Douglas Andersen, Tax Partner | Elisa Reyes, Tax Partner | Susan Rarick, Tax Partners | Juan Acevedo, Tax Manager

March 23, 2026

California’s corporate income and franchise tax nexus thresholds are a key determinant of whether a business has a tax filing obligation in the state, even if an entity is not physically located there. However, recent guidance from the Office of Tax Appeals (OTA) suggests that falling below these thresholds may not eliminate filing requirements.

Understanding California's "Doing Business" Standard

For corporate income and franchise tax purposes, California applies a broad “doing business” standard under R&TC §23101.

An entity is considered doing business in California if it:

• Actively engages in any transaction for financial or pecuniary gain, or profit” (R&TC §23101(a))
• Meets one or more of the following economic nexus thresholds (R&TC §23101(b)):
• Organized or commercially domiciled in California
• Sales exceeding the lesser of $757,070 (for 2025) or 25% of total sales
• Real and tangible personal property exceeding $75,707 (for 2025) or 25% of total property
• Compensation exceeding $75,707 (for 2025) or 25% of total salaries/wages paid

Historically, many taxpayer have interpreted these thresholds as a practical safe harbor, assuming that falling below them would generally preclude a California filing obligation. 

OTA Decision: Appeal of Diet Standards, LLC (2025-OTA-646)

A recent nonprecedential OTA opinion challenges that assumption.

In this case, Diet Standards LLC, a Delaware entity based in Florida, sold products through Amazon and participated in the Fulfillment by Amazon (FBA) program. As a result, the company-maintained inventory in California warehouses.

Key facts:

• California sales: approximately $13,998 in 2019 (below 2019 threshold of $601,967)
• California inventory: approximately $2,333 in 2019 (below 2019 threshold of $60,197)

Diet Standards argued that a plain reading of R&TC section 23101 shows that doing business in California is established if the taxpayer meets the economic nexus thresholds, and if none are satisfied, a taxpayer is not “doing business” in California and therefore had no filing obligation.

OTA Opinion

The OTA disagreed.  Consistent with prior rulings, the OTA emphasized that bright-line thresholds in §23101(b) are not a safe harbor. Instead, they provide an additional path to establish nexus. An entity may still be considered "doing business" under the broader definition in §23101(a), even if it falls below those thresholds.

Broader Trend in OTA Decisions

Recent OTA rulings reinforce this interpretation:

• Appeal of GEF Operating, Inc. (2020-OTA-057P): Confirmed that economic thresholds do not limit the broader “doing business” definition or meeting the economic nexus thresholds leads to the determination that the entity is doing business in the state and is subject to tax (Appeal of Aroya Investment I, LLC, supra).
• Appeal of Metro Mortgage Group, LLC (2025-OTA-093SCP): Found nexus where a non-California business paid $121 to a single part-time clerical employee in the state who generated no business was enough to meet the financial or pecuniary gain test – because the employee was hired to further the appellant’s business (even if the work was merely clerical, and was not directly engaged in the profit California, despite minimal activity.
• Appeal of Fishbone Apparel, Inc. (2026-OTA-141): Determined that inventory stored in California through Amazon FBA constituted physical presence, even with only $9,403 in sales

Together, these cases illustrate a consistent position: any activity in California conducted for profit, even minimal, may be sufficient to establish nexus.

What This Means for Taxpayers

These developments raise important considerations:

• Economic nexus thresholds should not be viewed as a protective barrier against California filing obligations
• Physical presence, such as inventory held in-state through third-party logistics providers, remains a key factor
• Even limited in-state activity  activity may trigger the “doing business” standard

In practice, the thresholds function less as a safeguard and more as an additional test, meaning taxpayers below the thresholds may still have filing requirements depending on their facts and circumstances.

Have Questions or Need Guidance?

Given the evolving interpretation of California nexus standards, businesses should reevaluate their exposure, particularly those utilizing fulfillment services.

If you have questions regarding the Appeal of Diet Standards, LLC or how California's nexus rules may apply to your business, please contact your HCVT state and local tax advisor.