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Learn the fundamentals of sales tax
Do you need to collect sales tax in California?
You’ll need to collect sales tax in California if you have nexus there. There are two ways that sellers can be tied to a state when it comes to nexus: physical or economic. Physical nexus means having enough tangible presence or activity in a state to merit paying sales tax in that state. Economic nexus means passing a states’ economic threshold for total revenue or the number of transactions in that state.
Do you have physical nexus in California?
In California, every retailer engaged in business has physical nexus which includes but is not limited to having:
- A physical location – This includes an office, place of distribution, sale or sample room or place, warehouse or storage place, or other place of business.
- A person working for you – This includes a representative, agent, salesperson, canvasser, independent contractor, or solicitor operating in this state under the authority of the retailer or its subsidiary for the purpose of selling, delivering, installing, assembling, or the taking of orders for any tangible personal property.
- An affiliate – Also called “click through” nexus, this includes “a person or persons in this state, for a commission or other consideration, directly or indirectly refer potential purchasers of tangible personal property to the retailer, whether by an Internet-based link or an Internet Web site, or otherwise.” Nexus occurs when sales from affiliates exceed $10,000 in the preceding 12 months AND total in-state sales exceed $1 million in the preceding 12 months.
- Presence at a tradeshow – Making sales at a tradeshow may constitution nexus, but if the retailer had a physical presence at a convention or trade show for 15 or fewer days in any 12-month period and did not derive more than $100,000 of net income from these activities in the prior calendar year, nexus would not have been established. However, and it’s a big however, sellers are still required to collect use tax from buyers at trade shows.
While these are the elements of nexus that apply to most sellers, nexus can be established in California by other means, too. You should refer to California Sales and Use Tax law for comprehensive information for business owners.
Do you have economic nexus in California?
Effective April 26, 2019, California considers retailers who exceed $500,000 in taxable annual sales to have economic nexus. This means the state considers these sellers now obligated to collect sales tax from buyers in that state. You can read California’s economic nexus guides for sellers here and read more about economic nexus in every state here.
Is what you’re selling taxable?
If you’ve discovered you have sales tax nexus in California, your next step is to determine if what you’re selling is taxable.
Services in California are generally not taxable. However, if the service you provide includes creating or manufacturing a physical item, you may have to deal with the sales tax on products.
Tangible products are taxable in California, with a few exceptions. These exceptions include certain groceries, prescription medicine and medical devices. See California CDTFA publication 61 for a list of items that are exempt from California sales tax.
Is SaaS taxable in California?
SaaS is non-taxable in California since there is no transfer of tangible personal property. (Source)
What is use tax?
A business owes use tax on any purchase made to a retailer outside the state where the seller did not collect California sales or use tax (the use tax rate is currently 7.5%) and the item was used, given away, stored or consumed in California. For more details, consult the California CDTFA’s website.
How to get a sales tax permit in California
You can register for a California sales tax permit online at the California Department of Tax and Fee Administration (CDTFA) by clicking Register then Register a New Business Activity. Alternatively, you may register in person at one of their field offices.
Important Note: You may be asked for your California Secretary of State number. If this happens to you, and you are not based in California, you can call the California Department of Tax and Fee Administration if you have any questions. The best number for out-of-state sellers to call is 916-227-6600.
You’ll need this information to register for a sales tax permit in California:
- Social Security Number
- Driver License Number
- Email Address
- Federal Employer Identification Number (FEIN)
- State Employer Identification Number (SEIN)
- For Corporations: corporate name, corporate number, State and date incorporated
- Name, address and phone number of partner(s), corporate officer(s), member(s) or manager(s)
- Name(s) and phone number(s) of personal references
- Name(s) and address(es) of supplier(s)
- North American Industry Classification System (NAICS) code
- Standard Industrial Classification (SIC)
- Bank Information (name and address)
- Name and account number of the merchant credit card processor
- Name, address, and phone number of the person(s) who maintains the books and records
- If you purchased the business, name and contact information for previous business owner
There is no cost to apply for a permit. However, there may be a security deposit if you have unpaid taxes if the business closes. The amount of this deposit will be determined at the time you apply. Other business registration fees may apply.
