There are two key tax types businesses selling goods and services in California should be well-versed in: sales tax and use tax. Businesses should be well versed in both to be sure to stay compliant with California state and local tax laws. This guide aims to assist by summarizing key tax topics in an easy to read format.

Sales tax is a tax paid to a governing body (state or local) on the sale of certain goods and services. California first adopted a general state sales tax in 1933, and since that time, the rate has risen to 7.25 percent. On top of the state sales tax, there may be one or more local sales taxes, as well as one or more special district taxes, each of which can range between 0.1 percent and 1 percent. Currently, combined sales tax rates in California range from 7.25 percent to 10.25 percent, depending on the location of the sale.

As a business owner selling taxable goods or services, you act as an agent of the state of California by collecting tax from purchasers and passing it along to the appropriate tax authority. As of July 1, 2017, sales and use tax in California is administered by the California Department of Tax and Fee Administration (CDTFA). Previously, it was administered by the California State Board of Equalization.

Any sales tax collected from customers belongs to the state of California, not you. It’s your responsibility to manage the taxes you collect to remain in compliance with state and local laws. Failure to do so can lead to penalties and interest charges.

When tangible personal property is purchased in California, sales tax is generally collected by the retailer at the point of sale. Should it not be collected or if goods are purchased out of state and no tax is collected, a use tax is likely due and it is up to the buyer to file it.

Use tax may apply to businesses, individuals, or nonprofits that don't have an exemption granted by the CDTFA and attempts to level the playing field for purchases that avoid sales tax. Use tax is one of the most overlooked and misunderstood taxes. Two types of use tax exist, sellers use tax and consumers use tax.

Sellers use tax is a transaction tax. It is determined by applying the use tax rate (equal to the sales tax rate) to the purchase price of qualifying goods and services. Generally speaking, a business is required to pay sellers use tax if the following two conditions are satisfied:

1. No tax was collected on a sale that qualifies for sales tax in California.
2. A business in California uses, gives away, stores, or otherwise consumes a taxable item that was purchased tax-free.

To determine the amount of sellers use tax owed, the retailer should apply the sales tax rate where the item is used, stored, or otherwise consumed to the total purchase price.

Sellers use tax may also be referred to as "retailers use tax" or a "vendors use tax".

Consumers use tax is typically imposed on taxable transactions where sales tax was not collected. A good example is an taxable online purchase where the retailed fails to collect sales tax. The responsibility shifts from the seller to the buyer who can report, file, and remit total use tax on their annual California income tax return.

In some cases, an out-of-state purchase may be taxed at a sales tax rate different from that in California. If the consumer paid a higher, out-of-state tax rate, the CDTFA allows them to claim a credit.  If a lower out-of-state tax rate was paid, the consumer is expected to report, file, and remit the difference.

In California, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to state tax authorities. The seller acts as a de facto collector.

To help you determine whether you need to collect sales tax in California, start by answering these three questions:

1. Do you have nexus in California?
2. Are you selling taxable goods or services to California residents?
3. Are your buyers required to pay sales tax?

If the answer to all three questions is yes, you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.

If you meet the criteria for collecting sales tax and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.

It’s extremely important to set up tax collection at the point of sale — it’s near impossible to collect sales tax from customers after a transaction is complete.

The need to collect sales tax in California is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax.

Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.

In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.

This decision has had an important impact on out-of-state and online sellers as they are no longer required to have a physical presence in California in order to trigger nexus.

If you have sales tax nexus in California, you’re required to register with the CDTFA and to charge, collect, and remit the appropriate tax to the state. Out-of-state sellers with no physical presence in a state may establish sales tax nexus in the following ways:

• Affiliate nexus: Having ties to businesses or affiliates in California. This includes, but isn’t limited to, the design and development of tangible personal property (goods) sold by the remote retailer, or solicitation of sales of goods on behalf of the retailer.
• Click-through nexus: Having an agreement to reward a person(s) in the state for directly or indirectly referring potential purchasers of goods through an internet link, website, or otherwise, and:
  • The total cumulative sales price from such referrals is more than $10,000 within the 12 preceding months; and
  • The retailer’s total cumulative sales of tangible personal property to purchasers in California within the 12 previous months exceeds $1,000,000.
• Economic nexus: Having a certain amount of economic activity in the state. For sales made on and after April 1, 2019, a remote seller must register then collect and remit California sales tax if the remote seller meets either of the following criteria (the economic thresholds):
  • The remote seller's sales of tangible personal property (including sales made through a marketplace) into California during the current or prior calendar year exceed $500,000

Economic nexus can impact in-state sellers as well as out-of-state sellers. California businesses meeting the economic nexus threshold in the state are required to collect district (local) taxes in addition to state sales tax.

