a corporation may be doing business under the qualitative test in subsection (a) even if it falls below all three indexed thresholds in subsection (b).

Source: Cal. Rev. & Tax. Code § 23101 Source: FTB 2025 Schedule R Instructions

California C corporations must file Form 100 on or before the 15th day of the 4th month following the close of the taxable year. For calendar-year corporations, the filing deadline is April 15. S corporations are subject to a different deadline: the 15th day of the 3rd month following the close of the taxable year (March 15 for calendar-year S corporations). When the due date falls on a weekend or holiday, the deadline extends to the next business day.

Source: Cal. Rev. & Tax. Code § 18601 and FTB Due Dates: Businesses

California sources sales of other than tangible personal property—including services, intangibles, and certain real and personal property transactions—to the state based on where the taxpayer's market for those sales is located, not where the income-producing activity occurs. This market-based sourcing framework applies to all corporations apportioning business income using the sales factor for taxable years beginning on or after January 1, 2013.

Statutory framework under Section 25136

Under Revenue and Taxation Code Section 25136(b), California assigns four categories of non-tangible-property sales to the state:

1. Sales from services are in California to the extent the purchaser of the service received the benefit of the service in the state.
2. Sales from intangible property are in California to the extent the property is used in the state. For marketable securities, sales are in California if the customer is in California.
3. Sales from the sale, lease, rental, or licensing of real property are in California if the real property is located in the state.
4. Sales from the rental, lease, or licensing of tangible personal property are in California if the property is located in the state.

The first two categories—services and intangibles—present the most complex sourcing questions for multistate corporations and are governed by detailed regulations.

Regulation 25136-2: benefit-of-service and use-of-intangible rules

California Code of Regulations, title 18, section 25136-2 implements the statutory market-based sourcing standard. The regulation was originally adopted in 2012, amended in 2016, and substantially revised effective for taxable years beginning on or after January 1, 2026.

For services, the regulation establishes a cascading hierarchy to determine where the benefit is received:

• Presumptions based on service type: If a service predominantly relates to (a) real property located in California, (b) tangible personal property delivered in California, (c) intangible property used in California, or (d) an individual physically present in California at the time of service, the benefit is presumed received in California. These presumptions may be rebutted by a preponderance of the evidence.
• Substantiation from contracts and books: The location where the benefit is received is determined by the taxpayer's contracts or books and records kept in the normal course of business.
• Alternative sources and reasonable approximation: If contracts and records do not substantiate the location, the taxpayer may use other sources of information. If the location still cannot be determined, it must be reasonably approximated (for example, using population data for government contracts or advertising services).
• Billing address as final fallback: If none of the above methods yield a location, sales to individual customers are sourced to the customer's billing address; sales to business entities are sourced to the customer's commercial domicile.

For intangible property, the regulation distinguishes between marketing intangibles (trademarks, trade names, brand value) and non-marketing intangibles (patents, copyrights, trade secrets). Sales are sourced to California to the extent the intangible is used in the state, with specific rules for sales of stock, partnership interests, and goodwill depending on the composition of the underlying entity's assets.

Industry-specific rules: professional services and asset management

The 2026 amendments added two significant industry-specific safe harbors:

• Professional services safe harbor: If a taxpayer provides any single type of professional service (defined to include management services, tax and accounting, audit, consulting, and investment advisory services other than asset management) to more than 250 customers, gross receipts from that service are assigned to the customer's billing address—unless more than 5% of receipts from that service derive from a single customer, in which case that customer's receipts are sourced under the general benefit-of-service rules.

• Asset management services look-through: Receipts from asset management services (the direct or indirect provision of management, distribution, or administrative services to funds) are sourced based on the domicile of the fund's investors or beneficial owners, not the fund entity itself. Receipts are assigned to California in proportion to the average value of fund interests held by California-domiciled investors. The investor's domicile is presumed to be the billing address in the fund's records unless evidence shows a different primary residence or principal place of business. If precise investor domicile data is unavailable, reasonable approximation (including population-based proxies) is permitted.

These rules codify the Franchise Tax Board's longstanding position that asset management fees should be sourced to investor locations. The amendments supersede certain prior FTB guidance, including aspects of Legal Ruling 2022-01.

Relationship to apportionment formula

Market-based sourcing under Section 25136 determines what goes into the numerator of the sales factor for purposes of the single-sales-factor apportionment formula under Section 25128.7. A corporation with $10 million in total sales and $3 million properly sourced to California under these rules would have a 30% sales factor, and 30% of its business income would be apportioned to California (assuming it uses the single-sales-factor formula).

Corporations deriving more than 50% of their gross business receipts from certain qualified business activities are required to use an equally weighted three-factor formula (property, payroll, and sales) instead; for those taxpayers, the Section 25136 market-based sourcing rules still govern the sales factor, but property and payroll also affect apportionment. Banking and financial corporations were removed from the qualified-business-activity definition effective for taxable years beginning on or after January 1, 2025, and now use the single-sales-factor formula.

Source: Cal. Rev. & Tax. Code § 25136 Source: Cal. Code Regs. tit. 18, § 25136-2 — FTB announcement

When the California Franchise Tax Board (FTB) determines that a corporation owes additional franchise or income tax, it issues a Notice of Proposed Assessment (NPA) stating the proposed additional tax and/or penalties, the basis for the liability, and any accrued interest. The NPA is not an immediate billing; the taxpayer has time to review and respond before the assessment becomes final.

## 60-Day Protest Deadline

Cal. Rev. & Tax. Code § 19041(a) grants the taxpayer 60 days from the mailing date of the NPA to file a written protest with the Franchise Tax Board. The 60-day period runs from the date the NPA was mailed by the FTB, not from the date the taxpayer receives it or opens the envelope. Each NPA shows a "Protest By" date on its face; if no protest is filed by that date, the proposed assessment becomes final under Cal. Rev. & Tax. Code § 19042, and the FTB will bill the taxpayer for the full amount, including penalties and interest.

## Content Requirements for a Valid Protest

The protest must be in writing and must specify the grounds on which it is based. The FTB requires the protest to include:

• The taxpayer's name, California corporation number or federal employer identification number, and contact information;
• The amounts and tax years being protested;
• A statement of facts;
• Legal authorities that support the taxpayer's position;
• An explanation of why the taxpayer believes the proposed assessment is incorrect;
• Evidence and documentation substantiating the taxpayer's position;
• Any portion of the proposed assessment the taxpayer concedes;
• The signature of an entity officer or authorized representative; and
• A copy of the NPA.

If the taxpayer wishes someone else to represent it during the protest process, a completed FTB 3520 BE, Business Entity Power of Attorney Declaration, must accompany the protest.

