California's Tax Net Casts Wider Than Expected

California's tax authorities have expanded their reach, ensnaring a Delaware-based LLC in their net.

The Case of Diet Standards LLC

Diet Standards LLC, a Delaware-based company utilizing Amazon's Fulfillment by Amazon (FBA) program, has found itself subject to California's $800 annual LLC tax. The California Office of Tax Appeals (OTA) ruled that storing inventory in Amazon's California warehouses and shipping orders to customers constitutes "doing business" in California. This decision applies even if the company's sales, property, and payroll in California are below specific thresholds.

The Argument and the Ruling

Diet Standards LLC contended that they did not meet California's "bright-line" nexus thresholds, which are specific amounts of sales, property, or payroll that determine tax obligations. However, the OTA disagreed, asserting that the general definition of "doing business"—any activity done for financial gain—is sufficient to impose the tax.

Implications for E-Commerce Businesses

The OTA's decision raises critical questions:

• Why have economic nexus thresholds if any business activity for profit can trigger a tax obligation?
• What does this mean for e-commerce businesses?

This ruling serves as a wake-up call for businesses to review their operations and determine if they might be "doing business" in California or other states. It also highlights that tax agencies share data, and information from sales tax filings can be used to impose other taxes.

Key Takeaways for Businesses

• Stay vigilant: Monitor activities in different states.
• Understand the rules: Be aware of how third-party logistics services like Amazon's FBA can impact tax obligations.
• Plan accordingly: Even small-scale operations can lead to tax liabilities.