California Case Serves as Reminder for Physical Presence Nexus

The California Court of Appeals ruled on the case, Grosz v. California Department of Tax and Fee Administration (Grosz) on January 9, 2023.

This case relates to California sales and use tax and whether the California Department of Tax and Fee Administration (CDTFA) is legally bound to hold marketplace retailers liable for uncollected sales tax where a seller uses Fulfilled by Amazon (FBA) services for periods prior to the enactment of California’s sales and use tax economic nexus legislation, Assembly Bill (AB) 147, effective October 1, 2019.

The case effectively reinforces the CDTFA’s basis for asserting liabilities directly on remote sellers with physical presence through inventory owned in California warehouses, regardless of whether the remote seller or FBA moved the inventory into the state.


California imposes a sales tax on sales of tangible personal property (TPP) sold at retail to consumers in the state. Sellers making retail sales are considered doing business in the state if they have physical presence such as property, employees and business travel, or solicitation.

AB 147 considers remote sellers and marketplace facilitators who have annual gross receipts of $500,000 or 200 transactions as doing business in California and required to register and file sales and use tax returns. AB 147 didn’t do away with California’s longstanding physical presence nexus requirement.

Companies often use logistics service providers, such as FBA, to store and delivery their goods. As a result, a company can own inventory in California because it’s held at warehouses operated by a logistics service provider. By virtue of owning inventory located in California, the company is regarded as doing business in the state and is required to register and collect sales tax on its sales to California consumers.

In many situations, the logistics service provider has the discretion to move the company’s inventory between its warehouses to meet delivery requirements. As a result, the company could have sales tax nexus with California because the logistics service provider moved its inventory to the state.


In Grosz, California’s court of appeals agreed with the lower court and ruled that there’s no statute or regulation that conclusively establishes that the CDTFA must pursue marketplace facilitators for sales tax related transactions prior to October 1, 2019.

Given the lack of statutory or regulatory authority to hold the marketplace responsible as a retailer prior to October 1, 2019, the Court has effectively authorized the CDTFA to seek the tax from unregistered out-of-state sellers that had physical presence nexus by virtue of holding inventory in California warehouses, even though a logistics service provider brought the inventory into the state.

Grosz illustrates how the longstanding physical presence nexus rules should still be considered even after the Wayfair case ushered in new rules for economic nexus and marketplace transactions.

Specifically, holding inventory at third-party warehouses, even if the fulfillment company moves the inventory there at its own discretion, is considered physical presence in the state where the warehouse is located.

The CDTFA is amending the regulation on Marketplace Sales (Regulation 1684.5), although no announcement has been made regarding when it will be finalized.

Who’s Affected

Unregistered outside-of-California merchants that used FBA or similar logistics service providers and made sales into California prior to October 1, 2019, could be contacted by the CDTFA regarding California sales or use tax obligations due to the presence of inventory held at Amazon distribution centers. For non-filers, the CDTFA may examine unreported sales transactions going back eight years.

Broader Application

The use of FBA by a merchant making sales in the state can also create an obligation to file California franchise tax returns. Public Law (PL) 86-272 prohibits states from imposing a net income tax on revenue derived from interstate commerce, but the sellers only business activity within the state can be solicitation of orders of TPP. Ownership of inventory in a state would nullify the protection under PL 86-272.

These marketplace transactions can also affect states other than California, with marketplace legislation having been enacted by most jurisdictions. Several other states have legal cases addressing this issue, most notably in South Carolina, Amazon Servs., LLC v. Department of Revenue, S.C. Ct. App., No. 2019-001706, which is still pending.

For periods before states made the marketplaces responsible for collecting the tax, inventory presence may create a liability for sellers, which should be considered when evaluating sales and use tax compliance responsibilities and historical exposures. This may become a crucial factor when deciding whether to register in a state or to pursue available administrative options, such as voluntary disclosure, to resolve historical noncompliance.

We’re Here to Help

For more information on how this case, or others, could affect your sales and use taxes or how the program could affect you or your business in e-commerce, contact your Moss Adams professional.

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