## Filing Methods

A protest may be filed online through MyFTB, by mail, or by fax. Online filing requires registering or logging in to MyFTB, selecting "Account" then "Proposed Assessments," and choosing the correct NPA number to complete the online submission. For written protests, the FTB provides a mailing address on the NPA and on FTB Publication 5821.

For corporations that have not filed a valid tax return for one of the last five tax years, online protest filing is unavailable; those taxpayers must submit the protest in writing by mail or fax.

## Review Process and Hearing Rights

After a timely protest is received, the FTB reviews the facts and supporting information submitted by the taxpayer. The taxpayer has a right to request an informal oral hearing at the FTB's Sacramento office or at one of the FTB's other California offices. The request for a hearing may be made in the protest letter itself; it need only be stated once. FTB staff are prohibited from discouraging a taxpayer from requesting a hearing.

FTB Notice 2018-01 sets a goal for staff to make initial contact with the taxpayer or representative within 120 days of the protest filing. The initial contact will typically include a request to establish an agreed hearing date if a hearing has been requested, and may contain a request for additional documents or information. Issues not raised in writing within the 60-day protest period ordinarily will not be considered unless they can be resolved within the standard timeframe.

After considering the protest and conducting any requested hearing, the FTB issues a Notice of Action (NOA) that affirms, revises, or withdraws the proposed assessment. The NOA sets forth the FTB's final determination on the protested issues. Filing a protest does not stop the accrual of interest on the proposed tax.

Source: Cal. Rev. & Tax. Code § 19041 Source: Cal. Rev. & Tax. Code § 19042 Source: FTB Publication 5821, Protest Procedures Source: FTB Publication 7275, Notice of Proposed Assessment

After the Franchise Tax Board (FTB) issues a Notice of Action (NOA) on a protested proposed assessment, a taxpayer dissatisfied with the FTB's final determination may pursue an administrative appeal. California's administrative appeals route for corporate franchise and income tax disputes runs through a single independent administrative body—the Office of Tax Appeals (OTA)—before reaching the courts.

## Appeal to the Office of Tax Appeals

Cal. Rev. & Tax. Code § 19045 grants the taxpayer 30 days from the date the Notice of Action was mailed to file an appeal with the Office of Tax Appeals. The 30-day period runs from the mailing date printed on the NOA, not from the date of receipt. If the taxpayer fails to file a timely appeal, the Notice of Action becomes final, and the FTB will bill the taxpayer for the amounts due plus interest.

The OTA was created by the California Legislature in 2017 (Assembly Bill 102, Stats. 2017, Ch. 16, and Assembly Bill 131, Stats. 2017, Ch. 252) and assumed the adjudicatory function previously held by the State Board of Equalization for personal income tax, corporate franchise tax, and certain other taxes. The OTA is an independent state agency whose mission is to provide an impartial forum for the resolution of tax disputes between California taxpayers and the state's tax agencies. It is governed by Cal. Gov't Code § 15600 et seq.

## OTA Procedure: Briefing, Hearings, and Decisions

Appeals may be filed online through the OTA's portal, by mail to the OTA's West Sacramento mailing address (P.O. Box 989880, West Sacramento, CA 95798-9880), or by using OTA Form L-01. The appeal may be informal (a letter) or formal, and the taxpayer may represent itself or be represented by counsel or another authorized representative.

After the appeal is filed, the FTB files an opening brief, and the taxpayer files a responding brief. Briefs are typically limited to 30 double-spaced pages (or 15 single-spaced pages) unless the OTA grants an exception for reasonable cause. The taxpayer may request an oral hearing in writing. If a hearing is requested, the OTA will send a form to elect a hearing location in Sacramento, Los Angeles, or Fresno. Oral hearings are generally conducted before a three-member panel of administrative law judges (ALJs), although small cases (under $5,000 per tax year for income tax matters under Cal. Gov't Code § 15676.2) may be assigned to a single ALJ.

At the conclusion of the hearing or after reviewing the written record if no hearing is held, a three-member ALJ panel issues a written decision (called an "opinion") explaining the facts, applicable law, and reasons for the decision. The OTA aims to issue a decision within 100 days of an oral hearing or within six months of the completion of briefing when the matter is submitted on the written record.

## Petition for Rehearing

Under Cal. Rev. & Tax. Code § 19048, either the taxpayer or the FTB may file a petition for rehearing within 30 days of the date the OTA decision is issued. If no petition for rehearing is filed, the decision becomes final 30 days after it is issued.

## Judicial Review in Superior Court

Once the OTA decision becomes final, either party may seek judicial review by filing an action in the California Superior Court within the applicable deadline. Cal. Rev. & Tax. Code § 19047 provides that any action to review an OTA decision must be brought within 90 days of the date the decision becomes final. The taxpayer generally files in the Superior Court of the county in which the taxpayer's principal place of business is located or in Sacramento County. The Superior Court reviews the case de novo, meaning it does not review the OTA's decision for error, but rather conducts a new trial on the facts and law.

## Further Appeals: Courts of Appeal and Supreme Court

Superior Court decisions in franchise and income tax cases may be appealed to the California Court of Appeal, and ultimately to the California Supreme Court, following the standard rules for civil appeals. Either the taxpayer or the FTB may pursue such an appeal. In rare cases, an issue of federal constitutional law or federal tax treaty interpretation may support a further appeal to the United States Supreme Court.

Source: Cal. Rev. & Tax. Code § 19045 Source: Cal. Rev. & Tax. Code § 19047 Source: Cal. Rev. & Tax. Code § 19048 Source: Cal. Gov't Code § 15600 et seq. (OTA authorizing statute) Source: OTA Rules for Tax Appeals, 18 CCR § 30103 et seq. Source: OTA Appeals Procedures

California's statute of limitations for corporate franchise and income tax assessments and refund claims differs in key respects from the federal statute of limitations, most notably in granting the Franchise Tax Board a longer general assessment period.

## Assessment Statute of Limitations: General Four-Year Rule

Under Cal. Rev. & Tax. Code § 19057, the Franchise Tax Board generally may not propose a deficiency assessment after four years from the last day of the month following the due date of the return (determined without regard to extensions) or four years from the date the return was filed, whichever is later. This four-year period is one year longer than the federal three-year assessment statute and applies to both corporate franchise tax and corporate income tax returns. If the corporation timely files its return on or before the extended due date, the statute runs from the date the return was actually filed; if it files late, the statute runs from the date of late filing.

For a corporation that files a timely original return and later files an amended return reporting additional tax, the assessment statute runs from the date the amended return was filed for the items reported on the amended return, not from the original return date.

## Extended Periods for Substantial Omissions and Fraud

California follows federal law in extending the assessment period when a taxpayer substantially understates income or engages in fraud:

Substantial omission of income (25% rule): If the taxpayer omits from gross income an amount properly includible that is in excess of 25 percent of the amount of gross income stated in the return, the Franchise Tax Board may assess the tax at any time within eight years after the return was filed. Cal. Rev. & Tax. Code § 19058 adopts this extension by reference to the federal rule in IRC § 6501(e). The eight-year period applies to the entire deficiency, not just the omitted income portion.

