California Sales & Use Tax Exemptions Your Business Needs to Know
California sales and use tax is in the background of almost every transaction between you or your client’s business, suppliers, and customers. For most sales, this tax is simply the price you pay for the privilege of doing business in California. However, California’s Revenue and Taxation Code also offers sales tax exemptions for certain properties. These exemptions usually exist because of their necessity to consumers and their overwhelming benefit to society.
Why do your sales tax exemptions matter? As a business, you need to know about California’s sales tax exemptions for two important reasons. The first is to lower your tax liability to the CDTFA. Second, you want to avoid the collection of excess sales tax reimbursement from your customers which is often discovered during an audit and can result in additional tax liability to the CDTFA along with interest and penalties.
California Sales Tax Exemptions for Goods Essential to Life
The state of California removes the burden of sales tax on items that it views necessary for sustaining life, which encompasses categories like food, healthcare, and housing. If your business intersects with any of these markets, then sales tax may not apply to your transactions. We cover each of these exemption categories in more detail below.
When Your Food Sales May Be Exempt from California Sales Tax
Your sale of food items is generally exempt from sales tax unless one of the following conditions apply to the sale:
- It’s sold in a heated condition (except for hot baked goods or hot beverages sold at a separate price).
- You serve it as a meal.
- It’s consumed at your facility.
- When an admissions charge applies (e.g., food sold at a sporting event or other ticketed show)
- It’s sold through a vending machine. Tax will only apply to 33% of the receipts. However, the vending machine operator is the consumer of food sold for 15 cents or less or food sold in a bulk machine for 25 cents or less (e.g., a gumball machine). As the consumer, you will be liable for paying sales tax on your initial purchase and won’t be able to use a resale certificate.
Sale and use tax exemptions also apply to the following transactions involving products that eventually become food for human consumption:
- Animal life
- Feed used for animal life (including medicinal additives to feed or drinking water). See CDTFA-230-T and CDTFA-230-U.
- Plants and seeds (and fertilizer applied to their growth).
- The sale of drugs and medicine given to food animals for the purpose of disease prevention or control.
California Sales Tax on Food Purchases that Involve CalFresh Benefits
CalFresh benefits are given to Californians and others to make qualifying food purchases. In many cases, these purchases will be exempt from sales tax already. However, some sales with CalFresh benefits could be taxable such as:
- Carbonated beverages
- Food coloring
- Prepared hot meals bought from participating restaurants (primarily for the homeless, elderly, disabled, and others who cannot prepare their own food)
Taxable food purchases paid with CalFresh benefits are usually exempt from sales tax. However, any amounts paid with cash or other forms of payment will be subject to sales tax.
Healthcare Related Products Exempt from Sales Tax
If your business participates in the healthcare sector then some of its sales for goods could be exempt from California sales tax obligations. They generally include:
- The sale of meals from various health institutions to residents or patients (e.g., hospitals, elderly care facilities, alcohol or drug abuse recovery facilities).
- Containers and other storage equipment are used for the medical purpose of collecting units of blood.
- Under qualifying conditions, the sale of many prescribed medications which broadly includes items like sutures, permanent implants, orthotics, certain prosthetics, drug infusion devices, insulin syringes, mammary prostheses, certain surgery supplies, hemodialysis products, and FDA-approved drugs.
- Sales of medicinal cannabis to qualified patients or primary caregivers.
- Sales of prescribed wheelchairs, crutches canes, walkers, white canes for the legally blind, etc.
- Vehicle modifications for handicapped persons.
- Sales of prescribed oxygen delivery systems.
- Sales of medical identification tags (i.e., to notify about allergies or other medical conditions) from qualifying tax-exempt organizations.
- Health, safety, and medical information or educational materials sold or used in connection with a qualifying nonprofit national organization that disseminates the information.
California Sales Tax Exemptions for Needs Tied to Housing
The final category of sales tax exemptions and exclusions for life necessities are for certain products and services that relate to housing such as:
- Utilities (e.g., gas, electricity, water, steam, heat, etc.) and certain bulk sales of utilities to residences lacking service lines (e.g., water sales of 50+ gallons or liquid petroleum gas sales of 30+ gallons).
- Telephone and electrical transmission/distribution lines are excluded from the definition of tangible personal property.
- The rental value of the property is provided in a furnished living quarter.
Tax Exemptions for Sales that Offer Certain Public Benefits
Aside from life necessity, California’s tax code also recognizes exemptions for sales of property that provide a stated public benefit. If you make sales as a nonprofit, educational organization, religious organization, or government entity, then you may have some property sales exempt or excluded from tax. Some general examples include:
- Alternative Energy: qualifying property purchases for recycled feedstock projects, sale of energy produced from cogeneration technology, and sales of organic products or waste by-products as a fuel source.
- Certain original artworks and other museum display items sold to California government entities or nonprofits.
- Various items sold through different charitable, religious, or educational organizations under qualifying conditions. Usually, the proceeds from such sales must go towards furthering the organization’s purpose. For a more complete list of these exempt sale activities, refer to pages 5-8 of CDTFA Publication 61.
Industry-Specific Sales Tax Exemptions that May Apply to Your California Business
California also provides tax breaks for certain sales that are within industries. The idea being to incentivize, grow, and sustain the activities within those economies. Some of the benefitted industries with corresponding special sales tax treatments include:
- The transportation industry.
- The entertainment Industry.
- Manufactured housing and buildings (e.g., mobile homes, floating homes, factory-built schools, etc.). See CDTFA-230-O.
- Various leasing situations (e.g., mass commuting vehicles, linen rentals, etc.)
- Farm equipment and machinery sales to agricultural business identified in the Standard Industrial Classification Codes. See CDTFA-230-G.
- Timber harvesting equipment. See CDTFA-230-H.
- Manufacturing and R&D Equipment. See CDTFA-230-M.
You can also review other exemption forms from the CDTFA that may apply to your situation.
Bottom Line: Use Exemptions to Optimize Your California Sales Tax Compliance
Sales tax is largely unavoidable when you sell products in California. As a silver lining, California’s exemptions offer the opportunity to bypass some of those tax costs that would otherwise hit you or your customers. If you think you may have missed a chance to apply an exemption to your business transactions, then you may be able to pursue a credit or refund from the CDTFA. On the flipside, collecting tax reimbursement for exempt sales can create additional liability to the CDTFA in the form of penalties and interest or additional administrative burden as you attempt to refund your customers. In both cases, knowing the exemptions and exclusions that fall within your industry is key for successful sales tax compliance. Our team of tax professionals is here to help when those exemption questions and processes are too big to handle on your own.
Contact us for help with California sales tax exemptions during an audit, protest, or appeal.