Amazon FBA Inventory Triggers California Sales Tax Audit and Franchise Tax Liability

A recent California tax decision serves as an important warning for Amazon sellers and other e-commerce businesses: storing inventory in a state can create unexpected state tax obligations, even if the business has no office or employees there.

The California Office of Tax Appeals ruled that an out-of-state online retailer using Amazon’s “Fulfillment by Amazon” (FBA) program was responsible for California tax filings and franchise tax obligations because its products were stored in California warehouses.

This case highlights the growing risk of sales tax audits, state tax nexus issues, and Amazon FBA tax liabilities for online sellers nationwide.

California Tax Audit Targets Amazon FBA Seller

Fishbone Apparel, Inc., a Pennsylvania-based clothing company, sold products online through Amazon using the FBA program. Under Amazon FBA, Amazon stores inventory in warehouses across the country and ships products directly to customers.

Like many online sellers, Fishbone did not realize its inventory was being stored in California fulfillment centers.

In 2018, California tax authorities notified the company that it was considered to be “doing business” in California because:

• Inventory was stored in California warehouses
• Products were sold to California customers
• The company had established sufficient business presence, or “nexus,” in the state

As a result, California required the business to:

• Register with the California Department of Tax and Fee Administration (CDTFA)
• File California tax returns
• Pay California franchise taxes and related fees

California Franchise Tax and Sales Tax Liability

Fishbone eventually filed a California sales tax return for part of 2019, reporting more than $9,000 in California sales. However, the company argued that it did not have enough connection to California to owe California income or franchise taxes.

California disagreed and issued a tax assessment that included:

• The $800 California minimum franchise tax
• Late filing penalties
• Filing enforcement fees
• Interest charges

The company challenged the assessment, arguing that:

• It had no physical office in California
• It had no California employees
• It did not control where Amazon stored its inventory
• Simply storing products in an Amazon warehouse should not qualify as “doing business” in California

The California Office of Tax Appeals rejected those arguments and sided with the state.

California Office of Tax Appeals Decision

The Office of Tax Appeals found that storing inventory in California through Amazon FBA created sufficient nexus for California tax purposes.

The court also noted that Fishbone had already filed a California sales tax return reporting California sales, which undermined its position.

Ultimately, the company was required to pay:

• The $800 minimum franchise tax
• Interest
• Filing enforcement fees
• Late filing penalties

Although one penalty was removed, most of the assessment remained in place.

What Online Sellers Should Learn From This Sales Tax Audit

This decision highlights a common misconception among e-commerce businesses and Amazon sellers.

Many online retailers assume they do not owe state taxes unless they have:

• A physical office
• Employees
• A storefront

However, under modern state tax laws, inventory stored in a state can create tax nexus and trigger:

• Sales tax collection obligations
• Franchise tax liability
• State income tax filing requirements
• Sales tax audits and penalties

Key Takeaways for Amazon FBA Sellers

Businesses using Amazon FBA or other third-party fulfillment services should regularly review where inventory is stored and understand their multistate tax exposure.

Online sellers should:

• Monitor inventory locations across all states
• Review state tax nexus rules
• Ensure proper sales tax registration
• File required state tax returns on time
• Conduct regular sales tax compliance reviews
• Consult a tax attorney or sales tax professional regarding Amazon FBA tax risks

Failing to address these issues can result in:

• State tax audits
• Back taxes
• Penalties and interest
• Franchise tax assessments
• Increased compliance costs

Conclusion

The Fishbone Apparel decision demonstrates how easily Amazon FBA inventory can create California tax obligations for online sellers. Even businesses with no physical office or employees in California may still face state tax liability if their products are stored in California warehouses.

As states continue increasing enforcement efforts against remote sellers and e-commerce businesses, proactive sales tax compliance and multistate tax planning are more important than ever.

Case Citation:
Appeals of Fishbone Apparel, Inc., OTA Case No. 230212546, Office of Tax Appeals State of California, December 29, 2025.

Amazon FBA Inventory Triggers California Sales Tax Audit and Franchise Tax Liability