California Sales Tax Overview
Sales tax is a tax paid to a governing body 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 . 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. Its 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.
When Do Businesses Need To Collect California Sales Tax
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:
If the answer to all three questions is yes, youre required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.
How To Use Sales Tax Exemption Certificates In California
A sales tax exemption certificate is a form you can fill out yourself certifying that you meet the qualifications outlined for making sales-tax-free purchases. You will need to present this certificate to the vendor from whom you are making the exempt purchase – it is up to the vendor to verify that you are indeed qualified to make a tax-exempt purchase.
California provides a specific form that is to be used if you are making a tax-exempt purchase of certain items, like farm equipment.Business who wish to purchase goods which are intended for resale should utilize the “General Resale Certificate”. This certificate includes the purchaser’s Seller’s Permit number, business details, and details about the goods which are to be purchased for resale.
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Sourcing Sales Tax: Understanding Which Rate To Apply
In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale . In others, sales tax is based on the location of the buyer and the destination of the sale . 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 youre 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 while district sales taxes are based on the customers location .
For additional information, see the California Department of Tax and Fee Administration and the CDTFA Tax Guide for Out-of-State Retailers.
California Sales And Use Tax Exemption
California allows qualifying manufacturers and certain research and developers a partial exemption from sales and use tax on various purchases of machinery and equipment used primarily for manufacturing, research, and development activities. Additionally, the state expanded the partial exemption to certain power generators and distributors for equipment used for power generation, production, storage or distribution.
Currently, the partial exemption on qualifying TPP lowers the current statewide tax rate of 7.25% to 3.3125% . This exemption of these taxes applies to the sale, storage, use, or other consumption of property in California before July 1, 2030. The original sunset date of this exemption was previously extended from July 2, 2022.
Must meet all three conditions:
Purchase Qualified Tangible Personal Property.
Qualified tangible personal property includes, but is not limited to:
- Machinery and equipment, including component parts.
- Equipment required to operate or control machinery computers, data-processing equipment, computer software, etc.
- Operational equipment.
- Pollution control equipment.
- Special purpose buildings integral to processing or manufacturing.
Filing a Claim for Refund
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Assessment Of The Sales And Use Tax On Purchases
The sales and use tax rate is determined by the point of delivery or the ship to address. The California vendors will charge sales tax on the purchase of tangible personal properties based on the ship to address. Since out-of-state vendors often do not collect sales tax on invoicing, it is the Universitys responsibility to accrue use tax on the purchase of taxable tangible personal properties based on the ship to address.
Wired To A Power Grid
If your solar power equipment is tied to the local power grid and is not directly attached to qualifying manufacturing equipment, your solar power equipment may still qualify if it is designed to generate power primarily for your manufacturing equipment. The solar equipment is deemed to generate power primarily for the qualifying manufacturing equipment if the solar power equipment is designed to generate at least 50 percent of the power used by the qualifying manufacturing equipment.
To determine whether solar power equipment is used at least 50 percent in manufacturing, divide the annual amount of power consumed by qualifying manufacturing equipment by the total annual amount of power generated by the solar equipment. Please note that the power generated by the solar equipment when the facility is not operating is regarded as power that is effectively “banked” in the local power grid such that the calculation is not limited to those periods when the facility is operating.
For example, your:
- Qualifying manufacturing equipment consumes 600 kilowatts of electricity per year, and
- Your solar equipment produces 1000 kilowatts of electricity per year.
Your solar power equipment is used 60 percent in manufacturing, . Therefore, the solar power equipment is used at least 50 percent in manufacturing and is eligible for the partial exemption.
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The Impact Of Failing To Collect California Sales Tax
If you meet the criteria for collecting sales tax and choose not to, youll be held responsible for the tax due, plus applicable penalties and interest.
Its extremely important to set up tax collection at the point of sale its near impossible to collect sales tax from customers after a transaction is complete.
Learn about sales tax automation
Introducing our Sales Tax Automation 101 series. The first installment covers the basics of sales tax automation: what it is and how it can help your business.
Sales Tax Considerations For Out
If you have sales tax nexus in California, youre 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 isnt limited to, the design and development of tangible personal property sold by the remote retailer, or solicitation of sales of goods on behalf of the retailer.
- : Having an agreement to reward a person 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 retailers total cumulative sales of tangible personal property to purchasers in California within the 12 previous months exceeds $1,000,000.
If you have sales tax nexus in California, youre required to register with the CDTFA and to charge, collect, and remit the appropriate tax to the state.
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Federal Income And Payroll Tax
Refer to Tax-Exempt Status for Your Organization to review the rules and procedures for organizations that seek to obtain recognition of exemption from federal income tax under section 501 of the IRC. It explains the procedures you must follow to obtain an appropriate ruling or determination letter recognizing your organization’s exemption, as well as certain other information that applies generally to all exempt organizations. To qualify for exemption under the IRC, your organization must be organized for one or more of the purposes designated in the IRC. Organizations that are exempt under section 501 of the IRC include those organizations described in section 501. Section 501 organizations are covered in Tax-Exempt Status for Your Organization .
The Impact Of Fulfillment By Amazon On Sales And Use Tax
If youre an active Amazon seller and you use Fulfillment by Amazon , you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in California.
