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CDTFA Publication 77 and California’s Sales Tax Registration Requirements for Out-of-State Sellers

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In September 2023, the California Department of Tax and Fee Administration (CDTFA) updated its guidance on the sales and use tax registration requirements for out-of-state sellers in Publication 77. Out-of-state businesses with online sales and other connections to California need to understand how these rules could impose obligations on them to report and collect sales tax. We discuss the following in this explanatory guide:

  1. How the CDTFA determines a company’s need to register for a seller’s permit in California.
  2. The consequences of not obtaining a seller’s permit and not paying owed sales and use tax.
  3. Options for companies that have concerns about their nexus, past noncompliance, or outstanding tax liability.

Four Ways Your Company Could Be Engaged in Business in California

California requires retailers “engaged in business” in the state to register for a seller’s permit with the CDTFA and to collect sales tax from customers under Section 6203 of the Revenue and Taxation Code. Subsection (c) outlines four specific activities that could establish a company as engaged in business through its physical or economic nexus with California. Each of these activities is discussed in more detail below.

  1. You Have a Physical Business Location in California

A physical business location inside the geographic boundary of California will quickly establish your nexus for sales tax purposes. See Section 6203(c)(1). Online retailers, ecommerce businesses, and other out-of-state sellers must understand this concept has a broad application. You may not have a physical storefront where customers can purchase your goods, but a business location could exist in other forms. For example, a distribution center, warehouse, storage facility, or another location that aids your business in California. The operation of a physical business location through an agent or subsidiary could also establish nexus for sales tax purposes.

  1. You Have a Representative in California

Sales tax collection obligations could also arise through your business’s use of agents and other representatives to aid in the sale of tangible personal property or taxable services. See Section 6203(c)(2). Business representatives could include agents, contractors, salespersons, canvassers, and any others who engage in the following types of activity on your behalf in California:

  • Soliciting sales or business
  • Delivering goods
  • Installing or assembling sold property
  • Taking or executing sale orders
  1. You Own or Lease Property in California

If your business owns or leases property, including tangible personal or real property, in California as part of its commercial activities, it could establish nexus for sales tax registration obligations. See Section 6203(c)(3).

  1. You Have Economic Nexus in California

The first three business activities are forms of physical nexus that could create your need to register. However, California also imposes registration requirements on out-of-state sellers that have sufficient economic nexus with the state because of their sales in the prior or current calendar year. Retailers with sales of tangible personal property delivered into California that exceed $500,000 will need to register.

Important Exclusions from California’s Sales Tax Registration Requirements

CDTFA Publication 77 notes two important business activities that do not require registration for a seller’s permit, which are for (1) trade show activities and (2) warranty or repair services. Your trade show activities should not trigger registration requirements with the CDTFA so long as the following conditions are met:

  • You cannot participate in convention or trade show activity for more than 15 days in any 12-month period.
  • Your income from convention or trade show activity cannot exceed $100,000 of net income in the prior calendar year.
  • You do not sell merchandise or take orders to deliver merchandise at the convention or trade show (Note: You can register for temporary seller’s permits to sell merchandise at a trade show and still qualify for the exception).

The use of an independent contractor or another representative to provide warranty and repair services in California for the products you sell is another exclusion that will not create registration obligations with the CDTFA. However, this must be your only connection to California and ownership between your business and the repair servicer must not be substantially similar.

How to Register to Report, Collect, and Remit Your California Sales and Use Tax

Out-of-state sellers can register for a seller’s permit through the CDTFA by using California’s Taxpayer Online Services Portal. The process generally involves submitting information about the business and the people managing it who are responsible for maintaining compliance with California sales and use tax.

The Consequences of Not Registering Your Company When Engaged in Business in California

Failing to register for a seller’s permit when engaged in business in California could be a costly decision. You could risk selection for a sales tax audit and face punishments in the form of accrued interest, late fees, other financial penalties, and possible criminal charges. The length of the audit could go as far back as the period when your business first had nexus with California for sales tax purposes. For out-of-state sellers, this period could be as early as 2019 when the U.S. Supreme Court authorized states to impose sales tax obligations on remote retailers with economic nexus.

How Our Sales Tax Professionals Can Help with Your California Registration and Nexus Concerns

Understanding your sales and use tax registration obligations as an ecommerce business is the first step in compliance that can lead to a more efficient tax strategy. The team at Sales Tax Helper offers several services that could better help your company in its multi-state sales tax needs, particularly those with nexus issues in California. We can provide a nexus study to help determine your business’s need for a California seller’s permit through the CDTFA and advise on specific or complex sales tax questions that arise as a result. If you have concerns about past exposure from not being registered to collect sales tax in California, our team could help with submission of a voluntary disclosure or represent your interests in a future audit.

Schedule a consultation today.

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