The California Office of Tax Appeals (OTA) recently issued an opinion in In the Matter of the Appeal of Diet Standards LLC (OTA Case No. 230613542), decided on October 7, 2025. This case serves as a critical reminder to tax practitioners regarding the scope of "doing business" in California, particularly concerning out-of-state entities utilizing the Fulfillment by Amazon (FBA) program. The OTA affirmed the Franchise Tax Board’s (FTB) position that physical presence via inventory, regardless of value, satisfies the statutory definition of doing business under Revenue and Taxation Code (R&TC) section 23101(a), independent of the bright-line economic nexus thresholds found in section 23101(b).

Factual Background

The appellant, Diet Standards LLC, is a limited liability company organized in Delaware and based in Florida. During the 2019 tax year, the appellant sold products through Amazon’s FBA program. Under this arrangement, the appellant owned inventory stored in Amazon fulfillment centers located within California and contracted with Amazon to ship these products to customers. The appellant estimated that for the 2019 tax year, it maintained a maximum inventory in California of $2,333 and generated California sales totaling $13,998.

The dispute arose after the FTB received data from the California Department of Tax and Fee Administration (CDTFA) indicating the appellant derived income from California sources. On April 20, 2022, the FTB issued a Demand for Tax Return, requiring the appellant to file a return, prove a return had been filed, or complete a nexus questionnaire by May 25, 2022. The Demand explicitly warned of the imposition of a demand penalty for failure to respond.

The appellant failed to respond by the deadline. Consequently, the FTB issued a Notice of Proposed Assessment (NPA) asserting an $800 annual LLC tax, a late filing penalty, a demand penalty, and a filing enforcement fee, plus applicable interest. Following a protest and a subsequent determination letter from the FTB, the appellant paid the balance due and filed a 2019 return reporting zero tax liability, thereby claiming a refund of the amounts paid. The FTB accepted the return but revised the liability to the minimum $800 tax plus the demand penalty and interest, effectively denying the refund claim. The appeal to the OTA followed the deemed denial of the refund claim.

Taxpayer’s Request for Relief

The appellant sought a refund of $1,127.50 for the 2019 tax year. The core of the appellant’s argument was that it was not "doing business" in California and thus not subject to the $800 annual LLC tax.

The appellant contended that R&TC section 23101 should be read such that a taxpayer is only doing business if they meet the specific bright-line nexus thresholds for sales, property, or payroll outlined in R&TC section 23101(b)(2)-(4). The appellant asserted that because its inventory ($2,333) and sales ($13,998) fell well below these statutory thresholds, it did not meet the definition of doing business and had no filing requirement. Additionally, the appellant sought abatement of the demand penalty and interest.

OTA’s Analysis of the Law

The OTA’s analysis focused on the interpretation of R&TC section 23101. The statute defines "doing business" in subdivision (a) as "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit". Separately, subdivisions (b)(2) through (b)(4) provide that a taxpayer is doing business if they satisfy specific bright-line threshold amounts regarding sales, property, or payroll.

Citing prior precedential opinions, specifically the Appeal of Aroya Investment I, LLC and the Appeal of GEF Operating, Inc., the OTA clarified that satisfaction of either subdivision (a) or subdivision (b) results in a finding that a taxpayer is doing business in California. The OTA explicitly rejected the appellant’s interpretation that subdivision (b) acts as a safe harbor. The court held that failure to meet the economic nexus thresholds of subdivision (b) does not preclude a finding of doing business under the general "active engagement" standard of subdivision (a).

Regarding the demand penalty, the OTA analyzed R&TC section 19133, which imposes a penalty for failure to file a return or provide information upon demand, absent reasonable cause. The burden of proof rests on the taxpayer to demonstrate that an ordinarily intelligent and prudent businessperson would have acted similarly under the circumstances.

Regarding interest, the court reviewed R&TC section 19101, noting that interest is mandatory compensation for the use of money and not a penalty. Abatement is restricted to limited scenarios under R&TC sections 19104 (unreasonable FTB error/delay) or 21012 (reliance on written advice).

Application of Law to Facts

Issue 1: Doing Business

The OTA found it undisputed that the appellant participated in the FBA program, held title to inventory in California warehouses, and made sales to California customers during the 2019 tax year. The FTB determined, and the OTA agreed, that this conduct constituted active engagement in transactions for financial gain. While the appellant’s inventory and sales figures were admittedly below the bright-line thresholds of R&TC section 23101(b), the court ruled that the appellant’s physical activities satisfied the standard under R&TC section 23101(a). Consequently, the appellant was subject to the $800 annual LLC tax.

Issue 2: Demand Penalty

The appellant failed to respond to the Demand for Tax Return by the prescribed deadline. The appellant offered no argument justifying this failure, other than reiterating its substantive argument that it was not subject to tax. The OTA cited the Appeal of Wright Capital Holdings LLC to establish that ignorance or misunderstanding of the law does not constitute reasonable cause to excuse noncompliance. Therefore, the penalty was sustained.

Issue 3: Interest Abatement

The appellant did not allege, nor did the record support, that the assessment of interest was due to an unreasonable error or delay by the FTB in a ministerial or managerial act. As such, the appellant failed to establish a statutory basis for interest abatement.

Conclusions

The OTA sustained the FTB’s deemed denial of the refund claim in full. The key holdings are:

Nexus Established: The appellant was doing business in California under R&TC section 23101(a) due to its participation in the Amazon FBA program and ownership of inventory in the state, despite falling below the economic nexus thresholds of section 23101(b).
Penalty Upheld: The appellant failed to establish reasonable cause to abate the demand penalty, as ignorance of the filing requirement is not a valid defense.
Interest Sustained: There was no legal basis for interest abatement.

For tax professionals, this case reinforces that R&TC section 23101(b) is a test for inclusion, not exclusion. Clients utilizing third-party logistics or fulfillment centers that store inventory in California likely trigger the "active engagement" standard of section 23101(a), necessitating the payment of the minimum annual tax even if their sales volume is de minimis.

Prepared with assistance from NotebookLM.