• Inventory in the state: Storing property for sale in the state. This includes merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in California in a warehouse owned or operated by Amazon.
• Marketplace sales: Making sales through a marketplace. Effective October 1, 2019, marketplace facilitators are responsible for collecting and remitting sales tax on behalf of marketplace sellers in California. The collection requirement applies to all in-state marketplaces and out-of-state marketplace providers that surpass the $500,000 economic nexus threshold.
• Trade shows: Attending conventions or trade shows in California. You may be liable for collecting and remitting California use tax on orders taken or sales made during California conventions or trade shows. However, you generally would not have nexus if all the following are true:
  • You’re in the state solely to engage in convention or trade show activities;
  • You or your representatives don’t engage in convention and trade show activities for more than 15 days in California during any 12-month period; and
  • You didn’t derive more than $100,000 of net income from convention or trade show activities during the prior calendar year.

If you have sales tax nexus in California, you’re required to register with the CDTFA and to charge, collect, and remit the appropriate tax to the state.

For more information, see California will tax sales by out-of-state sellers starting April 1, 2019, AB 147, and the California Department of Tax and Fee Administration. 

Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. In California, trailing nexus generally lasts through the quarter the retailer ceases nexus-triggering activities in the state, plus the following quarter.

In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing). California does a little of each.

California is a modified origin-based state: State, county, and city taxes are based on the ship-from address, but district taxes are based on the ship-to address.

For example, if you’re based in California and you make a sale to another location in the state, the city, county, or state taxes are based on your location as the seller (origin sourcing) while district sales taxes are based on the customer’s location (destination sourcing).

For additional information, see the California Department of Tax and Fee Administration and the CDTFA Tax Guide for Out-of-State Retailers.

After determining you have sales tax nexus in California, you need to register for a California seller's permit. We get a lot of questions about this and recognize it may be the most difficult hurdle for businesses to overcome. Avalara Licensing can help you obtain your California business license and sales tax registration.

You can register for a California seller’s permit online through the CDTFA. To apply, you’ll need to provide the CDTFA with certain information about your business, including but not limited to:

• Business name, address, and contact information
• Federal EIN number
• Date business activities began or will begin
• Projected monthly sales
• Projected monthly taxable sales
• Products to be sold

There is currently no cost to register for a seller's permit in California.

You must register with the CDTFA if you acquire an existing business in California. The state requires all registered businesses to have the current business owner’s name and contact information on file.

The Streamlined Sales and Use Tax Agreement (SSUTA), or Streamlined Sales Tax (SST), is an effort by multiple states to simplify the administration and cost of sales and use tax for remote sellers. Remote sellers can register in multiple states at the same time through the Streamlined Sales Tax Registration System (SSTRS).

At the date of this guides most recent publication (January 2020), California is not a member of SST.

Once you've successfully registered to collect California sales tax, you'll need to apply the correct rate to all taxable sales, remit sales tax, file timely returns with the CDTFA, and keep excellent records. Here’s what you need to know to keep everything organized and in check.

How you collect California sales tax is influenced by how you sell your goods:

• Brick-and-mortar store: Have a physical store? Brick-and-mortar point-of-sale solutions allow users to set the sales tax rate associated with the store location. New tax groups can then be created to allow for specific product tax rules.
• Hosted store: Hosted store solutions like Shopify and Squarespace offer integrated sales tax rate determination and collection. Hosted stores offer sellers a dashboard environment where California sales tax collection can be managed.
• Marketplace: Marketplaces like Amazon and Etsy offer integrated sales tax rate determination and collection, usually for a fee. As with hosted stores, you can set things up from your seller dashboard and let your marketplace provider do most of the heavy lifting.
• Mobile point of sale: Mobile point-of-sale systems like Square rely on GPS to determine sale location. The appropriate tax rate is then determined and applied to the order. Specific tax rules can be set within the system to allow for specific product tax rules.

California sales tax collection can be automated to make your life much easier. Avalara AvaTax seamlessly integrates with the business systems you already use to deliver sales and use tax calculations in real time.

Some goods are exempt from sales tax under California law. Examples include most non-prepared food items, food stamps, and medical supplies.

We recommend businesses review the laws and rules put forth by the CDTFA to stay up to date on which goods are taxable and which are exempt, and under what conditions.

Some customers are exempt from paying sales tax under California law. Examples include government agencies, some nonprofit organizations, and merchants purchasing goods for resale.

Sellers are required to collect a valid exemption or resale certificate from buyers to validate each exempt transaction.

California sales tax exemption and resale certificates are worth far more than the paper they’re written on. If you’re audited and cannot validate an exempt transaction, the CDTFA may hold you responsible for the uncollected sales tax. In some cases, late fees and interest will be applied and can result in large, unexpected bills.

Sales tax holidays exempt specific products from sales and use tax for a limited period, usually a weekend or a week. Approximately 17 states offer sales tax holidays every year. As of March 2019, however, there are no sales tax holidays in California.

You're registered with the California Department of Tax and Fee Administration (CDTFA) and you've begun collecting sales tax. Remember, those tax dollars don't belong to you. As an agent of the state of California, your role is that of intermediary to transfer tax dollars from consumers to the tax authorities.

Once you’ve collected sales tax, you’re required to remit it to the CDTFA by a certain date. The CDTFA will then distribute it to state and local tax agencies where appropriate.

Filing a California sales tax return is a two-step process comprised of submitting the required sales data (filing a return) and remitting the collected tax dollars (if any) to CDTFA. The filing process forces you to detail your total sales in the state, the amount of sales tax collected, and the location of each sale.

