Nearly all states in the U.S. charge sales tax on items sold, California is no different in that regard. Sales taxes go into the general fund to help pay for education, health care, public pensions, and other programs. Sales taxes can also be collected for special programs or specific areas of the state.
How Does Sales Tax Work?
California state sales and use tax is administered by the Board of Equalization and applied as a base percentage rate (currently 7.25% in California) plus any local and district tax. Sales tax can be up to 10% or more on certain purchases.
A district can be an entire county or part of a municipality. District taxes are approved by the local voters and are used for special services, such as libraries, or general services. Sales and use taxes go into the state’s general fund.
Use tax is typically collected by the retailer at the time of sale, but it is imposed on items for use in California but purchased outside of the state.
Sales and use taxes are charged at the same rate.
The seller is responsible for paying the correct amount of tax to the BOE and almost always collects it from the purchaser. If the seller does not remit the taxes, he or she is then subject to additional tax charges, applicable penalties, and interest charges.
What Is Subject to State Tax?
Sales and use taxes are collected on the retail sale or use of tangible personal property within the state of California.
Sales tax is imposed on items such as:
Some services require sales tax to be collected as well, but it can get tricky. If the service is "inseparable from the sale of a physical product," that service may be taxed as well. It includes services such as machine or equipment set-up, fabrication, or assembly.
Installation and repair, on the other hand, are not taxable (usually) but installation and set-up sound like the same type of services, don’t they? Construction is another service where it can be debated whether sales tax applies.
If you think that is complicated, shipping and handling are worse. California has unusually complex rules surrounding shipping which can be tax-exempt, partially taxable, or full taxable depending on the situation.
If you don’t keep accurate records of your shipping costs, include delivery charges in the cost of the product, or deliver it using your own vehicle instead of a common carrier, the shipping charges may be fully taxable and you, as the seller, are stuck for it.
When it comes to drop shipping and tax nexus, more complications set in.
Tax Exempt Items
There is a long and detailed list of items that are not taxable, but generally, the following are tax exempt:
- Food for human consumption
- Manufacturing machinery
- Raw materials for manufacturing
- Utilities and fuel used in manufacturing
- Medical devices and services
Looking at these lists, you can see the delineation between taxable and tax-exempt can be anything from the fact that the item in question is a human necessity, like food, to non-profit organizations to tax breaks provided to encourage certain industries to operate in the state. It seems like for each exemption or exclusion there is an exception to the rule. Let’s take a look.
Overview of Tax Exempt Items
For a detailed list of tax-exempt items, the BOE puts out a Sales and Use Tax publication that shows the exemptions and exclusions to the tax, some of which have expiration dates.
The BOE breaks the items into broad categories:
- Necessities of life
- General public benefit
- Industry benefit
- Exclusions by definition
- Other exemptions, exclusions, and credits
As you may have guessed, the top necessity of life is food. However, the exemptions can appear complicated because the BOE looks at a variety of items that may not seem to be food but are related in a way that allows tax exemption.
For example, most food products for human consumption are easily recognized but where and how they are sold impacts the exemption. Food that falls under the following conditions is considered taxable:
- Sold in a heated condition
- Served as meals
- Consumed on or at a seller’s facilities
- Is ordinarily sold for consumption on or near the seller’s parking facility, or
- Is sold for consumption where there is an admission charge
Wouldn’t you know it; there is an exception. Hot bakery items or hot beverages such as coffee sold for a separate price are still tax exempt.
The justification for the tax exemption on food products sold through a vending machine is just as convoluted. The vending machine operator is considered the consumer of any food products retailing for 15 cents or less and food products sold through bulk vending machines for 25 cents or less.
Wait, there’s more: for sales of cold food products, hot coffee, hot tea, and hot chocolate through a vending machine for more than 15 cents, 67% of the receipts are tax exempt. The rest is fully taxed.
Other necessities of life include health-related products, services, and meals as well as some utilities like gas, water, and electricity.
General Public Benefit
General public benefit tax-exemptions are conferred on alternate energy technology, museums and public art exhibits, certain aspects of non-profit, religious or educational organizations, and miscellaneous categories such as POW bracelets and pollution control facilities.
Non-profit organizations may only be tax exempt if the profits from the items they sell go to benefit a specific group, such as AIDS/HIV patients or disabled children. Some exemptions even include language requiring the items to be made by the non-profit group.
Industry benefits in California obviously include the entertainment industry but also include transportation, petroleum, leasing, and manufactured houses and buildings, plus a raft of special classes like numismatic coins, custom computer programs, and hay production.
Other exclusions and exemptions can be found in the list that includes details about sales prices and gross receipts, admission charges, and other transactions not considered to be tangible personal property. There is even an exclusion for the term "person."
It seems there is no such thing as a simple tax. Sales and use taxes carry a plethora of legal definitions, exclusions, exemptions, and exceptions within a group of exemptions. It’s enough to make a seller’s head spin. However, it is unlikely a single seller will need to be cognizant of every category.
If you are not certain whether you should collect sales or use tax, look at the Board of Equalization website or call a knowledgeable tax attorney to help you make certain you are doing the right thing.