The California Office of Tax Appeals held that storing inventory at a third-party warehouse constitutes “doing business” for income and franchise tax purposes.
The taxpayer was a Pennsylvania-based corporation making online sales of apparel through a third-party digital marketplace. The taxpayer also contracted with the marketplace to hold and ship inventory from warehouses (fulfillment centers) to customers in various states. In 2018, the California Department of Tax and Fee Administration (CDTFA) sent the taxpayer a letter informing it that CDTFA received information that appellant had inventory stored in fulfillment centers located in California and as such, met the definition of a retailer engaged in business in California for sales and use tax purposes. CDFTA informed the taxpayer that it was therefore required to register with CDTFA, file sales and use tax returns, and pay tax on sales made to consumers in California – all of which the taxpayer did.
Subsequently, the Franchise Tax Board (FTB) received the taxpayer’s gross sales information from the CDTFA and issued an assessment for the $800 minimum franchise tax plus penalties, and enforcement fee, and interest. The definition of “doing business” in California, specifically, Cal. Rev. & Tax. Code § 23101(b), includes a bright line test: (1) sales of the taxpayer in California exceed the lesser of $500,000 or 25 percent of the taxpayer’s total sales; (2) the real property and tangible personal property of the taxpayer in California exceed the lesser of $50,000 or 25 percent of the taxpayer’s total real property and tangible property; or (3) the amount paid in California by the taxpayer for compensation exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the taxpayer. Although the taxpayer was nowhere near these thresholds, the OTA found that the taxpayer was doing business in California under subdivision (a) of section 23101, finding “appellant’s storage of inventory and sales in California during the 2019 tax year satisfies the criteria of ‘actively engaging in any transaction for the purpose of financial or pecuniary gain or profit’ for income tax purposes.”
This decision is a good reminder that one may be “doing business” in California under section 23101, subdivision (a), even if the bright-line thresholds in subsection (b) are not met, and that the California tax agencies communicate with each other.
Appeal of Fishbone Apparel, Inc., OTA Case No. 230212546, 2025-OTA-141 (December 29, 2025).