California Practice and Procedure
California administers its major taxes through several separate agencies, each with its own notices, deadlines, and appeal routes. This hub collects the questions that recur across those taxes and agencies, grouped by topic; procedure, from the first contact letter through administrative appeal and collection, has its own section.
96California articles
Income and franchise tax
38 articles- How does California treat a Section 338(h)(10) election, and where does the gain land in the sales factor?California follows a federal section 338(h)(10) election and taxes the deemed asset sale; substantial, occasional sale receipts stay out of the sales factor.Law as of Oct 13, 2026
- Can a California service subsidiary of a foreign parent amend prior years to market sourcing, and where does the parent receive the benefit?Yes: a California service subsidiary can amend open years to market sourcing, to the extent its foreign parent receives the benefit outside California.Law as of Oct 15, 2026
- How are asset management fees sourced for California apportionment?From 2026, California sources asset management fees not covered by Regulation 25137-14 to investors' domicile under amended Regulation 25136-2.Law as of Oct 12, 2026
- Can a taxpayer use the installment method for California but not for federal tax purposes?Yes: a taxpayer that elects out of the installment method federally can still use it for California under section 17024.5(e) or 23051.5(e), on Form 3805E.Law as of Oct 13, 2026
- Where is cancellation of debt income sourced for California purposes, for a business and for a nonresident?California apportions business debt discharge income outside the sales factor; a nonresident's personal debt with no California tie has no California source.Law as of Oct 17, 2026
- When does a captive finance subsidiary pay California's higher financial corporation rate?A captive finance subsidiary pays California's 10.84 percent rate if over half its gross income is from dealing in money in competition with national banks.Law as of Oct 13, 2026
- How does California apportion a charter and aircraft management company, and how far does the air transportation regulation reach?California's air transportation formula (Regulation 25137-7) reaches only passenger and freight hauling; charter management fees follow general rules.Law as of Oct 15, 2026
- Does a corporate limited partner in an investment fund apportion or allocate its California income?In California, a corporate fund partner ordinarily apportions its share as business income; nonbusiness interest and dividends follow its commercial domicile.Law as of Oct 10, 2026
- How does a corporate partner source gain from selling a partnership interest in California?In California, a corporate partner apportions gain on a partnership interest serving its unitary business, or else allocates it by the partnership's factors.Law as of Oct 13, 2026
- Are sales picked up at a California warehouse California sales for apportionment?Not automatically: California uses the ultimate destination, so goods picked up in California solely to transport out of state can be out-of-state sales.Law as of Sep 28, 2026
- Where does a digital subscription business source California receipts from individual subscribers, and what becomes of the rest?California sources subscription fees to where the subscriber benefits; fees sourced to other states stay in the sales factor denominator, with no throwback.Law as of Oct 17, 2026
- Is California withholding required on dividends paid to out-of-state owners?Usually not: under California Regulation 18662-4(b)(8), dividends to out-of-state owners need no withholding unless the stock has a California business situs.Law as of Oct 22, 2026
- Does a federal accounting method change automatically apply for California?Per Franchise Tax Board Notice 2024-01, a federal accounting method change generally applies for California only if the state conforms to the underlying law.Law as of Oct 8, 2026
- Does California follow a federal check-the-box entity classification election?Yes: California follows an eligible entity's federal classification under Revenue and Taxation Code Section 23038, and allows only a narrow separate election.Law as of Oct 12, 2026
- Is a federally disregarded limited partnership subject to California's $800 annual tax?No: under Franchise Tax Board Legal Ruling 2019-02, a federally disregarded limited partnership is also disregarded in California and owes no $800 annual tax.Law as of Oct 8, 2026
- Are sales of mortgage notes included in California's sales factor at gross proceeds or net gain?In California's sales factor, mortgage note sales count at gross proceeds for a general corporation, at net gain for a financial one (Regulation 25137-4.2).Law as of Sep 28, 2026
- Does a foreign corporation with no California activity owe California's minimum tax?Not automatically: a foreign corporation owes California's $800 minimum tax only if doing business or qualified there, subject to a first-year exemption.Law as of Oct 12, 2026