Fraud or willful attempt to evade tax: If the taxpayer files a false or fraudulent return with the intent to evade tax, or willfully attempts in any manner to evade tax, there is no statute of limitations—the FTB may assess at any time. Cal. Rev. & Tax. Code § 19057 expressly states that no statute of limitations applies in cases of fraud or willful evasion.

Failure to file a return: Similarly, if the taxpayer never files a required return, there is no statute of limitations on assessment. Cal. Rev. & Tax. Code § 19057(a) provides that the FTB may assess the tax at any time when no return has been filed. A return filed after the FTB has issued a notice of proposed assessment does not start the limitations period unless the FTB accepts it as a valid return.

## Federal Changes and the Six-Month Reporting Rule

Cal. Rev. & Tax. Code § 18622 requires a taxpayer to report any final federal determination (such as an IRS audit adjustment, Tax Court decision, or federal refund) that changes or corrects federal taxable income, or any item thereof, within six months of the date the federal determination becomes final. When the taxpayer timely reports a federal change, or when the FTB is otherwise notified of the change by the IRS, the FTB may assess additional California tax within one year after the date the report is filed or the FTB receives the information, even if the general four-year statute would otherwise have expired. Cal. Rev. & Tax. Code § 19059 extends the California statute by one year from the date the FTB receives notice of the federal change.

## Statute of Limitations on Refund Claims

Cal. Rev. & Tax. Code § 19306 imposes a statute of limitations on claims for refund or credit of franchise or income tax. A taxpayer must file a claim for refund within the later of:

• Four years from the date the original return was filed; or
• One year from the date of overpayment.

For purposes of this rule, a return filed before the last day of the period prescribed by law for filing (including extensions) is deemed to have been filed on the last day of that period. Cal. Rev. & Tax. Code § 19306(a). If the taxpayer did not file a return, the claim for refund must be filed within four years from the date the tax was paid.

A refund claim that is denied by the FTB may be appealed to the Office of Tax Appeals within 30 days of the date of the denial notice, or if the FTB takes no action on the refund claim within six months, the taxpayer may treat the claim as deemed denied and file an appeal with the OTA. Cal. Rev. & Tax. Code § 19324 and § 19331.

## Agreements to Extend the Statute

The FTB and the taxpayer may agree in writing to extend the statute of limitations on assessment. Cal. Rev. & Tax. Code § 19067 authorizes the execution of such agreements (commonly called "consents" or "extensions"). The extension typically specifies a new assessment date and may be limited to particular issues. An executed extension is binding on both parties and may be revoked by either party upon written notice, effective six months after the notice is given.

Source: Cal. Rev. & Tax. Code § 19057 Source: Cal. Rev. & Tax. Code § 19058 Source: Cal. Rev. & Tax. Code § 19059 Source: Cal. Rev. & Tax. Code § 18622 Source: Cal. Rev. & Tax. Code § 19306 Source: Cal. Rev. & Tax. Code § 19324 Source: Cal. Rev. & Tax. Code § 19331 Source: Cal. Rev. & Tax. Code § 19067

California offers taxpayers facing potential past-due franchise or income tax liabilities two principal avenues for proactive resolution: the Voluntary Compliance Initiative (VCI) and the Technical Advice Memorandum (TAM) / Chief Counsel Ruling process for obtaining advance guidance on unsettled legal questions.

## Voluntary Compliance Initiative (VCI)

The California Franchise Tax Board administers a Voluntary Compliance Initiative for taxpayers that discover prior noncompliance and wish to come forward before the FTB initiates contact. Unlike many state voluntary disclosure programs, California's VCI is an ongoing program (not a limited-time amnesty) and is codified in FTB procedures rather than statute. The program is available to taxpayers that have not yet been contacted by the FTB for the tax types and years at issue.

Eligibility and anonymity. A taxpayer is eligible for the VCI if:

• The taxpayer has not filed returns (or has filed incomplete or inaccurate returns) for past California franchise or income tax obligations;
• The FTB has not yet contacted the taxpayer, nor is the taxpayer currently under audit or subject to a collection case for the years and tax types to be disclosed; and
• The taxpayer or its representative initiates contact with the FTB in good faith to report the unreported or underreported liabilities.

California does permit anonymous pre-clearance of VCI eligibility. A taxpayer's representative (typically a CPA, attorney, or enrolled agent) may contact the FTB's VCI coordinator on an anonymous basis, using a taxpayer identification number only, to confirm eligibility and discuss the parameters of the disclosure before identifying the taxpayer by name.

Look-back period. California does not impose a statutory cap on the VCI look-back period. In practice, the FTB typically requests that the taxpayer file returns and pay tax, interest, and penalties for all open periods under the applicable statute of limitations. Because California's general statute of limitations on assessment is four years (and longer for substantial omissions or no return filed), the look-back period often extends to four or more tax years. The FTB retains discretion to negotiate the look-back on a case-by-case basis, particularly when older years involve small amounts or statute-barred periods.

Penalty relief. The primary benefit of the VCI is a waiver or reduction of penalties. The FTB generally waives the late-filing penalty and the demand penalty (the 25% demand penalty under Cal. Rev. & Tax. Code § 19133) for years disclosed through the VCI. However, accuracy-related penalties (such as the negligence penalty under § 19164 or substantial understatement penalty under § 19164) may still apply if the facts warrant. The VCI does not waive interest; interest accrues from the original due date and is assessed in full. The FTB also does not waive tax liability.

Filing and payment. Once the taxpayer's representative confirms eligibility and the parties agree on the parameters of the disclosure, the taxpayer is required to file all delinquent returns and pay the full tax, interest, and any non-waived penalties within the timeframe specified by the FTB (typically 60 to 90 days from the date of acceptance into the program). Failure to complete the filing and payment requirements within the agreed timeline will result in the FTB withdrawing the VCI acceptance and initiating standard collection and penalty procedures.

FTB VCI contact. The FTB's VCI program is administered through the Voluntary Compliance Initiative unit within the Collection Division. Information and contact details are available on the FTB's website at ftb.ca.gov. Practitioners are advised to contact the VCI coordinator by telephone or secure message before submitting a formal VCI application to confirm current eligibility criteria and processing timelines.

## Technical Advice Memoranda and Chief Counsel Rulings

Taxpayers seeking advance guidance on the application of California franchise or income tax law to a specific set of facts may request a private letter ruling or technical advice memorandum from the FTB's Chief Counsel's Office. These rulings provide written legal guidance that may be relied upon by the requesting taxpayer (but not by other taxpayers).

