Despite popular theory to the contrary incorporating in a tax-free state such as Nevada does not avoid California income taxes.

California allows a credit against State income tax equal to the amount of income taxes paid to other states. A resident company doing business in California but incorporated elsewhere must pay California corporate income taxes. To the extent that any part income the corporate income be derived in another state, and taxed by that other state there is an offset claim for that tax as a credit against the California state income tax.

Should there be no income tax due to another state there is no credit and therefore the full amount of tax applicable to California is due to California.

In many situations there is what is known as apportionment issues between jurisdictions, it is mandatory to establish which state the income was derived to determine to what state income taxes maybe due. This is not as straight forward as it would initially appear in that California requires a very complex set of procedures to allocate earnings to other states and assumes that all earnings otherwise are reportable to California.

The mere incorporation of an entity in some other state does not alleviate the reporting of activities conducted in California, and therefore income derived in California is taxable here. This concept extends to corporations that do business in multiple states including California, therefore earnings derived in California by those multistate, or multinational companies owe taxes on that portion of earnings derived in California to the California State Franchise Tax Board.

This concept extends to entities that may not even have resident status in California, as an example to the extent that certain air carriers fly over the state, California requires earnings attributable to the flight and air time over the state as being taxable.

The same concept applies to personal or professional services, such as when professional sports teams, and their employees, the players, compete here in California they owe California income taxes for the games played here.