- When are dividends from an insurance company subsidiary deductible in California?California allows an 85 percent deduction for qualified dividends from an insurer owned at least 80 percent, under Revenue and Taxation Code Section 24410.Law as of Oct 12, 2026
- Should a new investment manager and its funds be limited partnerships or LLCs for California and Texas tax purposes?In California an LLC prepays the $800 annual tax and pays a gross income fee, while a limited partnership pays only the $800.Law as of Oct 23, 2026
- Does a California investment partnership owe nonresident withholding or the LLC fee?A qualifying California investment partnership owes no withholding on nonresident partners' securities income, though an LLC fund can still owe the LLC fee.Law as of Oct 13, 2026
- How does California source receipts from services and intangibles?California sources services where the purchaser gets the benefit and intangibles where used (section 25136); amended Regulation 25136-2 applies from 2026.Law as of Oct 9, 2026
- Is a merger termination fee business income in California, and does it belong in the sales factor?In California, a merger termination fee is usually apportionable business income but is usually kept out of the sales factor.Law as of Sep 28, 2026
- How does a combined group with both financial and general corporations apportion its income?From 2025, California combined groups mixing financial and general members use the single sales factor unless predominantly agricultural or extractive.Law as of Oct 12, 2026
- Does California require withholding when a partnership distributes refinancing proceeds?Possibly: California pass-through withholding keys on California source income, not on the cash, so a refinancing distribution can still require withholding.Law as of Oct 12, 2026
- How does California pass-through withholding work for domestic nonresident owners?California pass-through entities generally withhold 7 percent of California-source distributions to domestic nonresident owners paid over $1,500 a year.Law as of Oct 9, 2026
- Where does the dividends paid deduction go on a California REIT return?A real estate investment trust claims the dividends paid deduction on California Form 100 as a California deduction, not within the federal starting point.Law as of Sep 28, 2026
- How should an S corporation report a shareholder who left California mid-year, and what does a lower apportionment factor save while the shareholders are residents?On Schedule K-1 (100S), a shareholder who left California mid-year is best shown as a nonresident, with the full-year California-source share in column (e).Law as of Oct 17, 2026
- Is the California S corporation tax deductible on the shareholders' California returns?The 1.5 percent California S corporation tax is deductible federally but not on shareholders' California returns (Revenue and Taxation Code Section 17220).Law as of Oct 12, 2026
- When a seller sells businesses every few years, is a large sale "substantial and occasional" in California, and what does the exclusion do?California drops a substantial, occasional sale's receipts from the sales factor only if outside the seller's normal course; the gain stays taxable.Law as of Oct 15, 2026
- When does a disregarded LLC file a short period California Form 568?A disregarded single member LLC files a short period California Form 568 when its owner closes its books mid-year, because it has no taxable year of its own.Law as of Oct 12, 2026
- How are receipts from services performed at sea sourced for state tax purposes?For tax years before 2026, California sources services performed at sea, outside long-term contracts, by a taxpayer-built approximation such as port days.Law as of Oct 12, 2026
- Which California businesses still apportion with three factors instead of single sales?From 2025, only a California business with over half its gross business receipts from agricultural or extractive activity keeps three-factor apportionment.Law as of Oct 13, 2026
- Can a website defeat California throwback?When other states treat website cookies and chat as beyond Public Law 86-272, a California seller may be taxable there, so its sales escape throwback.Law as of Oct 14, 2026
- When does California throwback apply, and what makes a taxpayer taxable in another state?California throws back goods shipped from the state unless the seller is subject to income or franchise tax in the buyer's state, or could be.Law as of Sep 28, 2026
- Are California waiting time penalties deductible?California waiting time penalties paid to employees are generally deductible, as IRC section 162(f) reaches payments to or directed by a government.Law as of Oct 10, 2026
- What happens when California withholding credits do not match the K-1?California credits a partner with the withholding actually remitted for it, so a K-1 that understates withholding does not forfeit the difference.Law as of Oct 14, 2026
- Who is the payee for California withholding when distributions go to a disregarded entity?For California withholding, the payee behind a distribution to a disregarded entity is generally its owner, though Franchise Tax Board forms are less direct.Law as of Oct 9, 2026
