If you own a business which produces and sells tangible goods, then you are obligated to pay sales tax to the CDFA. 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.
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 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 CDFA.
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.
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 broad categories, 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 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 us take a look.