California: a dream for many, but its sales tax? That can be a business owner’s puzzle. Whether launching a startup or managing an established company, understanding the sales tax in California is crucial.
This guide breaks down everything you need to know about the Golden State’s sales tax, from determining the right sales tax rates to understanding exemptions and filing processes. By the end of this comprehensive guide, you’ll be equipped to handle California’s sales tax with confidence and ease.
Sales Tax Nexus in California
When a business creates either a physical or economic nexus, it is required to collect sales tax in California.
Physical Nexus
A physical nexus means having a significant physical presence or engaging in enough activities within a state to require collecting and paying sales tax. The factors that determine a physical nexus in California include:
- Physical Location: This includes having an office, a place for distribution, sales, or showcasing products, a warehouse or storage facility, or any other place where you conduct business.
- Inventory in the State: This covers situations where you store your products within the state, even if it’s done through a third-party fulfillment center or 3PL (like Amazon FBA) or an online marketplace.
- Affiliate Nexus or Click-through Nexus: You could trigger a physical nexus if you have affiliates, whether they operate online or in-person, who have collectively sold more than $500,000 worth of products for delivery in California in the preceding or current calendar year.
- Presence at Trade Show: You must collect sales tax at California trade shows if you are present for more than 15 days within a 12-month period and/or making sales of over $100,000.
Economic Nexus
States have established regulations to collect sales tax from out-of-state sellers who meet certain revenue and/or transaction thresholds. This rule is known as economic nexus.
Beginning April 1, 2019, the threshold for economic nexus in California is $500,000 in gross revenue on the previous or current calendar year’s sales.
While the nexus criteria mentioned above generally apply to most businesses, additional methods exist for establishing sales tax nexus. To access a comprehensive list of these rules, please refer to the CA Department of Tax and Fee Administration (CDTFA).
California Sales Tax on Goods and Services
One of the first things you need to know is whether the goods you’re selling or services you’re offering are taxable in California.
Tangible Products
Almost all goods are taxable in California, including:
- Clothing
- Computer Hardware
- Furniture
- Gifts
- Medicines
- Toys
- Antiques
The goods that are exempt from sales tax are:
It’s crucial to emphasize that these products are subject to specific regulations that exempt them from sales tax when purchased. For example, tax does not apply to sales of food products for human consumption but does not include sales of carbonated or effervescent bottled waters, spirituous, malt or vinous liquors, or carbonated beverages.
Services
In California, the majority of service-based transactions, such as consulting, teaching, or professional services, are not subject to sales tax. However, there are specific situations where certain services are deemed taxable.
For instance:
- Fabrication Services: In California, sales tax applies to certain fabrication services, such as producing or imprinting tangible personal property when customers provide the materials. This includes services like fur alterations and reupholstering, whose primary objective is producing or modifying tangible goods.
- Support Services: In California, sales tax is applied to specific support services based on their sales income. This covers domestic and related services, heavy cleaning, defined personal care, accompaniment for health-related travel, yard hazard cleanup, protective monitoring, training aimed at reducing the need for more services, and certain paramedical services aiding in independent living.
- Transactions Involving Tangible Personal Property: When services are part of a sale or lease of tangible personal property, they are taxable if the transaction’s primary intent or “true object” is to transfer the tangible personal property. On the other hand, if the primary intent of the transaction is to provide a service, even if some property is transferred as part of the service, the transaction is not taxable.
Software as a Service (SaaS)/Digital Products
SaaS is not taxable in the state of California.
Digital products (i.e., ebooks, downloadable video content, mobile apps) are not taxable either.
Shipping/Handling
Shipping and handling charges in the state of California are not taxable.
Sales Tax Permits and Licenses in California
Now that you’ve got a handle on when sales tax nexus applies and which products are taxable in California, the next important step is getting your California Seller’s Permit, also known as a sales tax permit.
Seller’s Permit
You can register for a CA sales tax permit online at the CDTFA’s website.
Ensure you have specific information on hand when registering for a seller’s permit, including, but not limited to:
- The ecommerce company’s federal tax identification number (if applicable) and the social security number of each business owner or corporate officer (if applicable);
- Driver license number, state ID number, or other valid ID (passport, military ID, etc.)
- Names and locations of banks where the company has an account
- Name and address of your bookkeeper or accountant
- Name and address of personal references
- Names and addresses of each of the company’s suppliers
- The types of products and services to be sold
- Projected average monthly sales, including the amount of the taxable sales
- Business email address
- Permit information on previously purchased existing business, if applicable
Registration fee
There is no fee to register for a sales tax permit. However, you will have to provide a security deposit to cover any unpaid taxes that you may owe if, later on, your business closes. The amount of the security deposit will be computed upon application.
Renewal
You don’t have to renew your sales tax permit unless the products you intend to sell are cigarettes or any tobacco products, which, in this case, you’ll have to renew your permit annually.
Resale Certificate
A resale certificate is a document that allows businesses to buy products without paying sales tax on them as long as they plan to resell those items to customers, who will then pay the tax. As a seller, you can also accept resale certificates from others looking to buy for resale.
