California marketplace inventory creates franchise tax nexus

Marketplace sellers have learned, often the hard way, that marketplace inventory in California establishes physical presence and a sales and use tax obligation in the state for the marketplace seller. According to the California Office of Tax Appeals, marketplace inventory in the state may also make marketplace sellers liable for California franchise tax and income tax.

• Tax agencies share information about taxpayers. After learning from the California Department of Tax and Fee Administration (CDTFA) that out-of-state sellers had marketplace inventory in California, the California Franchise Tax Board (FTB) held them liable for California franchise tax and income tax.

• Marketplace inventory can trigger multiple tax obligations that are difficult to track manually. As businesses expand across states and marketplaces, tracking where inventory is stored — and how that impacts franchise, income, and sales tax — becomes increasingly complex and time-consuming.

• Automation can help businesses monitor nexus and stay compliant as rules evolve. Solutions like Avalara Agentic Tax and Compliance™ and Avalara AvaTax can help businesses track economic activity in states, apply more accurate tax calculations, and manage filing obligations across jurisdictions, reducing the risk of errors and missed requirements.

The California Office of Tax Appeals (OTA) has found two separate out-of-state businesses to be liable for the state’s minimum franchise tax — and in one case income tax — based on their participation in Amazon’s Fulfillment by Amazon (FBA) program.

In OTA Case No. 230613542, the OTA agreed with the California Franchise Tax Board (FTB) that participation in the FBA program in 2019 established nexus and a tax obligation for a Delaware LLC based in Florida. Therefore, the LLC is liable for California’s minimum LLC tax of $800 for 2019, plus applicable penalties and interest. The LLC tax is like franchise tax and filed with the FTB.

An LLC “doing business” in California is required to file an annual LLC tax of $800 for the privilege of doing business in the state. Doing business is defined as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit,” which includes, but isn’t limited to, meeting certain nexus thresholds for payroll, property, or sales. In this particular case, marketplace inventory in the state created the LLC tax obligation.

In OTA Case No. 230212546, the OTA found a Pennsylvania-based corporation that sells clothing through Amazon’s FBA program to be liable for the state’s minimum franchise tax ($800) and minimum income tax (also $800), plus applicable penalties and interest, for 2019. 

The facts of this matter are similar but different. In December 2018, the California Department of Tax and Fee Administration (CDTFA) informed the business that it met the definition of a retailer engaged in business in the state for sales and use tax purposes because it had inventory stored in Amazon fulfillment centers in California. This was before California had economic nexus and marketplace facilitator laws.

The clothing seller registered with the CDTFA and reported about $9,400 in California sales for 2019. It indicated at the time that it “possessed and relied upon Amazon sales and inventory reports or other information to file the return.”

Storing inventory and making sales in California satisfies the criteria of “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” for franchise tax and income tax purposes, according to the OTA.

The FBA program allows businesses to outsource fulfillment to Amazon, which stores, picks, packs, and ships orders on behalf of participating businesses. Businesses that use Amazon FBA services own inventory located in Amazon warehouses and facilities.

Having a physical presence in a state is one of the principal ways businesses establish sales tax nexus with states. Marketplace inventory alone is not sufficient to establish physical presence nexus in some states, but in more than 20 states, marketplace inventory stored in a third party’s warehouse and controlled by the third party can create nexus for the marketplace seller.

Tax agencies communicate with each other. Here, the CDTFA shared information about two out-of-state businesses with the FTB, and the FTB determined both businesses developed nexus and tax obligations with California through their Amazon marketplace inventory.

Tax laws are evolving. Having a physical presence in a state used to be the only way for a business to establish sales tax nexus. Today, every state with a sales tax has an economic nexus law requiring certain remote businesses to register for a sales tax permit.

Public Law 86-272 (1959) prohibits states from taxing the income of businesses whose only activity in the state is the solicitation of orders for sales of tangible personal property. Yet in California, selling through Amazon can be enough to establish nexus for franchise tax and income tax as well as sales tax. 

New technologies are creating new tax obligations. Chicago imposes a 10.25% amusement tax on charges for paid television and amusements delivered electronically, like online games and streaming services. And as of January 1, 2026, Chicago levies a social media amusement tax (SMAT) on social media businesses that collect consumer date on more than 100,000 Chicago consumers in a calendar year. “Social media” means applications, internet platforms, products, and websites that allow consumers to engage with audio, images, and videos “presented in types and formats including, but not limited to, performances, promotions, memes, augmented reality, artificial intelligence, and live streams.”

Businesses need to keep abreast of new and changing tax requirements, understand how the taxes apply to them, and comply with all applicable payment and reporting obligations. It’s a big job. Avalara Agentic Tax and Compliance™, a new way of automating compliance across the entire business ecosystem, is up to the task. 

Discover the benefits of Agentic Tax and Compliance.

Can marketplace inventory create California tax obligations?

Yes. Having inventory in a facility owned and operated by a marketplace can be sufficient to trigger sales tax nexus in more than 20 states. In California, marketplace inventory can also create franchise tax and income tax obligations for out-of-state businesses. 

What is the bright line test for California franchise tax and income tax nexus?

Under Cal. Rev. & Tax. Code § 23101(b), “doing business” in California means “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” This includes satisfying one of the following conditions:

1. The taxpayer’s California sales exceed the lesser of $500,000 or 25% of their total sales. 

2. The taxpayer’s real property and tangible personal property in California exceed the lesser of $50,000 or 25% of their total real property and tangible personal property.

3. The amount the taxpayer paid in California exceeds the lesser of $50,000 or 25% of the total compensation paid by the taxpayer. 

How can businesses manage tax obligations triggered by marketplace inventory? 
Managing compliance across multiple tax types and jurisdictions can be challenging, especially when inventory is managed and moved by a third party. Automated solutions, such as Avalara Agentic Tax and Compliance™, can help businesses identify where they may have nexus, calculate applicable taxes, and streamline reporting and filing processes. This can help reduce manual effort and support more consistent compliance as tax laws change.