Private letter rulings. Cal. Rev. & Tax. Code § 21012 authorizes the Chief Counsel of the FTB to issue written determinations as to the application of California tax law to specific transactions or factual situations. A taxpayer may submit a ruling request before engaging in a transaction or taking a reporting position. The FTB charges a user fee for processing ruling requests; the fee schedule is published on the FTB website and is updated periodically.

Content of a ruling request. The ruling request must include:

• A complete statement of all relevant facts, including the business purpose and legal structure of the transaction;
• Copies of all relevant agreements, organizational documents, or other supporting materials;
• A statement of the specific legal issue or issues on which a ruling is requested;
• The taxpayer's analysis and proposed conclusion under California law; and
• Payment of the applicable user fee.

The FTB's Chief Counsel's Office reviews the request and may request additional information or clarification. The average processing time varies depending on the complexity of the issue and the FTB's workload; routine requests may be resolved in three to six months, while novel or complex issues may take a year or more.

Technical advice during audit. Taxpayers under audit may request that the FTB auditor seek a technical advice memorandum (TAM) from the Chief Counsel's Office on a disputed legal issue. The TAM process is similar to the private ruling process but is initiated during an examination. TAMs are binding on the FTB examining staff for the case at issue.

Non-precedential effect. Both private letter rulings and TAMs are addressed to the specific taxpayer and fact pattern presented. They do not constitute binding authority for other taxpayers or for the FTB in unrelated cases, although they may provide persuasive guidance on the FTB's interpretive approach to a particular statute or regulation.

Source: FTB Voluntary Compliance Initiative Source: Cal. Rev. & Tax. Code § 19133 (demand penalty) Source: Cal. Rev. & Tax. Code § 19164 (accuracy-related penalties) Source: Cal. Rev. & Tax. Code § 21012 (Chief Counsel rulings) Source: FTB Chief Counsel Rulings and Technical Advice

For taxable years beginning on or after January 1, 2025, California removed banking and financial business activities from the definition of "qualified business activities" for apportionment purposes, leaving only agricultural and extractive business activities as qualified. Cal. Rev. & Tax. Code § 25128(c). This change affects which apportionment formula a corporation must use: the equally weighted three-factor formula (property, payroll, and sales) under § 25128(b) for corporations deriving more than 50% of their gross business receipts from qualified business activities, or the single-sales-factor formula under § 25128.7 for all others.

Year-by-year application with no grandfather provision

The determination of whether a corporation qualifies for the three-factor formula is made annually based on the gross business receipts derived during that taxable year, measured against the definition of qualified business activities in effect for that year. Neither the statute nor FTB guidance provides a transition rule, grandfather provision, or lookback to prior-year receipts when the definition of qualified business activities changes.

A corporation that derived more than 50% of its gross business receipts from banking or financial business activities in 2024 (and therefore used the three-factor formula for that year under the pre-2025 definition) will immediately switch to the single-sales-factor formula for 2025 if it does not derive more than 50% of its gross business receipts from the remaining qualified business activities (agricultural or extractive) in 2025—even if it continues to derive the same percentage of receipts from banking and financial activities in 2025.

Practical example

Assume Corporation X derived 60% of its gross business receipts from banking activities and 40% from non-qualified services in 2024. Under the law in effect for 2024, banking was a qualified business activity, so Corporation X met the >50% test and used the three-factor formula for 2024.

For its 2025 taxable year (beginning on or after January 1, 2025), Corporation X derives the same 60% from banking and 40% from services. However, under the amended definition of qualified business activities effective for 2025, banking is no longer a qualified business activity. Corporation X derives 0% of its 2025 gross business receipts from qualified business activities (agricultural or extractive). It does not meet the >50% threshold under § 25128(b) and must use the single-sales-factor formula under § 25128.7 for its 2025 taxable year. There is no phase-in, no grace period, and no grandfather rule permitting it to continue using the three-factor formula based on its prior-year status.

Combined reporting groups

For corporations filing on a combined reporting basis under Cal. Rev. & Tax. Code § 25101, the more-than-50-percent test is applied to the gross business receipts of the entire apportioning trade or business of the combined reporting group, not to each member separately. Cal. Rev. & Tax. Code § 25128(d)(8). The 2025 change in the definition of qualified business activities applies at the group level: if the combined group does not derive more than 50% of its group-wide gross business receipts from agricultural or extractive activities in 2025, the entire group switches to the single-sales-factor formula for 2025, regardless of the group's composition or receipts in 2024.

Remaining qualified business activities

After the removal of banking and financial activities effective for 2025, the only business activities that remain as qualified business activities under § 25128(c) are:

• Agricultural business activity: activities relating to any stock, dairy, poultry, fruit, furbearing animal, or truck farm, plantation, ranch, nursery, or range (§ 25128(d)(2)); and
• Extractive business activity: activities relating to the extraction from the earth of mineral ores, natural gas, crude oil, sand, gravel, stone, shale, and other similar natural deposits (§ 25128(d)(3)).

A corporation deriving more than 50% of its gross business receipts from these activities in 2025 will continue to use the three-factor formula. A corporation that derived more than 50% of its receipts from banking or financial activities in 2024 but does not derive more than 50% from agricultural or extractive activities in 2025 will use the single-sales-factor formula in 2025.

Source: Cal. Rev. & Tax. Code § 25128 Source: Cal. Rev. & Tax. Code § 25128.7 Source: FTB 2025 Form 100 Booklet, p. 6

California's factor-presence nexus thresholds under Revenue and Taxation Code Section 23101(b) are adjusted annually for inflation. The statute establishes baseline thresholds of $500,000 for sales and $50,000 each for property and payroll, measured against the California Consumer Price Index (CCPI) with a base year of 2012.

Statutory indexing mechanism

Cal. Rev. & Tax. Code § 23101(c)(1) requires that the $500,000 and $50,000 amounts in subsection (b) be adjusted annually for inflation using the method prescribed in Section 17041(h), except that the base year is 2012 rather than 1988. Section 17041(h) directs the Franchise Tax Board to adjust the amounts "in the same manner as the brackets in the California tax rate schedules are adjusted for inflation," meaning the FTB multiplies the prior year's indexed threshold by the percentage change in the CCPI from the prior calendar year. The inflation adjustment rounds each amount to the nearest dollar.

Because the indexing is based on the CCPI, California's doing-business thresholds increase more rapidly than federal thresholds indexed to the national Consumer Price Index for All Urban Consumers (CPI-U). The CCPI has historically risen faster than the CPI-U, reflecting California's higher cost of living.

