Making a sale is the fun part of running a business. Fulfilling that sale and then making sure you pay all the required taxes on that sale, not so much. Like sales tax in general, California sales and use tax can be a complicated headache. But it’s part of doing business in a state with a potentially large customer base for what you have to sell.
If your business is based in California, or you make sales to customers in California, you need to be familiar with California sales and use tax.
This information is provided solely for educational purposes. Do not rely on it to make decisions regarding your businesses’ responsibilities for sales or use tax. Consult your tax advisor for details regarding your business.
Brief Overview Of California Sales Tax
Retailers engaged in business in California, including some retailers based out of state who do business in California, must register with the California Department of Tax and Fee Administration (CDTFA) and pay the state’s sales tax, which applies to all retail sales of tangible goods and merchandise except those sales specifically exempted by law.
There are three parts to the sales tax and use tax: the state tax rate (currently 7.25%), the local tax rate, and any district tax rate that may be in effect.
Understand that even businesses not located in California may have to collect and pay California sales tax. If you don’t, there may be legal and financial consequences for your business, both of which can be costly.
This tax is separate from any California state income tax your business may be required to pay.
What Is Sales Tax?
Sales tax is a tax on the sale of tangible goods or services. In California, sales tax is imposed on retailers (sellers), and is required for all sales of tangible goods unless specifically exempted. More on that in a moment. Sales tax may apply in the case of service and labor costs if they are part of the sale of TPP.
Sales tax is typically collected by the seller at the time of purchase and then remitted to the state government. In California, sellers are responsible for the payment of sales tax based on gross sales, again, unless those sales are exempt from sales tax.
In California, sales tax ranges from 7.25% to 10.25%.
As a small business owner or retailer doing business in California, you need to understand how sales tax works and make sure you collect it and pay it when required.
What is taxed and what is not depends on the types of goods or services sold. Goods for resale generally aren’t subject to sales tax. You’ll find more detailed guidelines in publications available on the CDTFA website that spell out many specific requirements for certain types of businesses.
Again, you should be aware that some out-of-state businesses may also be required to pay sales tax, as we’ll describe in a moment.
Use tax is a related concept. It’s designed to remove the unfair advantage out-of-state retailers may enjoy if Californians don’t have to pay sales tax on a purchase made from a retailer outside California. When an out-of-state or online retailer doesn’t collect the tax for an item delivered to California, the purchaser may owe “use tax,” which is simply a tax on the use, storage, or consumption of personal property in California.
Items not subject to sales tax are not subject to use tax, and there are other exemptions. California exempts the first $800 of foreign purchases hand carried into the state, for example. There are several resources available that help explain use tax for Californians and California businesses.
California Sales Tax Rate Structure
There are three parts to California sales and use tax rate: the state tax rate (currently 6%), the local tax rate (1.25%), which together make up the standard or basic statewide tax rate, plus any district tax rate that may be in effect.
In most areas of California, local jurisdictions have added district taxes, ranging from 0.10% to 1.00%, that increase the tax owed by a seller.
Examples of when these district tax rates may apply include:
- You (the seller) has a location in a district that imposes district taxes;
- You (the seller) deliver merchandise in your own truck to a location in a district that imposes district tax;
- Your sales staff physically enters and solicits sales in a district that imposes district tax;
- You (the seller) have sales that exceed a certain threshold within California in the previous year.
Here’s where it gets even trickier: some areas may have more than one district tax in effect. Sellers are required to report and pay the applicable district taxes for their taxable sales and purchases, regardless of how confusing it may be.
If you’re not sure which rate to collect and pay, here are a few options:
- Look up the rate by address
- Contact CDTFA’s Customer Service Center at 1-800-400-7115 (TTY: 711),
- Call the local CDTFA office closest to you for assistance
- Use sales tax software that can help you understand the correct sales tax rate
Here’s another important point to keep in mind. If you sell or lease merchandise, vehicles, or other tangible personal property in California, even temporarily, you are generally required to register with the California Department of Tax and Fee Administration (CDTFA), and to pay sales tax on your taxable sales. According to the CDTFA, if you make three or more sales in a 12-month period, you are required to hold a seller’s permit.
Items for resale are not subject to sales tax but you may need a California Resale Certificate and you’ll want to make sure you document those sales. You’ll find more information about California Seller’s Permits here.
Definition Of Sales Tax Nexus
For states with a sales tax, it’s usually clear that when a business located in that state sells to buyers in that state, it needs to pay sales tax, unless a specific transaction is exempt.
