You Are Doing Business in California and Did Not Even Know It
Many business owners assume they only owe California taxes if they live or operate physically in the state. For online sellers, especially those using Amazon Fulfillment by Amazon, that assumption is often incorrect. A recent California Office of Tax Appeals decision shows how easy it is to create California tax nexus without any direct presence or awareness.
In the Appeal of Diet Standards LLC, the California Office of Tax Appeals held that a remote out of state business was doing business in California and was required to pay the $800 annual LLC tax, even though its California sales and property were below the state’s economic nexus thresholds.
What Happened in the Case
Diet Standards LLC was a Delaware limited liability company headquartered in Florida. The company sold products through Amazon and participated in Amazon’s Fulfillment by Amazon program. As part of that program, the company owned inventory that Amazon stored in California fulfillment centers and sold those products to California customers.
The business argued that it did not have California nexus because it did not exceed the bright line economic nexus thresholds for sales or property. The Franchise Tax Board disagreed and denied the company’s refund claim for the $800 annual LLC tax. The Office of Tax Appeals sided with the Franchise Tax Board.
Why Inventory in California Matters
California law defines doing business very broadly. A business is doing business in California if it actively engages in transactions for profit within the state. The Office of Tax Appeals concluded that owning inventory located in California fulfillment centers and selling that inventory to customers constituted active engagement in California.
Importantly, the Office of Tax Appeals reaffirmed that California’s economic nexus thresholds are not a safe harbor. Even if a business falls below those dollar amounts, it can still be doing business in California under the general standard.
Penalties and Interest Were Also Upheld
The taxpayer also challenged a demand penalty imposed after it failed to respond to a Franchise Tax Board demand for a tax return. The Office of Tax Appeals rejected this challenge, explaining that ignorance of filing obligations or disagreement with the law does not establish reasonable cause.
Interest abatement was also denied. Under California law, interest is mandatory and can only be abated in very limited situations. None of those exceptions applied in this case.
Key Takeaways for Online Sellers
- Storing inventory in California through Amazon Fulfillment by Amazon creates California nexus.
- Economic nexus thresholds do not protect a business from the $800 annual LLC tax.
- Failure to respond to Franchise Tax Board demands almost always results in penalties.
- Interest abatement is rarely available under California law.
This decision is consistent with prior Office of Tax Appeals rulings and reinforces California’s aggressive approach to nexus for remote sellers. If you sell products online and use third party fulfillment services, you may already be considered to be doing business in California without realizing it.
See current federal rates on the Economic Dashboard.