Published indexed amounts

For taxable years beginning in 2025, the indexed thresholds are:

• Sales: $757,070 (or 25% of total sales, whichever is less)
• Property: $75,707 (or 25% of total real and tangible personal property, whichever is less)
• Payroll: $75,707 (or 25% of total compensation, whichever is less)

A corporation that exceeds any one of these thresholds for a taxable year is doing business in California under Section 23101(b), even if it does not meet the qualitative "actively engaging in any transaction" test of Section 23101(a). Because the thresholds are indexed annually, a corporation whose California presence remains constant in nominal dollars may cross the doing-business threshold in a later year solely due to inflation indexing, or may fall below it if the FTB's indexed amounts rise faster than the corporation's actual California sales, property, or payroll.

Where the FTB publishes annual indexed amounts

The Franchise Tax Board publishes the current year's indexed thresholds in the instructions for Schedule R (Apportionment and Allocation of Income), in the instructions for Form 100 (Corporation Franchise or Income Tax Return), in the instructions for Schedules K-1 (565 and 568), and on the FTB's "Doing Business in California" web page at ftb.ca.gov. The FTB typically releases the indexed amounts for taxable year N in the fall of year N-1, when the prior calendar year's CCPI data becomes available and the FTB calculates the adjustment for the upcoming tax forms.

Practitioners should confirm the applicable indexed thresholds each year by reviewing the FTB's published form instructions for the relevant taxable year, rather than relying on prior-year amounts. The indexed amounts apply to the taxable year in which they are published—for example, the $757,070 and $75,707 amounts apply to taxable years beginning in 2025, regardless of when in 2025 the taxable year begins.

Application to pass-through entities

Under Cal. Rev. & Tax. Code § 23101(d), a corporation's sales, property, and payroll include its pro rata or distributive share of amounts from partnerships and S corporations in which it holds an interest. The indexed thresholds apply to the combined total of the corporation's direct California presence plus its pass-through share. For example, if a corporation has $50,000 in direct California sales and a 10% interest in a partnership with $7,000,000 in California sales, the corporation's total California sales for doing-business purposes are $750,000 ($50,000 + 10% × $7,000,000), which exceeds the 2025 indexed sales threshold of $757,070 only if the partnership sales attribution is correct—this example would be just under the threshold and therefore not meet the sales test, though it would still be subject to the Section 23101(a) qualitative test.

The indexed thresholds under Section 23101(b) are independent of the qualitative doing-business test under Section 23101(a). Recent Office of Tax Appeals decisions (including Matter of GEF Operating, Inc., 2020-OTA-045P, and Matter of Diet Standards LLC, Case No. 230613542) have held that the quantitative thresholds are not a safe harbor—a corporation may be doing business under subsection (a) even if it falls below all three indexed thresholds. Conversely, exceeding any single threshold establishes doing-business status without needing to demonstrate active engagement in transactions for profit under subsection (a).

Source: Cal. Rev. & Tax. Code § 23101(c) Source: Cal. Rev. & Tax. Code § 17041(h) Source: FTB 2025 Schedule R Instructions

A taxpayer facing a pending federal tax issue that may affect California taxable income — such as an IRS audit, Tax Court litigation, or federal refund claim — may file a protective claim for refund with the California Franchise Tax Board before the federal matter is finally determined. The protective claim preserves the taxpayer's right to claim a California refund within the statute of limitations even though the exact refund amount cannot yet be calculated.

## Purpose and function of a protective claim

California's four-year statute of limitations on refund claims under Cal. Rev. & Tax. Code § 19306 begins to run from the later of (1) four years from the date the original return was filed, or (2) one year from the date of overpayment. For a taxpayer whose California liability depends on a federal determination that is not yet final, the four-year period may expire before the taxpayer knows whether a California refund is due or can calculate the amount. Filing a protective claim "leaves the statute of limitations open for a claim for refund" by establishing the grounds for relief within the limitations period, even though the claim cannot yet be quantified or paid.

A protective claim also extends the period within which the FTB may assess additional tax when the federal change results in an increase to California taxable income. Under Cal. Rev. & Tax. Code § 19059, when a federal determination changes California taxable income, the FTB may assess additional California tax within one year after the taxpayer reports the federal change (or the FTB otherwise receives notice of it), even if the general four-year statute would otherwise have expired. Filing a protective claim ensures that both the taxpayer's refund rights and the FTB's assessment rights remain open for the year at issue.

## Form and content requirements for a protective claim

Cal. Rev. & Tax. Code § 19322 requires that every claim for refund be in writing, be signed by the taxpayer or the taxpayer's authorized representative, and "state the specific grounds upon which it is founded." The implementing regulation, Cal. Code Regs. tit. 18, § 19322(a), adds that "the claim must set forth in detail each ground upon which a refund or credit is claimed and facts sufficient to apprise the Franchise Tax Board of the exact basis thereof."

California does not require a protective claim to state a specific dollar amount of refund. Neither § 19322 nor the regulation requires quantification of the refund. Because the purpose of a protective claim is to preserve the right to a refund when the underlying issue is not yet finally determined, the taxpayer need not calculate or assert a dollar figure. The FTB's official guidance states that protective claims are "usually for $1 or more," indicating that a nominal placeholder amount is sufficient. The claim must, however, identify the specific grounds — the tax year, the nature of the federal issue, and the legal or factual basis on which a California refund may be due once the federal matter is resolved.

FTB Publication 1008, Federal Tax Adjustments and Your Notification Responsibilities to California, describes two filing methods for a protective claim:

1. Amended return (Form 100X): The taxpayer files an amended California Corporation Franchise or Income Tax Return (Form 100X) for the year at issue and writes "PROTECTIVE CLAIM" in blue or black ink at the top of the completed Form 100X. The amended return should explain the federal issue and its potential California impact, but need not recompute California tax or show a specific refund amount if that amount cannot yet be determined.

1. Letter claim: The taxpayer may file a letter stating that it is a protective claim, identifying the tax year, describing the federal issue (e.g., IRS examination of IRC § 199A deduction, Tax Court petition challenging deficiency notice for year 20XX), and explaining the grounds on which a California refund may be due. The letter must be signed by the taxpayer or its authorized representative.

Publication 1008 states that a protective claim should be labeled "PROTECTIVE CLAIM" at the top of the form or letter.

## Circumstances warranting a protective claim

FTB Publication 1008 identifies two principal scenarios in which a protective claim is appropriate:

• Pending IRS examination or final determination: The taxpayer is under IRS audit, has received an IRS notice of proposed adjustment, has filed a Tax Court petition, or is awaiting a closing agreement or other final federal determination that will change federal taxable income and consequently California taxable income.

• Pending litigation: The taxpayer or another taxpayer is party to federal or state litigation (including Tax Court, federal district court, or California superior court) on an issue that, if decided in the taxpayer's favor, would support a California refund for the year at issue.

A protective claim is particularly valuable when the federal issue spans multiple tax years and some years are approaching the expiration of the California four-year refund statute while the federal matter is still unresolved.

