"The Texas S corporation zero's out its K-1 income by paying the same amount of wages to the employee/shareholder, now a Texas resident."

"Thus, the Texas S corporation has no income to be taxed in California."

Doesn't seem right as stated.

I think you mean, the CA-sourced LLC-sourced income will be offset by the Texas S Corp wages, just like any other Texas S Corp expense activity will offset the other Texas S Corp income, to end with a net. You are mixing perspectives. Either you're looking solely at CA-sourced income and expense, or you're looking at the Texas S Corp's bigger picture.

You can't just wipe out a sourced income by having other unrelated expenses to account for it. You still had the sourced income; that's what the K-1 is reporting. You might net 0 for the Texas S Corp, but there was reported income. If you had sourced expense against that sourced income, as the CA LLC will have, that would be different. You explained there is no CA activity done by the Texas S Corp, though.