But where it gets murkier is when out-of-state sellers sell to customers in other states. A 2018 Supreme Court case, South Dakota v. Wayfair held that sellers may be required to pay sales for sales in the state, even if the business doesn’t have a physical presence in the state.
As a result of that decision, most states have enacted economic nexus laws that require out-of-state sellers to register and pay sales tax if they meet specific thresholds, usually based on the level of sales or the number of taxable transactions within a state.
In California, that resulted in the passage of a California state law that requires sellers with $500,000 or more in total gross sales in California or for delivery into California in the prior or current year to collect California use tax, regardless of the seller’s physical presence. It applies to both in-state and out-of-state sellers
Notably, California also passed the Marketplace Facilitator Act. As a result, starting October 1, 2019, businesses are no longer responsible for collecting tax on sales through a marketplace facilitator (for example, Amazon). Instead, the marketplace facilitator is considered the retailer responsible for collecting the tax at the appropriate rate.
Here’s the catch: if your business makes all its sales through a marketplace facilitator it is not required to register for a sellers permit or certificate of registration – use tax.
If, however, you also sell items outside the marketplace facilitator, you may have a requirement to register and pay tax. The sales through the marketplace facilitator contribute to the $500,000 gross sales threshold. California’s Tax Guide for the Marketplace Facilitator’s Guide can help you understand the requirements here.
Determining Nexus In California
The state of California has created a guide, Use Tax Collection Requirements Based on Sales into California Due to the Wayfair Decision. It also publishes a California Tax Matrix for Remote Sellers that goes into more detail about the requirements, including details about specific types of purchases, from alcoholic beverages to window coverings. Review the guide and talk to your tax professional or contact the CDTFA if you have questions.
Common Scenarios for Nexus
The CDTFA spells out five common ways in which you can be considered engaged in business in California. It explains that “If any of the following situations apply to you, you are required to collect, report, and pay sales and/or use tax.
- You maintain, occupy, or use, directly or indirectly, or through a subsidiary or agent, a permanent or temporary office, place of distribution, sales or sample room, warehouse or storage place, or other physical place of business in California.
- You have representatives, agents, or independent contractors operating in California on your behalf or under your authority, or under the authority of your subsidiary, for purposes of making sales, taking orders, assembling or installing tangible personal property, training customers, making deliveries, or otherwise establishing or maintaining a market for your products.
- You receive rental payments from the leases of tangible personal property located in California, such as leases of machinery, equipment, and furniture.
- You own or lease real property or personal property such as machinery or equipment, furniture, or computer servers located in California.
- Beginning April 1, 2019, you have total combined sales of tangible personal property for delivery in California by you and all persons related to you exceeding $500,000 during the preceding or current calendar year.”
Again, if you make sales in California, your business will be considered to have met the $500,000 sales threshold based on your total sales of tangible personal property, which can include a mix of marketplace and non marketplace sales, and may also include nontaxable sales, such as sales for resale.
If, however, your business is located outside California, it does not meet any of the requirements to be considered doing business in California, and it does not meet the $500,000 sales threshold in the prior or current calendar year, you aren’t required to register with CDTFA. But if you meet any of those requirements in the future it’s essential you register.
eCommerce and California Sales Tax
Again, ecommerce sellers who sell to California customers may be required to pay tax on sales of nonexempt tangible personal property in California if they meet certain threshold requirements, and they aren’t selling exclusively through marketplace sellers.
Business Sales Tax Registration and Collection
You can register a new business at CDTFA.gov. It will walk you through the registration process for a new business. Create a username and password, and keep them in a safe place since you’ll return periodically.
Filing Frequency And Deadlines
You may be required to file on a quarterly prepay, quarterly, monthly, fiscal yearly, or yearly basis, depending on your reported sales tax or your anticipated taxable sales at the time of registration.
You will find a complete list of due dates based on filing frequency on the CDTFA website.
Completing A Sales Tax Return
If you are working with a tax professional, they will likely assist you with completing and filing your sales and use tax return. You can also complete and file your return online at the CDTFA website.
Sales Tax Tools And Software For Businesses
If you want your customers to cover the cost of sales tax, you must make sure you are properly charging sales tax at the time of purchase. Keep in mind that if you refund a purchase where you charged sales tax to the buyer, you must also refund the sales tax.
