If you own a business which produces tangible goods, then you are obligated to pay sales tax to the Board of Equalization. There are, however, a number of exemptions to this rule, some of which apply to various types of goods and others which attach to certain buyers. It is important to understand which types of business can get a partial or full sales tax exemption and the consequences for improperly failing to pay sales or use tax. Sales tax is a complex area of law, with a huge range of exemptions that apply to various goods or types of sellers. Penalties for failing to pay sales tax are steep, so a little knowledge now can keep you from a huge liability later.
The Board of Equalization
The State Board of Equalization (BOE) is a publicly elected tax commission charged with the administration of sales and use taxes, property taxes and special taxes. It also acts as an appellate body for franchise and income appeals. Here, we are concerned with the sales and use taxation element of the BOE.
Overview of sales and use taxes
Sales taxes are imposed on individuals and businesses which sell goods (not services) within the state of California. The amount is calculated by the BOE 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 BOE 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.
Rates of sales tax
Sales tax is measured by determining the business’s gross receipts and subtracting any non-taxable sales. The BOE may conduct an audit of sales/use tax at their discretion.
The current tax rate in California is 7.5% statewide, and is due to decrease to 7.25% 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% has been added, meaning that the total sales tax collected is 8%. The BOE provides a complete listing of all city and country district taxes and rates.
Exemptions and exclusions from sales and use taxes
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 veteran’s organizations are wholly exempt. Other exemptions are in place so that the same item doesn’t 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 US Government and sales of prescription medicine. The list of exemptions is long and detailed, so if you aren’t 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.
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.
If it is determined that your business owes unpaid sales or use taxes, the BOE may take steps to claim that money. They are often quite aggressive approach in tracking down businesses with liabilities. If you receive a notice from the BOE about a sales and use tax liability, you may benefit from the help of an experienced tax attorney to help you navigate the issue. Unpaid taxes may attract large fines and penalties on top of the original liability, and any delay or confusion can quickly compound a bad situation into something much worse.
If you are still in business at the time that the BOE determines there to be an outstanding liability, they will usually insist that repayment is the business’s first priority. That means that even if immediate repayment will cause financial hardship or permanent consequences to the business, you will be expected to pay the outstanding taxes.
If the business has ceased to trade prior to the BOE’s attempt to collect tax, they will assess the liability as belonging to as many individuals who were linked to the business as possible, irrespective of whether those individuals had the control or knowledge of the company’s finances at the relevant time. The burden is on the taxpayer to prove that they are not responsible for the tax liability. This “guilty until proven innocent” approach can be very
For further information on whether part or all of your business is exempt, you may contact the BOE for more information. There are pamphlets and even classes available to help business owners understand the sales and use tax system. You may also request written advice on a particular transaction and rely on that advice if you are audited. Make sure you understand your obligations before carrying on business, and don’t hesitate to seek help from an experienced tax attorney if you get into trouble.