For taxable years beginning on or after January 1, 2011, new “economic nexus” rules came into effect in California. By way of background, “nexus” rules are put into place by states to establish the minimum contacts, or conduct, necessary to establish a sufficient connection (i.e., “nexus”) between the business and the state to give the state the legal power to tax the business.

The new rules primarily affect out-of-state corporations and pass-through entities and their equity holders that have property, payroll or sales in California. Under the prior rules, a company was considered to have nexus with California if it actively engaged in any transaction for the purpose of financial or pecuniary gain or profit. The new rules expand upon the old standard and are intended to “ensnare” businesses that the old standard did not.