- How does a company with no gross receipts apportion its California income?A California company with no gross receipts may petition under Revenue and Taxation Code Section 25137 to apportion by property and payroll instead.Law as of Sep 28, 2026
Procedure
10 articles- How does a taxpayer petition the Franchise Tax Board for alternative apportionment?A taxpayer petitions California's Franchise Tax Board Chief Counsel in writing under Revenue and Taxation Code section 25137, proposing a substitute method.Law as of Sep 28, 2026
- What happens in a CDTFA sales tax audit of an out-of-state seller?A California Department of Tax and Fee Administration audit of an out-of-state seller is often a sample projected across a period of up to eight years.Law as of Oct 8, 2026
- What happens in an EDD worker classification audit?A California Employment Development Department audit reviews everyone paid without a W-2 and may propose payroll taxes for workers reclassified as employees.Law as of Oct 8, 2026
- What happens in the first sixty days of an FTB business entity audit?A California Franchise Tax Board business audit opens with a contact letter, an opening conference and numbered document requests with 30-day response limits.Law as of Oct 9, 2026
- What should be done when an FTB Notice of Tax Return Change is wrong?A wrong California Notice of Tax Return Change carries no protest right; the fix is to contact the Franchise Tax Board quickly, or pay and claim a refund.Law as of Sep 28, 2026
- Can California's large corporate understatement penalty be waived?No: California's large corporate understatement penalty under Revenue and Taxation Code section 19138 is strict liability, with no reasonable cause exception.Law as of Oct 10, 2026
- What happens after an S corporation files a California refund claim?A California S corporation refund claim may be examined by the Franchise Tax Board; shareholders must file their own claims, on their own deadlines.Law as of Oct 8, 2026
- Does filing an extension disqualify a taxpayer from California's voluntary disclosure program?An extension should not bar California's Voluntary Disclosure Program, which excludes entities that already filed a return, registered or were contacted.Law as of Oct 12, 2026
- Who decides a California tax appeal? The post-2017 landscapeFrom 2018, California's Office of Tax Appeals hears income and sales tax appeals; the Board of Equalization keeps insurance and alcoholic beverage appeals.Law as of Oct 9, 2026
- How does a taxpayer protest a Notice of Proposed Assessment in California?A California Franchise Tax Board Notice of Proposed Assessment is protested within 60 days of its mailing date (Revenue and Taxation Code section 19041).Law as of Oct 12, 2026
Residency and domicile
13 articles- How does California source carried interest when a partner changes residency?California generally sources carried interest paid to a nonresident partner as a distributive share under Regulation 17951-4, whatever the holding period.Law as of Oct 13, 2026
- How does the FTB evaluate a claimed change of residency out of California?California's Franchise Tax Board tests a claimed move out of state with evidence, not declarations, using the Appeal of Bragg closest connections factors.Law as of Oct 10, 2026
- Can California tax a nonresident spouse's out-of-state wages through community property?Yes: if a nonresident earner is domiciled in California or another community property state, half the wages are taxed to the spouse still in California.Law as of Oct 9, 2026
- Is a foreign student on a company-funded scholarship taxable in California?A foreign student in California is usually a nonresident; only degree candidates exclude tuition, and living allowances are treated as California source.Law as of Oct 12, 2026
- How does California source a nonresident's compensation and fringe benefits?California sources a nonresident's pay and fringe benefits by where services were performed, generally by California working days over total working days.Law as of Oct 12, 2026
- Is a nonresident's gain from selling a partnership interest California-source income?Generally not: a nonresident's gain on a directly held partnership interest is California-source only if the interest acquired a business situs in California.Law as of Oct 13, 2026
- Can California tax a nonresident shareholder's share of an S corporation's gain on selling its business?Yes, a nonresident shareholder's share of a unitary multistate S corporation's sale gain is California-source to the extent it is apportioned business income.Law as of Oct 13, 2026
- Does an 18-month work assignment outside California make a California domiciliary a nonresident?A California domiciliary is a nonresident automatically only if away 546 consecutive days under an employment-related contract, with no disqualifier.Law as of Oct 13, 2026
