California Sales and Use Tax for Online Retail and Related Activity
Thanks to internet technology, your business benefits from an expanded market that allows you to sell and deliver products to customers all over the United States and the world. While exciting, these changes in how we do business have left states like California scrambling to determine how sales and use tax applies. Many online sellers are shocked when they receive notices from California’s CDTFA that claim they owe additional tax or are now subject to an audit. Sometimes, these notices are appropriate but other times the CDTFA is wrong in their tax assessments to internet retailers because of misinformation or for going after the wrong party responsible for the tax. Equip yourself with knowledge about California’s sales tax rules for internet sales and get the professional guidance you need when facing an audit or surprise assessment.
Register with the CDTFA if You’re Engaged in Business in California
Before the internet, it was easy to know if you had to register with California to report and pay sales or use tax because your business likely had a physical presence in the state. Generally, this meant you maintained property or representatives within California. Since 2019, expanded definitions for being “engaged in business” means that you must also register with the CDTFA for sales and use tax reporting if you (or related persons) have more than $500,000 of total sales for delivery into California in the current or preceding year, which includes internet sales. If this is you, then you will need to obtain a California seller’s permit or a certificate of registration for use tax depending on where your sales happen.
Why You Collect and Remit Use Tax for Online Sales into California
California applies sales tax when a sale occurs in the state (based on the physical location of the property at the time of the sale). As a result, most online sales are subject to California use tax because the sale occurs outside California but ends up delivered into the state for use or consumption. As the retailer, you have the responsibility of collecting the sales or use tax for internet sales into California. You then pay the tax to the CDTFA along with your sales and use tax return filings.
The CDTFA offers a matrix of common products that online retailers may sell and that provides a brief explanation of their sales and use tax consequences. You can use this as a starting point for understanding how California’s sales and use tax may apply to your online business. If you sell products online into California, it’s imperative that you quickly identify the applicable use tax for the product so you can collect reimbursement for owed sales and use tax from your customers at the time of sale.
PDF embed: https://www.cdtfa.ca.gov/formspubs/cdtfa758.pdf
Pay Attention to California District and Local Taxes that Apply to Your Internet Sales
California also has district and local sales and use tax rates that apply to sales made in certain counties, cities, and other localities. Online retailers who sell products into California need to keep tabs on where their California transactions specifically occur to properly charge customers for any excess district rates that apply. The CDTFA also places the burden on you to properly allocate local tax percentages from collected state sales or use tax on your returns. The CDTFA generally assumes the place where you ship the product is the place where the customer will use it for purposes of determining applicable local use tax.
California Sales and Use Tax Duties When You Use an Online Marketplace or Fulfillment Center
Your internet sales probably happen in at least one of two methods (or possibly both). One method is you sell directly to the consumer through your own website or platform. Alternatively, you may rely on a third-party platform where customers purchase your items (e.g., Amazon, eBay, etc.). The third-party (known as a marketplace facilitator) is often responsible for handling all the customer sale information and for delivering products. This common method of internet sales creates interesting questions about who is the retailer and who is responsible for collecting the sales and use tax: you or the third party? It’s essential to know who California considers the retailer of your internet sales to avoid duplicative tax reporting and to avoid misplaced tax liability that may belong to others.
Prior to October 2019, California held you responsible for collecting and paying your sales or use tax on internet sales as the retailer – regardless of if you used a marketplace facilitator or not. Effective October 1, 2019, California’s Marketplace Facilitator Act shifted sales tax responsibility to marketplace facilitators as the retailer of online sales made through their platform. Keep your records of agreements with marketplace facilitators and other documentation showing their obligation to collect and pay the sales tax for the items they sell from you.
Distinguishing Marketplace Facilitators from Fulfillment Centers in California
Also, be careful not to confuse marketplace facilitators with fulfillment centers. Generally, fulfillment centers only provide packaging and shipping services and are not usually responsible for reporting and paying tax on your internet sales (unless they operate as a consignment seller for you, in which case a resale certificate may apply). However, some businesses (like Amazon) operate as both a marketplace facilitator and fulfillment center. If you use a fulfillment center that is not responsible for sales tax, you will need to collect the tax on those sales that they fulfill for you in California. This most commonly occurs in situations where you sell through your website and store inventory with another company responsible for delivery.
Are Shipping and Delivery Charges for Internet Sales Taxable in California?
California sale and use tax may also apply to the delivery charges you pass to your customers when they purchase your products for delivery into the state. Whether or not tax applies will depend on how much you charge and how you document the transaction. Delivery charges to California won’t usually be taxable when you ship directly to the purchaser, you separate the charge on your invoice, and your charge isn’t greater than the actual delivery cost.
Unfortunately for internet retailers, tracking the actual cost of delivery for individual sales is burdensome and many online retailers charge a standard rate for delivery. In some cases, you may choose not to separate those charges on the invoice and instead state a lump-sum on the invoice that includes delivery. While nothing is wrong with these common internet business practices, you should be aware of how those delivery charges will or won’t result in extra sales tax obligations. The CDTFA’s Publication 100 offers further guidance for online retailers when it comes to understanding how their delivery charges may result in additional taxable sales.
Other California Fees and Exemptions that Apply to Online Retailers
Depending on the nature of the product you sell online, you may be eligible for certain exemptions under California sales tax regulations, or you may have additional fees to collect and pay to the CDTFA. For example, the CDTFA has added fees for the sales of items like new tires or certain electronic devices. You can read more about these fees in the CDTFA publications linked below:
- eWaste Fee (Publication 95)
- Tire Fee (Publication 91)
- Lumber Products Assessment
- Lead-acid Battery Fee Guide
California Exempts Digital Products Transferred Electronically from Sales Tax
One of the biggest exemptions from California sales and use tax that could apply to your internet business is for electronic transfers of products to customers. The sale of electronic data is not taxable unless you also provide a printed copy or provide the same data in a physical storage medium (e.g., a flash drive or other device). Common examples of nontaxable electronic data products include:
- phone applications
- digital images
PDF embed: https://www.cdtfa.ca.gov/formspubs/cdtfa758.pdf
Concluding Thoughts on CA Sales Tax for as an Online Retailer
Despite internet sales being around for decades, California and other states’ related sales and use tax laws are somewhat new and current rules are susceptible to future changes. As a result, it’s important to know which rules are in effect for an applicable tax year and to have clarification about sales tax reporting if you work with a marketplace facilitator. This becomes especially important for audits of prior years where the law has since changed. If you received a notice from the CDTFA about an audit or sales tax assessment for your internet sales, our team of tax professionals is here to help.
Schedule a free consultation for your questions about California sales and use tax as an online retailer.