How to Collect Sales Tax in California
How much sales tax you collect in California is a little more complicated in most other states. While most states are either origin-based or destination-based sales tax states, California is a hybrid of both.
How in-state sellers should collect sales tax in California
At TaxJar, we recommend collecting sales tax in California based on your buyer’s location, or, in other words, the item’s destination. However, California is technically a “hybrid-origin” state when it comes to sales tax collection.
Hybrid-Origin Sales Tax Collection
For sellers, this means that you will collect at least two sales tax rates in California – one for buyers in the “district” where your business is located and one for buyers outside the district where your business is located.
Not many of us realize that the sales tax rate is the sum of two rates: the California state sales tax rate and a district sales tax rate. “Districts” are cities, counties and towns. The rates for these local jurisdictions range from 0.10% to 1.00% per district. (A full list of rates, including for Los Angeles County, are available on the CDTFA site.) More than one district tax may be in effect in a given location. California has four sales tax districts.
If you only have one location in California, then you’ll charge two sales tax rates. You’ll charge your district rate to buyers located in your district, and the California state rate to buyers outside your district.
If you have multiple locations in California, then your life gets a little more complicated. You may be required to collect sales tax at even more rates from buyers within California. For example, if you have locations in all four jurisdictions, then you must charge the district rate to all buyers in California.
The state sales tax rate (and use tax rate) in California is 7.25%.
How out-of-state sellers should collect sales tax in California
If you are based outside of California but have sales tax nexus in California, it’s simplest and most accurate to charge sales tax based on the sales tax rate at your buyer’s destination. According to the state, all California sellers that meet the economic nexus threshold are required to collect using destination sourcing.
Should you collect sales tax on shipping charges in California?
When are Returns Due?
When you file and pay California sales tax depends on two things: your assigned filing frequency and your state’s due dates.
How often will you file sales tax returns in California?
States assign you a filing frequency when you register for your sales tax permit. In California, you will be required to file and remit sales tax either monthly (in special cases), quarterly, semiannually or annually (calendar annual or fiscal annual).
California sales tax returns are always due the last day of the month following the reporting period. If the filing due date falls on a weekend or holiday, sales tax is generally due the next business day.
Important to Note: California requires some high-volume sellers to file on a quarterly basis but make monthly sales tax prepayments. If this applies to you, you will have monthly prepayments due to California by the 24th of the month following every month in which you do not have a sales tax filing and payment due. Read more about California monthly prepayments here, and see the California monthly prepayment due dates here.
Filing Sales Tax
When it comes time to file sales tax in California, you must do three things:
- Calculate how much sales tax you owe
- File a sales tax return
- Make a payment
How to calculate how much sales tax you owe in California
Calculating how much sales tax you should remit to the state of California is easy with TaxJar’s California sales tax report.
When you sign up for TaxJar, you’ll connect all your sales channels– such as Amazon, eBay, Shopify, Square, and more – and we’ll calculate exactly how much sales tax you collected. All the information you need to file your California sales tax return will be waiting for you in TaxJar. Get your step-by-step guide to filing your California sales tax return.
How to file a sales tax return in California
You have three options for filing your sales tax:
- File online – You can remit your sales tax payment through the California Department of Tax and Fee Administration’s online system. This step-by-step guide shows you how to file your California sales tax return the easy way.
- File by mail – You can use California’s short form sales and use tax return and file through the mail, though you must pay online if your estimated monthly tax liability is $10,000 or more.
- AutoFile – Let TaxJar file your sales tax for you. We take care of the payments, too. You’ll never have to worry about spreadsheets, calculations, or filling out complex sales tax returns.