Summary: The California Office of Tax Appeals recently ruled that a taxpayer with inventory in the state, due to participation in the Fulfillment by Amazon program, was considered to be doing business in California and therefore subject to the state’s LLC tax, even though the taxpayer did not exceed the state’s factor presence nexus threshold.
A recent decision by the California Office of Tax Appeals (OTA) provides guidance to taxpayers with inventory in the state.[1] The case focuses on how California determines if a business is “doing business” in the state and is therefore required to pay the state’s $800 annual limited liability company (LLC) tax.
Out-of-State LLC Using Amazon Fulfillment
The taxpayer in this case was a Delaware LLC based in Florida that sold products through Amazon as a participant in its Fulfillment by Amazon (FBA) program. As an FBA participant, the company’s owned inventory was stored at Amazon fulfillment centers located in California, and Amazon shipped the products to customers from those fulfillment centers. During 2019, the business had an estimated $14,000 in California sales and maintained a maximum inventory of about $2,330 held in the state.
Despite its business activities in California, the taxpayer did not file an LLC tax return for the 2019. In 2022, the Franchise Tax Board (FTB) issued the taxpayer a Demand for Tax Return, which required the taxpayer to either:
- File a return
- Inform the FTB that a return was already filed
- Complete a questionnaire to determine if the taxpayer had a filing requirement
The taxpayer ignored the demand letter and subsequently received a Notice of Proposed Assessment (NPA). After some back and forth between the taxpayer and the FTB, the FTB determined that the taxpayer owed the $800 LLC tax, a demand penalty of $200, plus interest.
What Counts as “Doing Business” in California?
Under California law, an LLC that is “doing business” in the state is subject to the $800 annual LLC tax.[2] The term “doing business” means “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.”[3] Since 2011, a taxpayer is considered to be doing business in California if its sales, property value, or payroll within the state exceeds certain thresholds.[4] This standard is commonly knowns as a factor-presence nexus rule. The applicable thresholds for each year are adjusted for inflation and are available on the FTB website.
OTA’s Decision: Factor-Presence is Not a Safe Harbor
The taxpayer argued that its sales and property (i.e., inventory) did not exceed California’s applicable thresholds, so it should not be subjected to the tax. However, the OTA disagreed, noting that the factor-presence nexus rule is not a safe harbor, and that even if a taxpayer does not meet those thresholds, it can still be “doing business” if it is actively engaging in transactions for the purpose of financial or pecuniary gain or profit. The OTA agreed with the FTB that the taxpayer’s activity in the state as an FBA seller was sufficient to show that it was “doing business” under that standard.
Demand Penalty and Reasonable Cause
The OTA also upheld the $200 demand penalty, explaining that failure to respond to the demand notice gives rise to the penalty unless the taxpayer can establish reasonable cause to abate the penalty. To establish reasonable cause, the taxpayer must show that failure to reply to a demand occurred despite the exercise of ordinary business care and prudence, meaning that an ordinarily intelligent and prudent businessperson would have acted similarly under the circumstances. In this case, the taxpayer provided no justification other than continuing to argue that it was not subject to the tax. The OTA emphasized that ignorance of the law does not establish reasonable cause.
Final Thoughts: Implications for Businesses Using Fulfillment Centers
Approximately one-third of U.S. states have similar factor-presence rules for determining income or gross receipts tax nexus based on exceeding a certain level of property, payroll, and/or sales. However, simply staying below these thresholds does not guarantee that a business is not subject to state tax. Each state’s rules and guidance are different, and businesses must review each state’s laws to determine whether they have nexus and corresponding tax obligations.
[1] In the Matter of the Appeal of: Diet Standards LLC, OTA Case No. 230613542, 2025-OTA-646, October 7, 2025.
[2] Cal. Rev. & Tax Code §§ 17941(a) and 23153(d).
[3] Cal. Rev. & Tax Code § 23101(a).
[4] Cal. Rev. & Tax Code § 23101(b)(2)-(4). A taxpayer is also doing business if it is organized or commercially domiciled in the state. Cal. Rev. & Tax Code § 23101(b)(1).
