A recent decision by the California Office of Tax Appeals highlights a growing issue for online sellers that simply storing products in a state, even without a physical office, can create unexpected tax obligations. The decision is a reminder that running an online business does not mean you are free from state taxes, especially if your products are sitting in warehouses across the country. Fishbone Apparel, Inc., a clothing company based in Pennsylvania, sold its products through Amazon using the “Fulfillment by Amazon” (FBA) program. Like many online sellers, the company relied on Amazon to store its inventory and ship orders to customers. What Fishbone did not realize was that some of its inventory was being stored in California warehouses, which later caused a tax bill.
In 2018, California tax authorities notified Fishbone that because its products were stored in the state and sold to California customers, it was considered to be “doing business” in the state. That classification comes with responsibilities, including registering with the state, filing tax returns, and paying taxes. The Fishbone eventually filed a California sales tax return for part of 2019, reporting more than $9,000 in sales to customers in the state, but for income tax, Fishbone took the position that it did not have enough connection to California to be required to file. The state disagreed and issued a tax assessment that included California’s minimum franchise tax, along with penalties, fees, and interest.
Fishbone challenged the assessment, arguing that it had no real presence in California. It argued that it was not based in California, had no employees there and did not control where its inventory was stored. Fishbone even argues that simply having products in an Amazon Warehouse should not count as doing business in the state. The office of Tax Appeals sided with California and found that storing inventory in the state and making sales to California customers was enough to create a business presence. The court also pointed out that Fishbone had already filed a sales tax return showing California sales, which worked against its argument. In the end, Fishbone had to pay the $800 minimum franchise tax and was hit with a late filing penalty, a filing enforcement fee and interest. While one of the penalties was removed, the rest of the charges stayed in place.
The decision highlights a common misunderstanding among online sellers. Many assume that if they do not have a physical office or employees in a state, they do not owe taxes there. But with today’s e-commerce systems, especially programs like Amazon FBA, inventory can be stored in multiple states without the seller even realizing it, and that alone can trigger tax obligations. Businesses should review where products are stored and where customers are located. Ignoring those connections, even if unintentional, can lead to unexpected tax liabilities.
(Appeals of Fishbone Apparel, Inc., OTA Case No. 230212546, Office of Tax Appeals State of California, December 29, 2025)