Plus, California sales tax may not be the only sales tax your business is responsible for. In most states the threshold for out-of-state sellers is $100,000 in annual sales.
Even state sales tax in the home state where your business is located can be complicated and confusing, especially when different rates are charged by different cities, counties or districts.
This is where sales tax tools and software can be helpful. Some merchant services solutions offer sales tax software solutions that automatically calculate and charge sales tax on taxable items. For example, Shopify Tax can be used to track and collect the right amount of sales tax.
If your merchant service provider doesn’t offer this type of solution, you can use third-party tax software service. For example, Avalara AvaTax offers cloud-based software that delivers sales and use tax calculations to your shopping cart or invoicing system at the point of purchase.
Make sure you understand sales and use tax requirements, or work with an experienced tax professional, as this tax can easily trip up small businesses and penalties can add up.
Paying The Collected Sales Tax
First, remember that you can have sales tax liability even if you didn’t collect sales tax from your customer. It’s the seller’s responsibility to pay sales tax when required. You can pay the amount of tax due directly from your bank account, credit card, check, or by money order. Some taxpayers are required to make payments by Electronic Funds Transfer (EFT). Again, the CDTFA is the central place for filing returns and making most sales tax payments.
If you pay by bank account, it’s good practice to use a business bank account to pay business taxes, rather than a personal account. If you use a credit card (personal or business credit card) you’ll pay a 2.3% service fee.
Frequently Asked Questions on CA Sales Tax
How Do I Know if I Have a Sales Tax Nexus in California?
Just because you don’t have a physical location or presence in the state, that doesn’t mean you don’t have to pay sales or use tax. It’s essential that you comply with California’s complicated tax requirements. It’s a good idea to work with a tax professional who is familiar with these requirements. You can also attend any number of free educational workshops (including online workshops) on California tax topics, and you can always reach out directly to CDTFA.
Publication 107 explains whether you need a Seller’s Permit.
How Do I Register for a California Sales Tax Permit?
You can register for a Seller’s Permit at CDTFA.ca.gov. You’ll need projected monthly sales, projected monthly taxable sales and products to be sold.
Are There any Items Exempt from California Sales Tax?
Yes, in addition to items for resale, some products are exempt. But it’s complicated. Take food products, for example. Here’s a description from a CDTFA presentation on sales tax:
“Hot or cold food and beverages sold for consumption at your place of business are generally taxable, but cold prepared food items sold “to go” are generally nontaxable. But then the “80/80 rule” also applies. If the 80/80 rule applies and you do not separately track sales of cold food products sold to-go, you are responsible for tax on 100 percent of your sales. This rule applies to restaurants, bars, hotels, and similar establishments.”
There are other specific exemptions. For example, auto repair labor is generally not subject to sales tax. But labor charges for making a part (“fabrication labor”) are usually taxable, as are labor charges for installing parts on new vehicles.
Sales to federal agencies aren’t taxable, but sales to state and local government agencies are.
Additionally, you generally don’t owe sales tax on a sale when you ship the item directly to an out-of-state buyer for use outside of California.
Delivery charges you pass directly on to the customer typically are not taxable if you shipped directly to the purchaser by common carrier, contract, carrier, or US mail; your invoice clearly lists delivery shipping freight or postage as a separate charge and you don’t mark up the actual cost.
There is also a trade show exclusion for certain types of trade shows where the sale of tangible personal property is prohibited (and none is sold), the trade show is for educational or informational purposes only, as well as trade shows that meet certain requirements spelled out in California sales and use tax law.
Again, it’s wise to get professional advice and/or consult with the CDTFA to make sure you are properly tracking and paying sales tax.
What are the Tax Implications for Drop Shippers in California?
In California, a drop shipper refers to a supplier that delivers merchandise to California consumers on behalf of a retailer that is not engaged in business in California. The business that sells the product to the customer and engages the drop shipper to supply and ship the product is the true retailer.
Here’s what the CDTFA says about tax implications for drop shippers in California: “A drop shipper is engaged in business in California and is liable for the tax; they must report and pay the tax to California. The tax is based on the retail selling price of the merchandise paid by the California consumer to the true retailer. If the selling price is unknown, the drop shipper can calculate tax based on their selling price with a mark-up of 10%.”
Are LLCs Required to Pay Sales Tax?
Your choice of business entity doesn’t matter when it comes to CA sales tax. Whether you form a CA LLC or corporation, or operate as a sole proprietor does not affect whether your business must pay sales tax.