In California, sellers use resale certificates to buy goods from their suppliers that they intend to resell. The issuance of the certificates is always done in good faith that the seller would report tax on the final sale of the items. Meanwhile, although California requires ecommerce businesses to have a seller’s permit first before using a resale certificate, some are not required to, especially if they sell sales tax-exempt items when sold at retail.
You can fill out the form provided by the CDTFA or visit the California Department of Tax’s website for more information about filling out the resale certificate. If you don’t want the hassle of registering, sign up for our all-inclusive service that includes sales tax registration.
Streamlined Sales Tax (SST)
The Streamlined Sales Tax (SST) is an initiative to simplify and standardize sales tax regulations across multiple states. However, California is not a party to this program, meaning it does not follow the uniform rules and definitions established by SST but has its own sales tax regulations.
Check with the California Department of Tax and Fee Administration (CDTFA) for the most current information on California’s participation in the Streamlined Sales Tax initiative.
Calculating and Collecting Sales Tax in California
Sales Tax Computation
In California, sales tax isn’t just one simple rate; it’s a combination of state and local taxes. To figure out the total sales tax for your calculation, you’ll need to add up the rates for the state, county, and city (if applicable) where your transaction occurs.
Here’s an example. Suppose an out-of-state seller satisfies the economic nexus criteria in California and are selling to a customers in Beverly Hills, CA, with a ZIP code of 90210, the following is the breakdown of the total sales tax you’ll have to charge your customer:
 |
SALES TAX FORMULA |
RATE |
| State: |
California |
7.25% |
| County: |
Los Angeles |
1.00% |
| District: |
Third District |
0.00% |
| City: |
Beverly Hills |
2.00% |
| Combined Sales Tax Rate = |
10.25% |
|
Origin-based vs. Destination-Based
Before diving into the sales tax rates and calculation in California, it is important to determine if you are located in an origin-based state or destination-based state to figure out what rate to charge for sales tax.
California has a mixed sales tax system, meaning it combines elements of both origin-based and destination-based taxation. In practical terms, this means that the application of sales tax can vary depending on several factors, including:
- District Taxes: California adds another layer with district taxes. These can be origin-based or destination-based. If your business has multiple locations in California, you might need to charge different sales tax rates.
- For Single Location Businesses: If you have one location, you’ll charge your local district rate for local buyers and the state rate for others.
- For Multiple Location Businesses: If you operate in multiple districts, you’ll charge the district rate for all California buyers.
- Out-of-State Sellers: If you’re based outside California but meet the economic nexus threshold, charge tax based on your buyer’s destination. This is required for all California sellers with economic nexus.
To make life easier, consider using sales tax software or consulting a tax professional, like TaxHero, to ensure accurate tax calculations and collections. Understanding these tax rules helps you stay compliant, whether you’re in-state or out-of-state.
Filing and Remitting Sales Tax Returns in California
The next step after collection is filing and remitting your CA sales tax returns. Filing and remittance can vary in frequency, typically monthly, quarterly, quarterly prepayment, or annually, based on the volume of sales. Given California’s intricate system of district taxes, it’s vital for businesses to understand the nuances, ensuring they remain compliant and accurately distribute collected taxes.
Due Dates
In California, the due date falls on the last day of the month. For instance, sales tax collected in January is due by February 28th (or 29th if it’s a leap year) for monthly filers. However, if this day is a holiday, weekend, or in the rare occurrence of a natural disaster, the deadline is typically extended to the next business day.
Another example is when you’re filing sales tax quarterly for the months of April through June, and the July 31st deadline falls on a holiday or weekend, you’d need to submit by the next business day, which would be August 1st.
Quarterly Prepayments
When a business collects a significant amount of sales tax but is not set to file sales tax returns monthly, they may be required to make monthly prepayments and then file a return quarterly. This schedule is termed as “quarterly prepayments.”
- Prepayment Due Dates: The 24th day of the current month.
- Return Due Dates: Similar to the regular quarterly filers.
Filing Sales Tax Returns
When filing your sales tax return for California, a few options are available:
- File online through the California Department of Tax and Fee Administration (CDTFA) Online Services portal.
- File by mail – See return here: https://www.cdtfa.ca.gov/formspubs/forms.htm.
- File with TaxHero – Let TaxHero take care of it so you don’t have to worry about missing a payment or return.
Timely Filing Discount
California does not offer a discount to businesses for collecting, filing, and remitting sales tax on time. Some states provide this as an incentive for companies to process sales taxes promptly, but California is not among them.
Sales Tax Holiday
Currently, for 2023-2024, there are no planned sales tax holidays in California.
Sales Tax Penalties in California
Like in most states, sales tax is a big part of how California generates revenue. Thus, maintaining compliance with sales tax regulations is of utmost importance. Failure to do so can lead to consequences and sales tax penalties. Therefore, it is crucial always to ensure you are up-to-date in filing, collecting, and remitting sales tax to the state.
Here are the specific penalties for non-compliance with sales tax regulations in California:
- Civil penalties amounting to 10% of the total sales tax due;
- On the criminal side, offenses can be classified as either misdemeanors or felonies, depending on the severity and specific circumstances.
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