If you sell taxable goods to California residents and have inventory stored in the state, you likely have nexus and an obligation to collect and remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.
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Registering For A California Seller’s Permit
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.
Overview Of Sales And Use Taxes
Sales taxes are imposed on individuals and businesses which sell goods within the state of California. The amount is calculated by the BOE as the total receipt of sales minus any non-taxable sales.
An item is taxable if it is tangible personal property, which includes retail goods of all kinds. Although in general services are excluded, they may be subject to sales tax if they result in the production of a retail good.
A use tax differs in that it applies where a good is purchased from an out-of-state retailer who is selling the good within California but does not have sales nexus within California such that they are required to collect sales tax. The applicable tax rate is the same for both sales and use taxes.
As a business owner, you are responsible for paying the sales tax to be remitted to the BOE and you carry the liability for any unpaid amounts. However, you may pass the cost of that sales tax onto the consumer as long as the buyer is made aware that they are paying sales tax as part of the transaction. Business owners must have a permit in order to collect sales tax and should register for the permit as soon as possible.
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General Sales Tax Exemption Certificates
Please note that this chart provides a brief description of the various exemption documents. Additional requirements may apply. See the individual forms and instructions for details.
General sales tax exemption certificates
|No, but must be an agency, or instrumentality of the United States||Purchase of any taxable tangible personal property or service by a United States governmental entity||Not a Tax Department form. A copy of a contract signed by an authorized United States government official is also sufficient to show exemption. Form ST-119.1 is not valid to show exemption for governmental entities|
Note: A Tax Bulletin is an informational document designed to provide general guidance in simplified language on a topic of interest to taxpayers. It is accurate as of the date issued. However, taxpayers should be aware that subsequent changes in the Tax Law or its interpretation may affect the accuracy of a Tax Bulletin. The information provided in this document does not cover every situation and is not intended to replace the law or change its meaning.
Location Of Materials And Fixtures Installed In A Special Purpose Building
To determine whether materials or fixtures installed in a special purpose building may qualify for the partial exemption, you must look at whether the installed items are being used for a qualifying portion of the building.
If more than one-third of the usable volume of a special purpose building is used for non-qualifying activities, only the materials or fixtures that are installed or used in the qualifying area may qualify for the partial exemption. For example, if only half of the structure is used in the manufacturing process or for research and development, new light fixtures installed in the manufacturing and research and development area of the building will qualify. However, light fixtures installed in the administration area of the building will not qualify for the partial exemption.
If one-third or less of the useable volume of a special purpose building is used for a non-qualifying line of business, the entire building qualifies as a special purpose building. If the entire building qualifies, where the materials or fixtures are installed or how they will be used will not matter, and all materials and fixtures installed will qualify for the partial exemption. For example, if the entire building qualifies and the employee restroom needs to be remodeled, all materials and fixtures that are installed to remodel the restroom qualify for the partial exemption.
There are three ways that your solar power equipment may qualify for the partial exemption:
Determine If Your Purchase Is Qualified For A Partial Sales And Use Tax Exemption
To find out if your purchase is qualified, see below links for information regarding the California Regulation and UC Guidelines:
- Sales And Use Tax Regulations
- UC Guidelines – California Partial Sales and Use Tax Exemption
- Qualified Person – A “qualified person” is an organization primarily engaged in a “qualified activity”. A qualified person may be primarily engaged either as a legal entity or as an establishment within a legal entity.
- Qualified Property includes machinery and equipment valued at $5,000 or more with a useful life greater than one year that is used in a qualified activity.
- Qualified property includes:
- Qualified property that is being leased
- Machinery and equipment, including component parts and contrivances such as belts, shafts, moving parts, and operating structures
- Equipment and devices used or required to operate, control, regulate, or maintain the machinery in conjunction with all repair and replacement parts with a useful life of one or more years
- Special purpose buildings and foundations including but not limited to clean rooms, climate controlled facilities, wind tunnels, linear accelerators
- Non-depreciable property like leased computers used more than 50% for qualified activities, and catalysts
Sales Tax Exemptions In California
Medical devices such as prosthetics are exempted from sales tax. In addition, certain groceries, hot beverages, some types of farm items, and certain alternative-energy device are also considered to be exempt from the California sales tax.
Many states have special, lowered sales tax rates for certain types of staple goods – such as groceries, clothing and medicines. Restaurant meals may also have a special sales tax rate. Here are the special category rates for California:
These categories may have some further qualifications before the special rate applies, such as a price cap on clothing items. Groceries are generally defined as “unprepared food”, while pre-prepared food may be subject to the restaurant food tax rate.
Candy and soda may be included or excluded from any preferential tax rate depending on whether or not the state considers them to be a “grocery”:
IS considered a groceryis NOT considered a grocery
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Exemptions From Sales & Use Tax
The law provides various exemptions from sales and use tax. Among these exemptions are most services and labor charges, items purchased for resale and computer software delivered electronically where no tangible personal property is transferred. For a list of common exemptions applicable to UCLA, see Related Information for Common Sales and Use Tax Exemptions. For the tax treatment of computer software licenses and maintenance agreements see the Software License California Sales Tax Quick Reference Guide and the Software Maintenance California Sales Tax Quick Reference Guide.