What is a Sales Tax Nexus and How Does it Affect My Business?
Sales Tax Mistakes to be Aware of and How to Avoid Them
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Sales taxes are imposed on individuals and businesses which sell goods (not services) within the State of California. The amount is calculated by the CDTFA 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 CDTFA 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.
Sales tax is measured by determining the business’s gross receipts and subtracting any non-taxable sales. The CDTFA may conduct an audit of sales/use tax at their discretion.
The current tax rate in California is 7.5 percent statewide, and is due to decrease to 7.25 percent at the end of 2016. However, some districts within California have voted for an additional ‘district’ tax which brings the total rate higher.
In Santa Barbara County, for example, an additional 0.5 percent has been added, meaning that the total sales tax collected is 8 percent. The CDTFA provides a complete listing of all city and country district taxes and rates.
Even though the California sales tax and use tax rates are the same, there is a distinct use tax vs sales tax difference.
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There are a number of exemptions to the obligation to remit sales and use taxes. Some of these exemptions exist in an attempt to promote certain types of industry or consumer choices. An example is the current such exemption on fresh, but not prepared, foodstuffs.
Other exemptions exist to avoid burdening certain organizations with the obligation to collect sales tax, and so many nonprofit or veterans’ organizations are wholly exempt. Other exemptions are in place so that the same item does not give rise to two sales tax charges. Thus, items purchased for resale, or to various out-of-state entities (usually transport companies) or which are in transit to an overseas destination, are exempt.
Other examples of exempt sales include sales of certain food plants and seeds, sales to the U.S. Government and sales of prescription medicine. The list of exemptions is long and detailed, so if you are not sure if your business falls under those headings, you may wish to clarify with the DOE. A comprehensive list is available as Publication 61.
In general, businesses which provide a service that does not result in a tangible good are exempt from sales tax, as it only applies to goods. For example a freelance writer or a tradesperson is not required to remit sales tax, although a carpenter making custom furniture is so required.
In terms of the California online sales tax, online sellers who do not have sufficient sales nexus within California also do not have to collect sales tax, although the test for “sales nexus” is so wide that it will be considered sufficient if one of your affiliates, agents, warehouse suppliers or other place of business is located within the state.
Presence at trade shows or conventions for more than 15 days in a calendar year will also establish nexus.
If you are selling to a customer who has an exempt status, you must collect a California Sales Tax Exemption certificate and keep it on file. If you are audited, you will be expected to produce this as proof that you sold an exempt item.
If you are a reseller, you may also apply for a California Resale Certificate, which allows you to buy goods within California for resale without paying sales tax on those goods.
California Department of Tax and Fee Administration Audits — Short Tests and Sampling: Part One
CDTFA Audits of Sales for Resale
How the California Department of Tax and Fee Administration Handles Tax Liens
The Good and Bad News for Amazon Sellers That Have Received CDTFA Notices
How to File an Appeal With the California California Department of Tax and Fee Administration
Your Rights as a Taxpayer With the California Department of Tax and Fee Administration