Sales tax looks simple at the register, where a line item appears on the receipt. Behind that line sits a system with several layers of rates, a registration requirement for sellers, rules that depend on where the buyer is and a set of obligations that differ for businesses that sell online. California’s system is administered by the California Department of Tax and Fee Administration, known as CDTFA, and sellers who understand the main concepts avoid the most common mistakes. This article is general information, not tax advice, and sellers should confirm the details with the agency or a professional.
Who collects sales tax?
Sales tax is imposed on retailers for the privilege of selling tangible personal property in California, and retailers usually collect it from customers and pass it to the state. The legal burden technically falls on the seller, which is why a seller who forgets to collect tax can still owe it. A related tax, use tax, applies when a purchaser buys taxable goods without paying sales tax, for example from an out-of-state seller that does not collect, and uses them in California. In practice, use tax closes the gap so that goods are taxed whether they are bought locally or elsewhere.
What is a seller’s permit?
A business that sells taxable goods in California generally must register with the CDTFA and obtain a seller’s permit, which authorizes it to collect tax. The permit is free, though registration is required before starting business, and each location may need its own permit. Selling without one can result in penalties. The permit is separate from the city-level registration described in the San Diego business tax certificate guide, and from the state formation steps in how to register a business in California.
The permit also lets a business buy goods for resale without paying tax, by providing the supplier with a resale certificate. Sellers must keep records to support those purchases.
How is the rate set?
California has a statewide base rate of 7.25 percent, which combines the state’s portion and mandatory local portions. On top of that base, local voters and governments can approve district taxes, which add additional percentages for specific purposes, such as transportation or public safety. Because districts overlap in different ways, the total rate varies by location. Combined rates in California commonly run higher than the base, with some areas well above it, and the exact rate for an address is published by the CDTFA’s lookup tool.
In San Diego County, a number of cities and areas have district taxes, so the rate in one city may differ from the rate a few miles away. The county’s transportation sales tax, described in what SANDAG does, is one example of a local measure that sits on top of the base.
Sellers need to charge the rate that applies. For a sale made at a storefront, that is generally the rate at the store’s location. For a sale shipped to a customer, district taxes often depend on where the buyer receives the goods, so sellers who ship across the state may need to charge different rates for different destinations.
What is taxable, and what is not?
California taxes sales of most tangible goods, but it exempts certain categories. The most familiar exemption is for most food products for home consumption. Groceries are generally not taxed, while prepared food sold for immediate consumption, such as restaurant meals, is. Prescription medicine is exempt. Most services are not taxable, though a service that includes the sale of goods can create tax on the goods. Sales to some nonprofit and government buyers can be exempt, and sales for resale are not taxed when documented properly.
The details are technical, and edge cases are common: bundled products, delivery charges, digital goods, items sold with services and discounts or coupons can each be treated differently. The CDTFA publishes regulations and guides for specific industries, and a seller who is uncertain should check them or ask the agency.
What about online and remote sellers?
Since a Supreme Court decision in 2018 allowed states to require out-of-state sellers to collect tax based on economic activity, many states have adopted “economic nexus” rules. California’s rule applies to remote sellers whose sales into the state exceed a threshold, which the state has set at $500,000 of sales in the current or preceding calendar year. A seller above the threshold must register and collect tax on sales delivered into California. Sellers who fall below it may still have obligations if they have a physical presence in the state.
Marketplace facilitators, meaning platforms that process sales for third-party sellers, are generally responsible for collecting and remitting the tax on those sales, and the sales count toward the threshold. A small seller who sells only through a marketplace may therefore find that the platform handles collection, but the seller still has to understand its own registration and reporting obligations. Rules and thresholds change, so remote sellers should check the CDTFA’s current guidance.
How and when are returns filed?
Sellers file returns and pay the tax periodically. The CDTFA assigns a filing schedule, which may be monthly, quarterly or annual depending on the expected volume of taxable sales. Returns are filed online, and the filing is due even when no tax is owed. Late filing and late payment bring penalties and interest, so sellers should mark the due dates and set money aside. Sales tax collected from customers is held in trust for the state, and mixing it with operating funds can cause trouble when the bill comes due.
Good record-keeping is a requirement. Sellers must keep sales records, invoices, resale certificates and other supporting documents for several years, and the CDTFA can audit returns. A well-organized system, ideally using accounting software that tracks tax by jurisdiction, makes returns easier and audits less painful.
Who benefits from the tax?
Sales tax revenue is shared among the state and local governments. A portion funds state programs, and a portion goes to cities and counties, which depend on it for services described in budget documents such as those covered in how the city builds its budget. Because California limits property tax rates, as explained in Proposition 13, sales tax is a major source of local revenue, which is why cities often compete for retail businesses.
What should new sellers do first?
A reasonable starting point is to confirm whether the products or services are taxable, apply for a seller’s permit before the first sale and set up a system that records the buyer’s location and the tax collected. Sellers should learn which of the CDTFA’s filing schedules applies, mark the deadlines and keep the tax separate from other funds. A tax professional or a small business adviser can help with unusual situations, such as sales through multiple channels or across state lines.
The system can seem complex, but the core idea is straightforward: register, charge the right rate, report on time and keep records. Sellers who follow those basics will avoid the most common problems.
Sources: California Department of Tax and Fee Administration; California Board of Equalization; California Revenue and Taxation Code