Filing sales tax online is generally recommended, but businesses may also submit the State, Local, and District Sales and Use Tax Return paper form (CDTFA-401-A). This form replaces the CABOE-401-A2. Taxpayers can file and pay returns online through the California Taxpayers Services Portal.

The CDTFA will assign you a filing frequency. Typically, this is determined by the size or sales volume of your business. State governments typically ask larger businesses to file more frequently. See the filing due dates section for more information.

California sales tax returns and payments must be remitted at the same time; both have the same due date.

You may file directly with the CDTFA by visiting their site and entering your transaction data manually. This is a free service, but preparing California sales tax returns can be time-consuming — especially for larger sellers.

To save time and avoid costly errors, many businesses outsource their sales and use tax filing to an accountant, bookkeeper, or sales tax automation company like Avalara. This is a normal business practice that can save business owners time and help them steer clear of costly mistakes due to inexperience and a lack of deep knowledge about California sales tax code.

Avalara Returns for Small Business is an affordable third-party solution that helps business owners simplify the sales tax returns process and stay focused on growing their business. Learn how automating the sales tax returns process could help your business.

Once you have a California seller's permit, you’re required to file returns at the completion of each assigned collection period whether or not any sales tax was collected. When no sales tax was collected, you must file a "zero return.”

Failure to submit a zero return can result in penalties and interest charges.

The CDTFA requires all businesses to "close their books" by filing a final sales tax return. This also holds true for business owners selling or otherwise transferring ownership of their business.

Many states encourage the timely or early filing of sales and use tax returns with a timely filing discount. As of March 2019, the CDTFA does not offer sales tax filers a discount.

It's important to know the due dates associated with the filing frequency assigned to your business by the California Department of Tax and Fee Administration. This way you'll be prepared and can plan accordingly. Failure to file by the assigned date can lead to late fines and interest charges.

The CDTFA requires all sales tax filing to be completed by the last day of the month following the assigned filing period. Below, we've grouped California sales tax filing due dates by filing frequency for your convenience. Due dates falling on a weekend or holiday are adjusted to the following business day.

NOTE: If the due date falls on a weekend or state holiday, the due date is extended to the next business day.

Filing a California sales tax return late may result in a late filing penalty as well as interest on any outstanding tax due. There are a numnber of reasons why your tax payment may be subject to interest and penalty charges including missed due date, failure to include payment, operating a unlicensed business, or knowingly keeping collected tax revenue.

Publication 75 from the CDTFA offers the most accurate details pertaining to interest, penalties, and fees associated with assessed charges.

In the event a California sales tax filing deadline was missed due to circumstances beyond your control (e.g. weather, accident), the CDTFA may grant you an extension. However, you may be asked to provide evidence supporting your claim.

Businesses in need of assistance dealing with penalty charges can work with Avalara Professional Services, a team of expert tax advisors who can assist you with voluntary disclosure agreements (VDA), backfiling, and more.

Hopefully you don't need to worry about this section because you're filing and remitting California sales tax on time and without incident. However, in the real world, mistakes happen.

If you miss a sales tax filing deadline, follow the saying, “better late than never,” and file your return as soon as possible. Failure to file returns and remit collected tax on time may result in penalties and interest charges, and the longer you wait to file, the greater the penalty and the greater the interest.

If you're in the process of acquiring a business, it’s strongly recommended that you contact the CDTFA and inquire about the current status of the potential acquisition. Once you've purchased the business, you’ll be held responsible for all outstanding California sales and use tax liability.

Because California is the most populous state in the U.S., and the fifth largest economy in the world, most businesses have customers in the Golden State. If you’re collecting sales tax from California residents, you’ll need to consider how to handle taxes on shipping and handling charges.

California sales tax may apply to charges for shipping, delivery, freight, and postage. Charges for handling are generally taxable.

The general rule of thumb in California is that if the sale is exempt, related delivery charges are exempt. However, if the sale is taxable, delivery-related charges may be fully taxable, partially taxable, or non-taxable.

California sales tax usually doesn’t apply to separately stated delivery charges when delivery is by common carrier, U.S. mail, or an independent contractor. However, California sales tax does apply to delivery charges when you make a delivery in your own vehicle(s).

Tax may also apply to drop shipping scenarios. If you use drop shipping to deliver items to customers in California, you may be responsible for collecting and reporting tax.

The CDTFA recommends keeping clear invoices and records for all transactions, with specific terms to describe delivery-related charges. Acceptable forms of documentation include but are not limited to:

• Bills of lading
• Express receipts or express company invoices
• Freight invoices
• Parcel post receipts or shipment records
• Sales invoices showing transportation charges and shipping instructions

If your records don’t show the actual cost of an individual delivery, tax generally applies to the entire charge for delivery of a taxable sale.

There are exceptions to almost every rule with sales tax, and the same is true for shipping and handling charges. Specific questions on shipping in California and sales tax should be taken directly to a tax professional familiar with California tax laws.

For additional information, see CDTFA Publication 100, Shipping and Delivery Charges.