It's been awhile since a CA emission test failure has been reported on a M103 engine, which surprises me. You're registration renewal probably directed you to a "test only" station and either the renewal form or the test report says "high emitter profile."

If the emission system is performing optimally the O2 content should be zero or no more than 0.1 percent, and CO2 should be over 15 percent because all the O2 has been consumed oxidizing HC to H2O and CO2. O2 content is a key piece of diagnostic data. There is a little bit of O2 in the exhaust gas. Plus the converter creates O2 by disassociating NOx to O2 and N2. So if there is no O2 at the tail pipe, the three-way catalyst is working at peak efficiency.

Catalysts "age" with miles and need to be hotter over time to achieve peak efficiency. Also, getting over 200K miles from an O2 sensor is a lot, but they don't last forever. If your 300E was originally sold in CA it should have diagnostics that are not on 49-state models and the "check engine" light should illuminate with a code for an O2 sensor fault, but maybe not in all cases. I believe Mercedes called for replacing the O2 sensor every 60K miles. My '88 190E 2.6 still has the original, but it only has 85K miles.

About ten years ago I did extensive testing on my car due to high HC readings. It passed, but had little HC margin, especially the 15 MPH test. I found information on this site about the R16/1 resistor. It controls the rate of spark advance with engine revs. The OE resistor is 750K. Removing it increases the rate of advance with revs and replacing it with a shorting plug (made out of a short piece of wire with the insulation removed from the ends, formed into a "U" and jammed in the socket) decreases the rate of spark advance with revs.

For normal driving my R16/1 resistor is not installed and for emission testing I install the shorting wire and replace the short molded rubber hose from the inlet manifold nipple to the 3mm nylon tube that goes to the EZL module with a piece of generic 1/8" vacuum tubing that is plugged with silicone. This disables the vacuum advance.

For a given speed and load the less ignition advance, the lower the peak combustion temperature, which lowers "engine out" NOx. At the same time it increases EGT, which will increase catalyst bed temperature

This configuration lowered my HC by about 50 percent and NOx a whopping 90 percent, though NOx was not a problem, and O2 is 0.0% at both speeds, so the catalyst is operating at peak efficiency. The engine is totally doggy below 2000 due to the retarded spark advance, but both tests are below 2000 (2nd and 3rd gear) so the effect is dramatic. I use a "drive though" test station a couple of miles away, but use a 5-mile route to get there so the cat fully warms up. I usually arrive about 0930 and get right into a test bay or maybe wait for one car to be completed, and NEVER SHUT OFF THE ENGINE. In fact I open the windows, turn on the A/C full and keep engine revs at about 1200-1500. This helps keep the catalyst hot.

Assuming you have a free retest you can replace the R16/1 resistor with a shorting plug and plug the vacuum advance as I described above. This will help, but may not be enough to do the job with your aged O2 sensor and catalyst, but it costs nothing out of pocket.

If it still fails I would probably replace the O2 sensor first and then the cat if it still fails, but let's wait and see what the new results are.

I strongly suggest that you search for threads stated by me, Duke2.6, using search words R16/1 resistor, and read those threads to understand how spark timing affects emissions and how to modify the spark advance map by shorting the R16/1 resistor disabling vacuum advance. As you probably know the initial timing is not adjustable - mine is 9 deg. BTDC, but that's okay. Retarding the rate of advance with engine revs and disabling the vacuum advance is more effective and easy to do on these engines.

Back before I learned about the R16/1 resistor, fifth gear was not useable below about 45 MPH - no torque. With it removed I can drop it into fifth at 35 MPH, and it easily pulls from about 1200. Around town fuel economy also improved by nearly 20 percent! The difference may not be as dramatic on an automatic (that I assume your car has), but is probably noticeable.

The R16/1 in my 190 is located on the plastic cover inboard of battery. It's visible and looks like a unconnected electrical connector wrapped up in electrical tape, so it's easy to access, but I remove the battery which takes about a minute to get better working space.

I believe it's in a different location on the W124 chassis - somewhere near the master cylinder, although that might be for the S-class, I'm not sure. More searching on the R16/1 resistor should lead to the location because there was a lot of discussion on this ten or more years ago, but not recently.

BTW, I'm a retired automotive/aerospace engineer - MSME from the U. of Wisconsin Engine Research Center where I did emissions research, so I understand emission creation and control at a very low level of detail.

Keep us posted.

Duke