If you live in the Golden State, you may already know that it has the highest statewide sales tax rate at 7.25 percent.
This includes an add-on tax which is distributed to local governments so it might be then said that California’s sales tax rate is really 6.5 percent. This would be in line with Massachusetts and Illinois, both ranking 13th on the same state sales tax rates chart.
In any case, I doubt we will ever add “Home of Tax-Free Shopping,” to our Welcome to California signs, posted on our state inroads like “first state” Delaware does.
Indeed, some of California’s wealthier constituents have been known to grumble about high taxes creating an exodus of people leaving California, as “it’s just too expensive to do business here.”
Whether you live in our fair, sunny and populous state or live out of state but do business here, I’ve written about what its sales and use tax structure looks like and how it works. Let’s take a look at the CDTFA.
Welcome to California
The entity administrating the sales and use tax for the state is The California Department of Tax and Fee Administration also known as the CDTFA. Sales tax is imposed on individuals and businesses in exchange for the privilege of selling goods in California.
It is measured by subtracting non-taxable sales from the business’s gross receipts. In general, sales tax is passed along to the consumer.
A “use tax” is paid by the purchaser on an item obtained for use inside the state from an out-of-state retailer.
One thing to note as a business owner, you may have become used to dealing with the Board of Equalization (BOE). The Taxpayer Transparency and Fairness Act of 2017, dispersed the responsibilities of the BOE to three different entities, one of them being the newly-established CDTFA.
The BOE still exists as an independent entity but does not deal with the assessment and collection of sales tax. Those activities now fall under the purview of the CDTFA.
Sales Tax and Owing the CDTFA
Sales taxes are imposed on individuals and businesses who sell goods or services in California.
The amount of the tax is calculated by determining the gross receipts of a business, minus any exempt (non-taxable) sales. The sales and use tax rates are the same and are subject to change.
In addition to the state sales tax rate, various local jurisdictions add additional municipal sales tax rates. These district rates increase the total sales tax owed by a business and must be remitted to the CDTFA along with the basic California rate.
You can see an updated list of the state and district sales tax rates on the CDTFA website.
Taxable retail sales in California include “tangible personal property,” which covers a huge range of items: clothing, furniture, toys, housewares and much more, including digital goods such as the finished artwork for a website.
Service and labor costs can also be taxable if they “result in the creation of tangible personal property.”
Use tax is the other side of sales tax, and it refers to the purchase of items from out-of-state retailers for use in California. This means that if your business is outside California, you are still required to collect use tax on any items you sell in California, and then remit the funds to the CDTFA.
There is a wide variety of items which are exempt from sales tax in California, including certain foodstuffs intended for human consumption, prescription drugs, and sales to the U.S. Government.
The rules and regulations surrounding exempt sales are complex, and this is a frequent point of trouble for businesses who do not understand what items are exempt and how to document exempt sales properly. A helpful guide to exempt sales is available from the CDTFA.
Businesses are allowed to collect sales and use tax from their customers at the time of sale, but to do so they must list the amount of sale tax reimbursement separately on receipts or invoices, or state on a posted sign, price tags and/or other printed material for the customer that sales tax is added to all prices.
If you are dealing with a sales or purchase agreement, that agreement must specifically call for the addition of sales tax to the purchase. It is important to note that while you can charge your customers sales tax, failing to do so does not absolve you from paying sales tax to the CDTFA.
The responsibility for paying sales tax rests only on the business owner.