- What actually happens in an FTB residency audit, from first letter to protest?California Franchise Tax Board residency audits run mostly by mail: contact letter, document requests, position letter, proposed assessment, 60-day protest.Law as of Oct 14, 2026
- How are days counted in a California residency audit, and what evidence wins?California's Franchise Tax Board counts residency days on a day-by-day calendar built from card, flight, cell and toll records, which stands unless rebutted.Law as of Oct 10, 2026
- Does spending more than six months, or more than nine, in California make someone a resident?Over nine months in California raises a rebuttable presumption of residence; six months or less protects only a qualifying visitor domiciled elsewhere.Law as of Oct 13, 2026
- Does California tax stock options exercised after a move out of state?California usually taxes a nonqualified stock option's spread after a move, sourced by California workdays from grant to exercise or end of employment.Law as of Oct 14, 2026
- When is a stay in California for a temporary or transitory purpose, and which visitors does the regulation name?California's residency regulation treats transit, vacations and brief engagements as temporary; long or indefinite work, recuperation or retirement are not.Law as of Oct 14, 2026
Sales and use tax
8 articles- How does California tax an advance-exchange repair program when the customer gets a different refurbished unit back?California taxes an advance-exchange fee as a sale of the refurbished unit and, if the units differ in kind, adds the surrendered unit's value as a trade-in.Law as of Oct 15, 2026
- When does a design studio owe California sales tax: concept or finished art?Under California Regulation 1540, concept work is generally nontaxable, and finished art is taxable in tangible form but not when sent only electronically.Law as of Oct 9, 2026
- What must a seller do with over-collected California sales tax?Under California Revenue and Taxation Code section 6901.5, a seller must refund over-collected sales tax to customers or remit it to the state, not keep it.Law as of Oct 9, 2026
- How do California manufacturers use the partial exemption and Cal Competes?California's partial manufacturing exemption needs no approval, just a certificate to the vendor; the California Competes credit is awarded competitively.Law as of Oct 9, 2026
- What resale documentation survives a California sales tax audit?In a California sales tax audit, a resale certificate holds up when taken timely and in good faith, complete on its face, and matchable to the customer.Law as of Oct 8, 2026
- Is SaaS taxable in California?Software as a service becomes taxable in California on January 1, 2027, under Senate Bill 122; earlier, only prewritten software on tangible media was taxed.Law as of Oct 14, 2026
- Does buying a vehicle, vessel or aircraft through an out-of-state entity still avoid California use tax after SB 1406?Senate Bill 1406 makes a shell company a California resident for vehicle, vessel and aircraft use tax if any owner is; its officers can be personally liable.Law as of Oct 14, 2026
- Does a stopover in California trigger use tax on goods in transit?A California stopover alone does not trigger use tax; property held only for shipment out of state and use solely elsewhere is excluded (Regulation 1620).Law as of Oct 14, 2026
Local and district taxes
13 articles- Does the billing address or the shipping address decide the California sales tax rate?For goods that ship, the shipping address controls California sales tax, not the billing address; district taxes follow the delivery point.Law as of Oct 13, 2026
- Must a California business file a property statement when the assessor asks, even if every asset was expensed?Yes: under California Revenue and Taxation Code section 441(a), the assessor can require a property statement; expensed equipment is reported at full cost.Law as of Oct 17, 2026
- Which construction costs belong in the California property tax base, and why is the cost segregation total the wrong number?California assesses new construction at full cash value on completion, not cost; a cost segregation total includes items never on the real property roll.Law as of Oct 17, 2026
- Does a single-member LLC with no receipts owe Los Angeles business tax registration, and how is the account closed?A single-member LLC owes Los Angeles business tax registration only if engaged in business in the city; passive dividends and interest alone do not count.Law as of Oct 17, 2026
- When is new construction assessed in California, and how is the supplemental bill computed?California assesses new construction in progress each January 1, sets a base year value on completion, and issues a prorated supplemental bill.Law as of Oct 17, 2026
- Why is the county assessing property tax on leased port property?California property tax reaches a tenant's possession of exempt port land as a taxable possessory interest (Revenue and Taxation Code section 107).Law as of Sep 28, 2026