## Amended claims and final determinations

A protective claim does not result in a refund payment. It holds the statute of limitations open. Once the underlying federal issue is finally determined, the taxpayer must file an amended claim (or amend the protective claim) with the FTB within the extended statute of limitations period, reporting the final federal determination and calculating the resulting California refund or additional tax.

Under Cal. Rev. & Tax. Code § 18622, a taxpayer must report any final federal determination that changes federal taxable income to the FTB within six months of the date the determination becomes final. The report must identify the tax year, fully explain all adjustments, and include federal documentation (IRS audit report, Tax Court decision, closing agreement, etc.). Failure to report the final federal determination within six months does not void the protective claim, but it does affect the extended statute: if the taxpayer fails to report within six months, the FTB has four years from the date it receives sufficiently detailed information to apply the federal changes to the California return, rather than the one-year period under § 19059.

Cal. Rev. & Tax. Code § 19306(c) also provides that when a federal change results in a California overpayment, the taxpayer may file a claim for refund within two years of the date of the final federal determination, even if the general four-year statute would otherwise have expired. This two-year extension applies only if the taxpayer reports the federal change as required by § 18622. A protective claim filed before the final determination, combined with a timely amended claim filed after the determination, ensures that the taxpayer captures the benefit of both the general statute and the federal-change extension.

## FTB action on protective claims

FTB Publication 1008 and the FTB's Claim for Refund webpage explain that the FTB typically does not take action on a protective claim until the taxpayer files an amended claim reporting the final federal determination. The protective claim remains open on the FTB's records as a pending matter. If the FTB receives notice of a final federal determination (either from the taxpayer or from the IRS under the federal-state information exchange), it may contact the taxpayer to request an updated computation and documentation. Until the federal issue is resolved and reported, the protective claim serves solely to preserve the statute of limitations.

If the FTB denies a protective claim (or the subsequent amended claim reporting the final determination), the taxpayer may appeal the denial to the Office of Tax Appeals within 30 days of the denial notice under the procedures set forth in Cal. Rev. & Tax. Code § 19324 and § 19331.

Source: Cal. Rev. & Tax. Code § 19322 Source: Cal. Rev. & Tax. Code § 19306 Source: Cal. Rev. & Tax. Code § 19059 Source: Cal. Rev. & Tax. Code § 18622 Source: Cal. Rev. & Tax. Code § 19324 Source: Cal. Rev. & Tax. Code § 19331 Source: FTB Publication 1008, Federal Tax Adjustments Source: FTB Claim for Refund

California corporations subject to franchise or income tax must make quarterly estimated tax payments if their estimated tax (after credits) is expected to be $500 or more for the taxable year. All corporations incorporated, qualified, or doing business in California—whether active or inactive—must make estimated tax payments, and the first estimated tax payment for a taxable year (except for newly incorporated or qualified corporations in their first year) cannot be less than the $800 minimum franchise tax.

## Due Dates for Calendar-Year Corporations

For a corporation with a calendar taxable year, estimated tax payments are due on April 15, June 15, September 15, and December 15. For fiscal-year corporations, the installments are due on the 15th day of the 4th, 6th, 9th, and 12th months of the taxable year. If the due date falls on a weekend or legal holiday, the payment is due on the next business day.

## California-Specific Payment Schedule: 30/70/70/100 Cumulative Percentages

California corporations do not follow the federal equal-installment (25/25/25/25) estimated tax schedule. Instead, California requires corporations to pay estimated tax on a cumulative front-loaded basis, measured against the total required annual payment. The FTB's Form 100-ES worksheet prescribes the following cumulative percentages for each installment:

• 1st installment (4th month): 30% of the required annual payment (but not less than the $800 minimum franchise tax for most corporations)
• 2nd installment (6th month): 70% cumulative (meaning an additional 40% is due with the second payment)
• 3rd installment (9th month): 70% cumulative (no additional payment required beyond the 70% already paid)
• 4th installment (12th month): 100% cumulative (the remaining 30%)

In practical terms, a corporation with a $100,000 estimated annual tax liability for a calendar year would pay $30,000 by April 15, $40,000 by June 15, $0 by September 15, and $30,000 by December 15. The third installment due date (September 15) remains on the schedule, and corporations that revise their estimates during the year may have an amount due at that time under the recalculation rules in Cal. Rev. & Tax. Code § 19026, but under the standard front-loaded schedule no payment is required in the third quarter.

Critical difference from the federal schedule. The federal corporate estimated tax rules under IRC § 6655 require four equal 25% installments. A corporation that makes four equal 25% payments to California will be underpaid on the first and second installments (having paid only 25% and 50% cumulative when California required 30% and 70%) and will be subject to an underpayment penalty under Cal. Rev. & Tax. Code § 19142 even though the full annual amount is paid by year-end. Practitioners must apply the California-specific 30/40/0/30 incremental (or 30/70/70/100 cumulative) schedule, not the federal schedule.

## Safe-Harbor Methods and Large-Corporation Exception

California corporations may use several safe-harbor methods to determine the required annual payment and avoid the estimated tax underpayment penalty. Under the general rule, a corporation satisfies the estimated tax requirement if it pays 100% of the current year's tax. Alternatively, a corporation may pay 100% of the prior year's tax (the "prior-year safe harbor"), provided the prior year was a full 12-month taxable year and the corporation filed a return showing a tax liability.

Large corporations are subject to a limitation on the prior-year safe harbor. A "large corporation" is any corporation (including a predecessor corporation) that had California net income (computed without regard to the net operating loss deduction) of $1 million or more for any taxable year during the three immediately preceding taxable years. A large corporation may use the prior-year safe harbor only for the first estimated tax installment. Any reduction in the first installment attributable to using the prior-year method (rather than 30% of the current year's tax) must be added back to the second installment. For installments 2, 3, and 4, a large corporation must pay based on 100% of the current year's tax (or use an annualized income method if income is earned unevenly).

Corporations may also use the annualized income method or annualized seasonal income method to calculate estimated tax on a quarter-by-quarter basis if income is received unevenly during the year. The FTB's Form 100-ES includes worksheets for these methods. When a corporation revises its estimate during the year under Cal. Rev. & Tax. Code § 19026, it recalculates the remaining installment amounts to account for the new estimate and any prior payments or underpayments.

## Statutory and Regulatory Framework

California's corporation estimated tax payment requirements are codified in Cal. Rev. & Tax. Code § 19025 (requirement to make estimated payments), § 19026 (amendment of estimates), and § 19142 (penalty for underpayment of estimated tax). Section 19142 incorporates by reference IRC § 6655, the federal corporation estimated tax penalty provision, with California-specific modifications. The FTB publishes detailed instructions and worksheets in the annual Form 100-ES booklet.

