To be subject to California's sales tax requirements, a company must have economic or physical nexus in the state (more on nexus later). The type of product or service the company sells must also be taxable — which isn't always the case, as some types of products and services aren't taxed, including, in most cases, digital goods.
Sales tax compliance is complicated in California, with many rules and taxability classifications to keep track of. This guide will explain everything that e-commerce sellers need to know, and it will offer tips on how to make complying with your tax obligations simpler.
E-commerce taxation rules in California
The California Department of Tax and Fee Administration (CDTFA) states that "Internet sales are treated just like sales made at retail stores, by sales representatives, over the telephone, or by mail order. Therefore, your retail Internet sales that take place in California, or are for delivery in California, are generally subject to California sales or use tax, unless a specific exemption or exclusion applies."
The CDTFA also makes clear that "in general, California sales and use taxes are imposed on the retail sale or use of tangible personal property in this state." This means that whether you run an e-commerce store or a local store, your sales of tangible personal property are probably taxable in the Golden State.
California differs from many other states in that it generally does not tax services and other intangible products, unless they are an integral part of the transfer of taxable property. So SaaS and digital goods are typically not taxed in the state because, according to California’s tax rules, allowing customers to access software remotely isn't the same as selling them tangible property.
But not all tangible personal property is subject to tax, as the state exempts specific types of items, such as some foods and certain basic necessities. The state also exempts certain buyers from taxation. For example, government agencies, nonprofits, and schools are not required to pay sales tax, so you don't have to collect and remit tax on sales to those types of customers — although you do need to make sure to have an exemption certificate from the exempt buyer on file.
All these exceptions add another layer of complexity to sales tax compliance for e-commerce companies with customers in California.
Four levels of taxation
And there’s still more to consider: When you’re required to collect and remit sales tax in California, you aren’t just collecting taxes on behalf of the state. There are actually four different jurisdictional sales taxes:
- State taxes
- County taxes
- City taxes
- Special district taxes
The base statewide tax rate is 7.25%, which includes state and local components. However, individual districts are allowed to set their own rates and make their own rules, and there are some areas in California where multiple tax districts are in effect.
Rates within these special districts range from 0.1% to 1.0% (on top of the statewide 7.25%), and in some cases, the combined state, county, city, and special district taxes could be as high as 10.75%. You can check an online list of tax rates by county to better understand the rate differences and how high the rates can go.
Origin-based vs. destination-based sales tax rules
The complications aren't done yet. When revenue departments charge sales tax, the rules are either:
- Origin-based, which means that tax rules are applied based on where the seller is located.
- Destination-based, which means that tax rules are applied based on where the buyer is located.
California is considered a modified origin state, as state, county, and city taxes are based on the seller's location, while district taxes are based on the buyer's location.
So when an out-of-state seller sells goods into California, then the buyer's location is the determining factor in which rates apply. That's because an out-of-state seller doesn't have a California origin point where there are local taxing rules to follow
When do e-commerce businesses need to collect sales tax in California?
Understanding the basics of California's e-commerce sales tax rules is important, because this will help you determine when your business actually needs to collect tax. The key factors that determine this are:
- Whether your business has nexus.
- Whether you are selling a taxable product.
- Whether your customers are required to pay sales tax.
Here’s how to determine your obligations:
Physical nexus
Having nexus means that you have enough of a connection to a jurisdiction, such as a state, that the jurisdiction can require you to follow its sales tax rules. There are two types of nexus: physical and economic
In California, you become obligated to charge sales tax if you have physical nexus. This means you have enough of a physical connection to the state that it has the authority to make you act as a tax collector. You may have physical nexus if you have:
- Any type of physical presence in the state, including but not limited to warehouses, storage spaces, and showrooms.
- Any California-based person working for you, including representatives, agents, canvassers, and independent contractors.
- An affiliate based in California: This includes any person in the state who, "for a commission or other consideration, directly or indirectly refer[s] potential purchasers of tangible personal property" to your business "whether by an Internet-based link or an Internet Web site, or otherwise." This type of nexus, called click-through nexus, kicks in once sales from affiliates exceed $10,000 in the preceding 12 months and total in-state sales exceed $1 million during the same time period.
- A presence at a California trade show: If you have a physical presence at a trade-show for 15 or more days during any 12-month period and you derived more than $100,000 in income from your trade show activities during the prior calendar year, then you establish physical nexus. Even if you don’t meet this threshold, you still must collect sales tax on all sales made at the California trade show.
If you meet any of these requirements, you become obligated to follow California's sales tax rules, including registering to collect sales tax, collecting tax on taxable sales, and remitting payments on your required schedule.
