For entrepreneurs, California offers access to the world’s 4th largest economy. But successfully operating in the state also requires navigating one of the most complex tax and compliance environments in the U.S.. The state’s notoriously complex tax system is now enforced by a Franchise Tax Board (FTB) armed with a new AI-powered audit system designed to find non-compliance.
This isn’t just about high income tax rates, either. The real challenge lies in the sheer volume of requirements, from annual franchise tax and complex sales tax nexus rules to high-stakes payroll classifications and a confusing patchwork of local ordinances. This measurable complexity earns the state a bottom-tier ranking, placing 48th in the Tax Foundation’s 2025 State Business Tax Climate Index.
To help you navigate the landscape, here are five of the most common California tax and compliance issues businesses encounter.
1. Annual Franchise Tax
One of the first costs many businesses encounter is the $800 Annual Franchise Tax. This is a minimum tax due annually to the Franchise Tax Board (FTB), and it applies to every LLC, S-Corp, C-Corp, and LP registered or doing business in California.
The key issue: this tax is due even if your business is pre-revenue, inactive, or operating at a loss. It is not a tax on profit; it’s a fee for the “privilege” of being registered. This often surprises new business owners who assume “no income” means “no tax”. If the payment is msised, penalties and interest may apply, even if the business wasn’t actively operating. his obligation continues until the entity is formally dissolved or cancelled with the Secretary of State, with only limited exceptions for first-year exemptions and the 15-day rule.
2. Sales & Use Tax Nexus
The $800 franchise tax is only one requirement. Once you start making sales, sales and use tax nexus becomes another major area of risk.. Not long ago, “nexus”, the connection that triggers a sales tax obligation, meant having a physical presence, like an office or warehouse. This is no longer the case.
Today, businesses establish nexus in California often without realizing it. The most common trigger is economic nexus: if your business exceeds $500,000 in total sales of tangible personal property to California customers in a calendar year, you may establish nexus. You must register, collect, and remit CA sales tax.
The other trigger is the new definition of “physical presence,” which is often broader than many businesses expect.. You can trigger physical nexus by having a single remote employee in the state, storing inventory in a third-party (like an Amazon FBA) warehouse, or even sending sales staff to a tradeshow.
One of the most costly scenarios is crossing the $500,000 threshold and failing to register and collect tax. In many cases, businesses later face uncollected sales tax, penalties, and interest for prior periods.
3. Worker Classification (AB5) and Payroll Compliance
Once you’ve navigated sales, the next major hurdle involves your team. California’s Employment Development Department (EDD) is known for strict enforcement around worker classification and payroll compliance, and its primary focus is ensuring workers are correctly classified.
The core risk here is worker misclassification. California’s Assembly Bill 5 (AB5) codified the “ABC test,” which makes it much harder to classify workers as independent contractors. The default assumption is always “employee.”
The cost of getting this wrong can be significant. Penalties for willful misclassification can range from $5,000 to $25,000 per violation, in addition to back taxes, wage claims, and interest. The rise of remote work has only complicated this. If your company is based in Texas but you hire one marketing specialist in Los Angeles, you are now a California employer. You must comply with all California rules for that employee, CA withholding, overtime, and paid sick leave, not your home state’s rules.
4. Business Property Tax (Form 571-L)
Beyond sales and payroll, businesses also need to account for business personal property reporting. This is one of the most commonly missed filings. This isn’t your real estate tax; it’s Form 571-L, or the Business Property Statement.
This is an annual requirement for businesses to report all business personal property (computers, equipment, furniture, machinery) to their county assessor. A common misconception is that fully remote businesses don’t need to file. In many cases, they do — especially if the business owns equipment used by employees working from home. Many businesses are surprised to learn this can apply to equipment as small as company-issued laptops used by employees at home.
5. Local Business Licenses and Gross Receipts Taxes
Finally, many businesses overlook local requirements. State-level compliance is only part of the picture. City and county requirements vary significantly by jurisdiction.
Nearly every city requires its own business license with its own fee structure. Some cities also impose additional taxes on top of state and federal requirements.. The San Francisco Gross Receipts Tax, for instance, requires businesses to calculate and pay an additional tax based on their revenue and business activities within the city, adding yet another complex layer of reporting.
Building Your Foundation for California Compliance with Scrubbed
Managing California’s complex tax landscape is a full-time job that drains internal resources and pulls focus from core operations. You don’t have to become a tax expert to run your business, but you do need one on your side.
This is where a professional partner is critical. Scrubbed provides the specialized, top-tier expert access to manage this landscape for you.
Our tax compliance & advisory services are built to handle the complexities of federal, state, and local tax obligations. Paired with our full service bookkeeping & accounting solutions, we ensure your financial data is accurate and audit-ready, providing the confidence you need to mitigate risk, avoid costly penalties, and focus on growth.
From Compliance Burden to Strategic Growth
As we’ve seen, California’s tax landscape is a high-risk, high-complexity environment. The requirements for sales tax, payroll, property, and local ordinances layer on top of each other, creating a massive compliance burden.
The single best piece of strategic advice in this environment is that proactive, year-round compliance is non-negotiable. You cannot “fix” California taxes in April; it must be a 365-day strategic function.
Stop letting compliance dictate your resources. Focus on growth and expand confidently.
Contact Scrubbed today for a consultation to learn how our scalable solutions can manage your tax and compliance burdens.