The front-loaded payment schedule is a California policy choice that differs from both the federal corporate schedule (equal 25% installments) and the federal individual schedule (equal quarterly payments). California applies the same 30/40/0/30 incremental schedule to individual estimated tax (Cal. Rev. & Tax. Code § 19136.1) and to corporations, resulting in the state receiving 70% of the year's estimated tax by mid-year rather than 50% under a federal-style equal-installment approach.

## S Corporations

S corporations are subject to the same estimated tax payment schedule and deadlines as C corporations. An S corporation must pay estimated tax equal to the greater of (1) 1.5% of its net income, or (2) the $800 minimum franchise tax. The $800 minimum is due with the first estimated tax installment for taxable years other than the first year. S corporations follow the same 30/70/70/100 cumulative payment schedule and use Form 100-ES.

## First-Year Corporations and Newly Qualified Entities

Corporations that incorporate or qualify to do business in California on or after January 1, 2000, are exempt from the $800 minimum franchise tax in their first taxable year under Cal. Rev. & Tax. Code § 23153(f)(1), but they remain subject to the income-based tax (8.84% of net income for C corporations, 1.5% for S corporations). First-year corporations are still required to make estimated tax payments if the income-based tax is expected to exceed $500, and they follow the same installment due dates and percentages, except that the first installment need not be at least $800. For a newly incorporated or qualified corporation with a short first taxable year of less than 12 months, the FTB's instructions for Form 100-ES include a special chart showing the installment due dates and percentages based on the month incorporation or qualification occurs.

## Electronic Payment Mandate

Under Cal. Rev. & Tax. Code § 19011, a corporation must make all estimated tax payments (and extension payments) by electronic funds transfer once either (1) any single estimated or extension payment exceeds $20,000, or (2) the corporation's total tax liability on an original return exceeds $80,000. Once the threshold is met, the corporation must use electronic payment for all future payments regardless of amount or taxable year. The FTB accepts electronic payments via Web Pay, the Electronic Funds Transfer Credit (EFT) system, and certain third-party processors. A corporation that is required to pay electronically but sends a paper check is subject to a 1% penalty on the payment amount under Cal. Rev. & Tax. Code § 19011.5.

Source: Cal. Rev. & Tax. Code § 19025 Source: Cal. Rev. & Tax. Code § 19026 Source: Cal. Rev. & Tax. Code § 19142 Source: Cal. Rev. & Tax. Code § 19011 Source: Cal. Rev. & Tax. Code § 23153 Source: FTB Form 100-ES Instructions (2025) Source: California Estimate Business Taxes and Prepayments

Public Law 86-272, codified at 15 U.S.C. § 381, is a federal statute enacted in 1959 that prohibits California from imposing a net income tax on an out-of-state corporation if that corporation's only business activity in California is the solicitation of orders for sales of tangible personal property, and if those orders are sent outside California for approval or rejection and, if approved, are filled by shipment or delivery from a point outside the state. This federal limitation on state taxing authority applies only to taxes measured by net income and does not extend to other taxes, including sales and use taxes, property taxes, or gross receipts taxes.

## Protection applies to franchise tax and income tax, but not the $800 minimum

California imposes both a franchise tax under Chapter 2 of the Revenue and Taxation Code and an income tax under Chapter 3 on corporations doing business in the state. Both taxes are measured by net income. A corporation that qualifies for P.L. 86-272 protection is exempt from both the income-based franchise tax (8.84% of net income for C corporations, or 1.5% for S corporations) and the corporate income tax.

However, P.L. 86-272 does not protect a corporation from the $800 minimum franchise tax imposed by Cal. Rev. & Tax. Code § 23153. Cal. Code Regs. tit. 18, § 23101 expressly provides that a foreign corporation whose only in-state activities are solicitation of orders for goods shipped from outside the state "would not be subject to either a tax measured by income imposed under Chapter 2 or the income tax imposed under Chapter 3. However, the corporation may be subject to the minimum tax imposed by section 23153, Revenue and Taxation Code." The FTB's Multistate Audit Technical Manual (Chapter 1100) confirms: "Public Law 86-272 does not apply in situations when the tax is something other than a net income tax… However, if Public Law 86-272 does apply, such that a corporation is immune from a state tax based on net income, then nexus is relevant in determining whether the minimum franchise tax may still be imposed."

An out-of-state corporation that is "doing business" in California under Section 23101—either because it actively engages in transactions for financial gain under subsection (a), or because it exceeds one of the indexed quantitative thresholds for sales, property, or payroll under subsection (b)—owes the $800 minimum franchise tax even if P.L. 86-272 shields it from the net income tax. Such a corporation must file Form 100, leave the net income line blank (or indicate "P.L. 86-272 immunity"), and pay the $800 minimum.

## Three statutory requirements for protection

15 U.S.C. § 381(a) prohibits California from imposing a net income tax if three conditions are met:

1. Sales of tangible personal property only. The corporation's in-state sales must be limited to sales of tangible personal property. Protection does not apply to sales of services, sales of intangible property, sales of real property, or leases or licenses of tangible or intangible property. A corporation that sells software as a service, consulting services, licensing fees, or real estate will not be protected, even if its only in-state activity is solicitation.

1. Solicitation of orders only. The corporation's only business activity in California must be "the solicitation of orders" for sales of tangible personal property. Solicitation is narrowly defined. The U.S. Supreme Court in Wisconsin Dep't of Revenue v. William Wrigley, Jr., Co., 505 U.S. 214 (1992), held that activities entirely ancillary to solicitation are protected, but any activity that goes beyond requesting orders—such as providing services, performing repairs, approving orders, maintaining inventory, or collecting accounts—will cause the corporation to lose protection.

1. Orders sent outside California for approval or rejection and filled from outside California. All orders must be sent to a location outside California where they are approved or rejected, and all approved orders must be filled by shipment or delivery from a point outside California. A corporation that maintains inventory in California (including inventory held at a third-party fulfillment center or marketplace facilitator warehouse), or that approves orders within California, will not meet this requirement and will lose protection.

All three conditions must be satisfied. If a corporation fails to meet any one of them, P.L. 86-272 does not apply, and California may impose franchise and income tax on the corporation's apportioned net income.

## FTB Publication 1050 and the status of guidance post-ACMA litigation

The Franchise Tax Board provides detailed guidance on protected and unprotected activities in FTB Publication 1050, Application and Interpretation of Public Law 86-272. The publication was originally issued decades ago and was revised in May 2022 to incorporate guidance on internet-based activities. In February 2022, the FTB had also issued Technical Advice Memorandum (TAM) 2022-01, which addressed internet activities and largely mirrored the Multistate Tax Commission's August 2021 revised statement on P.L. 86-272.