- Must a child live in an inherited home to keep the parent's base year value under Proposition 19?California's Proposition 19 keeps a parent's base year value on an inherited home only if a child makes it a principal residence within a year of transfer.Law as of Oct 13, 2026
- What did Proposition 19 change about California property tax reassessment?Proposition 19 limited California's parent-child reassessment exclusion to a family home or farm and let homeowners 55 and up move taxable value statewide.Law as of Sep 26, 2026
- How does a financial services business apportion its San Francisco gross receipts: customer location or payroll?Since 2025, a San Francisco financial business is taxed on 75% of receipts sourced to City customers plus 25% of group receipts apportioned by City payroll.Law as of Oct 15, 2026
- Does a change in control of an entity trigger California documentary transfer tax?Under 926 North Ardmore (2017), a change in control of an entity owning California real property often triggers documentary transfer tax, without any deed.Law as of Oct 12, 2026
- What happens when a California assessor never enrolls reported construction in progress, and how long should the reserve stay?A California assessor's failure to enroll reported construction in progress leaves escaped property, assessable for four years without interest or penalty.Law as of Oct 17, 2026
- When is a vessel exempt from California property tax, and does the sales tax exemption match?California exempts vessels over 50 tons carrying freight or passengers for hire from property tax; the sales tax watercraft exemption uses a different test.Law as of Oct 14, 2026
- What property tax relief can a California wildfire victim claim?A California wildfire victim with at least $10,000 of damage may seek reassessment under Revenue and Taxation Code section 170 or transfer base year value.Law as of Oct 14, 2026
Nexus and registration
5 articles- Does owning a disregarded LLC that operates in California give the owner nexus?Yes: a corporation that is the sole member of a disregarded LLC doing business in California is itself doing business there and owes California franchise tax.Law as of Oct 12, 2026
- When do California's bright-line nexus thresholds make a passive investor a taxpayer?A passive investor is doing business in California if its sales, property or payroll, counting pass-through shares, exceed the section 23101(b) thresholds.Law as of Oct 9, 2026
- A company opens its first California office: which registrations and taxes follow?A first California office brings separate Secretary of State, Franchise Tax Board and employer filings, plus a seller's permit if it sells goods.Law as of Oct 22, 2026
- Does P.L. 86-272 protect a foreign corporation that sells goods into California?No: California reads Public Law 86-272 as limited to interstate commerce, so it does not shield a non-U.S. seller shipping goods into California from abroad.Law as of Oct 13, 2026
- Do sales reps in California create sales tax nexus below the Wayfair threshold?A seller with salespeople or contractors soliciting in California must collect sales tax from the first dollar; the economic threshold is no safe harbor.Law as of Oct 10, 2026
Water's edge and international
7 articles- How does California treat IRC 367(d) deemed royalties in worldwide and water's edge years?In California, IRC section 367(d) deemed royalties may be deferred in worldwide combined years; electing water's edge brings the deferred balance into income.Law as of Oct 10, 2026
- Does California tax income a foreign corporation excludes under IRC Section 883?Generally no: California excludes IRC Section 883 income in a water's-edge report by following federal law, and for worldwide filers under section 24320.Law as of Oct 12, 2026
- How does California tax PFIC income when it does not conform to the federal PFIC rules?California does not conform to the federal passive foreign investment company rules; shareholders have California income only on distribution or disposition.Law as of Sep 28, 2026
- What happens to a California water's edge election when the group reorganizes?A California water's edge election usually survives a reorganization; if electing and nonelecting taxpayers combine, the larger by business assets decides.Law as of Oct 12, 2026
- Can a foreign-owned group that finds years of unfiled California returns still elect water's edge?A foreign-owned group cannot elect California water's edge for a year already past due, because the election requires an original, timely filed return.Law as of Oct 13, 2026
- What makes a water's edge election valid when the return and the election disagree?A California water's edge election needs a timely original return that computes tax on a water's edge basis; a late or amended return cannot make one.Law as of Oct 9, 2026
- When is a foreign corporation excluded from a California water's edge combined report?A foreign corporation is generally left out of a California water's edge combined report unless its United States factors average 20 percent or more.Law as of Oct 12, 2026
Unclaimed property
1 articleGross receipts tax
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