Should you collect sales tax in California?
Sales tax in California is imposed on retail sales of tangible personal property. However, you will collect the sales tax if you determine the business nexus in California. Nexus is the presence that may come physically or economically.
Physical nexus is typically created when your business has a store, warehouse, or office location in California. Economic nexus is intertwined when you cross paths with threshold limits already stipulated by the state. These thresholds are based on revenue.
Let’s explore if your business has a Physical nexus in California.
A physical nexus is integrated when your business is engaged in the following in California:
- Delivering items using owned, leased or company vehicles in California;
- Having a temporary or permanent location or maintaining a place of business in California;
- Employing or retaining any contractor, including an agent, representative or salesman, by whatever name called, conducting business activities within the state;
- Leasing or owning a real or personal property in California;
- Click-through nexus: This includes a retailer having an agreement or agreements under which a person in this state (affiliate) directly or indirectly refers potential customers to the retailer, whether by Internet-based link, website, or otherwise. The threshold limits are the retailer making more than $10,000 in sales of tangible personal property to purchasers in the state in the preceding 12 months under affiliate agreements and total sales exceeding $1 million in the last 12 months.
- Convention and Trade show activities: Participating in convention & tradeshow activities for up to 15 days during any 12 months and not making a net income of more than $100,000 during the last calendar year.
Is it constituting an Economic nexus in California?
If your gross sales exceed $500,000 during the previous or current calendar year, you must comply with and register under sales tax rules.
For more detailed, precise guidance, kindly visit the department website here.
How can you Register for Sales tax in California?
You can apply online for a sales tax permit in California by visiting the CDTFA website. You will be required to answer a few questions, and the registration portal will identify the permit and license applicable.
Additionally, before applying for a new tax account number or completing the JT-1 form, make sure you have the following information handy:
- A valid form of identification (like a Driving License, City ID card, etc.);
- Social security number or Individual taxpayer ID;
- Address details (email address and supplier address);
- Federal employer identification number (FEIN);
- Officer, member or partner information;
California has no particular fees for obtaining a sales tax permit. However, the CDTFA may ask you to deposit a security amount to cover unpaid taxes.
Is your product or services liable to Sales tax in California?
Tangible Property: Sales tax in California is imposed primarily on the retail sale of tangible personal property, such as Furniture, giftware, toys, etc.
Services: Although services are not subject to sales tax in California if any service or labour costs result in creating tangible personal property, sales tax is charged to it.
SAAS: SAAS is software that allows users to connect to the cloud and use it over an internet connection. This is non-taxable in California as there is no transfer of tangible personal property. Refer to guidance for detailed information.
Digital Product: Digital products are tax-exempt in California. Refer to guidance for detailed information.
Certain other sales tax exemptions exist for, e.g., home consumption food, sale to the US government, prescription medicine, etc. CDTFA, via publication 61, has listed the exempted items, which you can access by clicking here.
How should you collect and calculate state taxes in California?
Collecting and computing accurate sales tax to be remitted to the state is tricky and intricate in California. The base tax rate in California is 7.25%, including the local tax. California follows a hybrid model of imposing taxes involving origin- and destination-based mechanisms.
When you sell to a California-based customer in a different city or county, the sales tax will be on an origin basis; however, your customer’s destination will be considered for the district sales tax rate. Accordingly, you may have to pay a sales tax of 7.25% to 10.75%, depending on the city, county, or district you will sell in. CDTFA has defined the sales tax rates based on the city or county.
If you are an out-of-state seller, you must collect the tax only if you create an economic nexus in the state. The applicable tax rate would be prevailing at the buyer’s destination.
Any default may lead to severe concerns, penalties, or fines by the state. That is what TaxDo is here for you! Our specialized sales tax calculator and professional services will simplify your job and lighten your compliance burden.
Do you need to collect sales tax on Shipping Charges?
Shipping charges can be delineated separately in the sale invoice raised to the customer or dissipated within the selling price of the items sold. If shipping charges are separately stated on the invoice, there will be no tax applicability; however, you need to collect the tax on the total sales price, including shipping charges, if not stated separately. Handling charges are always taxable in the state. Click here for guidance issued by the state on shipping charges.
How should you file sales tax in California?
You can submit your California sales tax return online through the CDTFA e-filing portal, which is recommended for efficient processing. If you want to file the paper return, you can complete the CDTFA 401A form and mail it to their address.
Filing frequencies and due dates
Based on your reported sales tax or estimated taxable sales, CDTFA assigns you a filing frequency, which can be Monthly, Quarterly or Yearly. According to your filing frequency, the due date for filing sales tax would be the last Day of the month following the relevant reporting period.
Note: If the due date happens to be a holiday or weekend, the next business day will be considered the final due date. Here is what the state has to say about sales tax filing.
Are there any fines or penalties for default when filing or paying sales tax?
The state levies a penalty of 10% of the sales tax due if the return is filed or paid after the due date. Further, an additional 25% penalty is applied if the failure to furnish the return is due to fraud or with intent to avoid the sales tax. Refer to the CDTFA guide on fines and penalties here.
However, assigning your tax burden to TaxDo would not result in you paying any penalty or interest. We will adhere to the due dates.