On December 13, 2023, the San Francisco Superior Court in American Catalog Mailers Ass'n v. Franchise Tax Board, Case No. CGC-22-601363, struck down TAM 2022-01 and the portions of the May 2022 revision to Publication 1050 that addressed internet activities, ruling that they were "underground regulations" promulgated without compliance with the California Administrative Procedure Act. As a result, the FTB's 2022 guidance on internet-based activities is void and invalid and cannot be enforced. The court did not invalidate the remainder of Publication 1050—only the internet-activity-specific sections added or revised in 2022.

What remains operative. Publication 1050's Article IV lists protected and unprotected activities based on decades of pre-internet case law and administrative interpretation. The portions of Article IV that do not relate to internet-specific fact patterns remain valid FTB guidance. For example, the general principle that maintaining a warehouse in California, approving orders in California, or performing repair services in California are unprotected activities continues to represent the FTB's position and is grounded in caselaw predating the internet-activity controversy.

What is currently void. The specific examples in the May 2022 revision addressing live chat, email post-sale assistance, placement of internet cookies for non-sales purposes, online job applications, remote software fixes via transmitted code, and extended warranty sales via website—those fact patterns and the FTB's interpretations of them in TAM 2022-01 and the revised Publication 1050—are unenforceable. The FTB has not issued replacement guidance as of June 2026. Taxpayers with internet-based activities similar to those addressed in the invalidated guidance face uncertainty: the FTB may still assert that such activities exceed P.L. 86-272 protection, but it cannot rely on TAM 2022-01 or the voided sections of Publication 1050 as published authority for that position.

## Protected and unprotected activities: examples from Publication 1050 (pre-2022 content)

The following examples are drawn from Article IV of Publication 1050 and reflect longstanding FTB interpretation, not the invalidated 2022 internet guidance.

Protected activities (from Article IV, Section B):

• Soliciting orders for tangible personal property through employees or independent contractors.
• Carrying samples and promotional materials for display or distribution without charge.
• Furnishing or renting display racks and other promotional items to customers for use in displaying the corporation's products, if the items are furnished without charge.
• Providing automobiles to sales personnel for their use in conducting protected solicitation activities.
• Passing inquiries or complaints from customers to the home office, without resolving them in-state.
• Owning or leasing personal property (e.g., computers, communications equipment) used by sales personnel in conducting solicitation.
• Maintaining an in-home office for sales personnel, provided the office is not publicly attributed to the business or to employees or agents in their representative capacity.

Unprotected activities (from Article IV, Section A) that exceed protection and cause loss of immunity:

• Approving or accepting orders in California.
• Maintaining a warehouse, office (other than an in-home office), parts department, repair shop, or any kind of stock of goods other than samples for sales personnel.
• Making repairs or providing maintenance or service to the corporation's products in California.
• Collecting current or delinquent accounts.
• Investigating creditworthiness of customers in California.
• Picking up or replacing damaged or returned property.
• Hiring, training, or supervising personnel other than personnel involved solely in solicitation.
• Approving or rejecting orders, granting credit, or establishing or maintaining a stock of inventory in California.
• Installing or supervising installation of the corporation's products at or after shipment or delivery.
• Conducting training courses, seminars, or lectures for personnel other than personnel involved in solicitation.
• Providing any kind of technical assistance or service to customers, including by telecommuting employees located in California who perform non-sales functions.

## De minimis and the Joyce Rule

P.L. 86-272 contains no de minimis exception. If an out-of-state corporation conducts even one unprotected activity in California during a taxable year, protection is lost for the entire year, and the corporation becomes subject to California franchise and income tax on its apportioned net income. The Multistate Tax Commission's Statement on P.L. 86-272 and FTB Publication 1050 both confirm this principle. The loss of immunity in one year does not carry over to subsequent years; if the corporation's activities return to protected solicitation in the following year, protection is restored for that year.

California applies the "Joyce Rule" when determining whether activities conducted in the state are attributable to the corporation. Under the rule established in Appeal of Joyce, Inc., Cal. St. Bd. of Equal., Nov. 23, 1966, only those in-state activities conducted by or on behalf of the corporation are considered. Activities conducted by another person or business entity—whether or not affiliated with the corporation—are not attributed to the corporation unless that person is the corporation's agent or representative acting on its behalf.

## Filing requirement and reporting P.L. 86-272 status

A corporation claiming P.L. 86-272 protection is still required to file a California return (Form 100) if it is otherwise doing business in California. The corporation is not required to report net income or loss on Line 18 of Form 100 if it is asserting immunity under P.L. 86-272. The FTB recommends (in the Form 100 instructions and in FTB guidance published in the "All About Business" section of Tax News, February 2021) that the taxpayer write "P.L. 86-272 immunity" or similar language on the return when leaving Line 18 blank, to assist with processing.

If the corporation is doing business in California—because it meets the qualitative test under Section 23101(a) or exceeds a quantitative threshold under Section 23101(b)—it must pay the $800 minimum franchise tax and file the return, even if it reports zero net income due to P.L. 86-272 protection.

## Application to combined reporting groups

For corporations filing on a combined reporting basis under Cal. Rev. & Tax. Code § 25101 et seq., California applies P.L. 86-272 on a member-by-member basis, not to the combined group as a whole. The FTB's Multistate Audit Technical Manual (Chapter 1100) instructs that when evaluating whether P.L. 86-272 applies to exempt taxation upon income in a specific jurisdiction, the practitioner should "consider whether any member within the combined unitary group has activities beyond those protected activities under Public Law 86-272. If so, then Public Law 86-272 will not" shield the group from California tax.

In other words, if any member of the combined group conducts unprotected activities in California, that member (or the combined group, depending on the composition of income) will be subject to California tax on the group's apportioned income. The presence of one unprotected member can cause the entire group to be taxable in California.

## Corporations incorporated in California; sales of services or intangibles

P.L. 86-272 does not protect a corporation in the state where it is incorporated. 15 U.S.C. § 381(b) expressly provides that the prohibition does not apply to a corporation organized under the laws of California. A corporation incorporated in California is subject to California franchise tax on its worldwide income from the date of incorporation, regardless of the nature or extent of its in-state activities.

Similarly, P.L. 86-272 provides no protection for sales of services or intangible property. A software company that licenses software to California customers, a consulting firm that provides advisory services to California clients, a franchisor that licenses trademarks to California franchisees, or a licensor of patents or copyrights will not be protected by P.L. 86-272, even if its only in-state activity is solicitation, because the sale is not of tangible personal property.

Source: 15 U.S.C. § 381 (Public Law 86-272) Source: FTB Publication 1050, Application and Interpretation of Public Law 86-272 (Rev. 05-2022) Source: FTB Multistate Audit Technical Manual, Chapter 1100 (Nexus and a State's Right to Tax) Source: FTB "Doing Business in California" page Source: FTB Tax News, February 2021, "All About Business"