Economic nexus
Physical nexus was the only type of nexus to keep track of until the Supreme Court made a major change with its decision in a 2018 case called South Dakota v. Wayfair, Inc. In its ruling in this case, the court allowed states to require companies to collect sales tax based on economic nexus.
After the Wayfair decision, states began making rules for economic nexus. These rules centered around the number of transactions or the total volume of sales.
In California, for example, a company establishes economic nexus if its total combined sales of tangible personal property to Californians exceed $500,000 during the preceding or current calendar year.
Once your company has nexus, you are required to register to collect sales tax on taxable sales and remit payments, just like companies with a physical presence in California.
Taxable products
Once you have sales tax obligations in California, you must charge tax on taxable products. Remember, this includes tangible personal property unless it is exempt. Some examples of product categories that are tangible but usually exempt are:
- Sales of some food for human consumption.
- Sales made to the U.S. government.
- Sales of prescription medications.
- Sales of certain medical devices.
- Sales of items that are paid for with EBT cards.
California provides a complete list of property that is excluded or exempt from tax, so you can determine whether your tangible personal property falls within an exemption.
It's also worth noting that most digital products are not taxable in CA unless they include physical materials. For example, as the CDTFA explains, "your sale of electronic data products such as software, data, digital books (eBooks), mobile applications, and digital images are generally not taxable when you transmit the data to your customer over the Internet. However, if as part of the sale, you provide your customer with a printed copy of the electronically transferred information or a backup data copy on a physical storage medium, such as a flash drive, your entire sale is usually taxable."
This means if you sell e-books, SaaS products, or other kinds of digital goods, you don't have to worry about charging sales tax unless you are including physical materials (for example, if you are selling a digital product on a USB drive), in which case the entire purchase becomes taxable.
Taxable customers
The last thing to determine is whether your customers are supposed to be taxed on the transaction. If they are, and if you have nexus and a taxable product, you must collect sales tax. If they are not, then you don't have to, but you must ensure that you have a valid exemption certification on file.
Certain organizations, such as some government agencies, nonprofits, and schools, may qualify for exemptions. For sales to exempt customers, you must obtain valid exemption certificates and keep them on file.
Marketplace sellers
Finally, if you sell goods on a marketplace, special rules may apply under marketplace facilitator rules.
California law defines a marketplace as "a physical or electronic place where marketplace sellers sell or offer for sale tangible merchandise for delivery in this state." Marketplaces help make sales possible and, in doing so, become responsible under the law for collecting sales tax on all sales that take place on their platform.
This means, for example, that Amazon, Etsy, and similar sites where you might do business must collect sales tax and remit it on your behalf if you sell a product on their platform. While Shopify is not a marketplace because it doesn't do enough to facilitate sales for retailers, the Shopify Shop app is, so this rule applies there too.
If you are in doubt, you should check with any third-party websites that help with the sale of your product to confirm whether they are covered by marketplace facilitator laws.
Staying compliant in California
Complying with California sales tax laws can be very complicated, as you can see. To summarize, you will need to:
- Determine whether you’ve established an obligation to collect and remit sales tax by tracking your physical and economic nexus in the state.
- Register with the state as soon as you reach economic or physical nexus
- Determine which transactions are taxable, making sure not to collect tax on sales of exempt items or sales to exempt customers.
- Charge the correct amount of tax based on the products being sold.
- File tax returns and remit the tax amounts you’ve collected by the mandated deadline, which is based on your transaction volume.
If you fail to meet any of these obligations, you face fines and penalties. But help is available: Numeral can track nexus for you, register you in California and other states as required, collect the right taxes on your behalf, and even handle all tax correspondence for you.
With Numeral's help, you can be audit-ready and stress-free about sales tax in every state in the U.S., as well as in the more than 60 countries Numeral operates in.
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Additional resources for staying compliant
California provides many resources to help you succeed in complying with sales and use tax rules. Examples include:
- The California Department of Tax and Fee Administration has many helpful guides, as well as links to where you can file a return and pay taxes, register for a permit, and to learn about rates and fees.
- Resources for California Use Tax has an annual report about sales and use tax revenue, as well as information about registering and reporting requirements.
- CDTFA's Tax Education portal can help you find classes where you can learn more about your tax obligations.
Final thoughts
California's tax rules are complicated, but you must remain compliant with them if you are doing business in the Golden State. You don't want to risk fines, penalties, and negative consequences.
Numeral can make compliance easy as it handles everything related to sales tax. In fact, most Numeral customers spend less than five minutes per month taking care of sales tax issues. Contact Numeral today to find out just how easy e-commerce sales tax compliance can be.
