New sales and use tax rates for the state of California have gone into effect January 1, 2017. You may be wondering how the rates are set and why they seem to vary across the state. Here is a brief review of the sales and use tax and then we will break down how California sets its sales tax rate and the various elements that impact the rate.
Sales and Use Tax Review
Currently, the base tax rate for the state sales tax is 7.5%. Local jurisdictions may add onto that. This tax is imposed on all California retailers and applies to all retail sales of merchandise within the state. All retailers must have a seller’s permit and pay sales tax to the California Board of Equalization.
Retailers are allowed to collect the sales tax from customers but are not required to do so. Most retailers do. In all cases, they are liable for sales tax on anything they sell, whether the tax is collected from customers or not.
The use tax is levied on consumers of merchandise used, consumed, or stored in the state of California. It does not matter where it was purchased. If you buy something from an online source that is not registered to collect California sales tax or else does not collect it, you are on the hook for paying the tax, which is the same rate as the sales tax.
Use tax is also imposed on leased merchandise such as cars, boats, and planes. If you make a purchase in a foreign country and hand carry it through U.S. customs into California, you must pay the use tax.
Sales and use taxes are mutually exclusive. You cannot be required to pay both sales tax and use tax for the same merchandise.
Components of the Statewide Sales and Use Tax
There are seven components to the sales and use tax rate; six are state and one is local. Just over half of the sales and use tax goes to the state’s General Fund. A portion of a percent is sent to the state for local safety, statewide education, and local revenue support for health and social services.
The local component receives just over one percent for county transportation and city or county operations.
Why Does the Tax Vary and Change?
While the state sets a base sales tax rate, district tax jurisdictions are allowed to add onto it. The jurisdiction may encompass an entire city, or one jurisdiction may be covered by two different tax districts.
If you are engaged in business within a tax district, you are liable for the state sales tax and any additional taxes levied by the tax district in which your business is located.
Tax rates are changed two ways:
- Voters approve a new tax
- An old tax district expires
Destination vs. Origin Tax Rates and Nexus
Some states require you to collect sales tax for the state where the purchase originated (origin tax rate) while others require you to collect sales tax for the state where the merchandise was purchased (destination tax rates).
Other states, including California, determine whether you have a nexus within the state requiring you to pay sales or use tax.
A nexus is a significant presence in the state; in California, this means every retailer engaged in business within the state for the purpose of commerce according to the clause of the U.S. Constitution has a nexus.
It also includes any retailer that federal law allows the state to impose a use tax collection duty.
You could have a nexus simply because you have a presence at a trade show or you have affiliate sales within the state. Selling through AmazonFBA may cause you to have a nexus; the amount of tax depends on the location of the California warehouse where your products are stored.
Filing deadlines are set for annual, quarterly, and monthly filers. There is also an option for quarterly filing with monthly prepayments.
Annual sales tax returns are due January 31 of the year following the taxable period. If you plan to file an annual return for 2016, your deadline is January 31, 2017.
Quarterly sales tax returns are due on the following dates in 2017:
- First quarter (Q1) is due May 1 (April 30 is on a Sunday)
- Second quarter (Q2) is due July 31
- Third quarter (Q3) is due October 31
- Fourth quarter (Q4) is due January 31, 2018
If you file monthly, your return is due on the last day of the month following the taxable month. For example, you would file sales taxes for February 2017 by March 31, 2017. The deadline for March 2017 taxes is due by May 1 since April 30 is on the weekend.
Quarterly filers with monthly prepayments due file their tax returns on the same quarterly dates as above but prepayments are due on the 26th of each month.
Keep In Mind for 2017 and Beyond
The definition of a retailer “engaged in business” in a tax district means that you:
- Ship or deliver the merchandise into the district using your own vehicle
- Maintain, occupy, or use any type of office, sales room, warehouse, or other space within the district, even if it is a temporary space, you are doing business indirectly or through an agent
- Have a representative of any kind making sales or deliveries, installing or assembling personal property, or taking orders within the district
- Receive revenue from the rental or lease of tangible personal property located in the district
- Sell or lease vehicles or undocumented vessels, which will be registered within the district
As long as you are “engaged in business” within the district, you are responsible for reporting and paying district taxes as well as state taxes. The requirement also applies to multiple business locations; you are liable for the sales tax amount in force in the district where you have a retail presence and conduct principal negotiations for sales within that district.
For use tax, there is a single exception to payment or collection: if you ship or deliver merchandise outside of a district to a purchaser's principal residence address or business address unless the merchandise is a vehicle, vessel, or aircraft. The caveat is that you must accept, in good faith, a properly executed declaration under the penalty of perjury to be relieved of this obligation.
Some things are not taxable:
- Services you perform unless you create or manufacture a product in the process
- Exceptions noted in the tax code such as prescription medicine and medical devices
Some customers do not have to pay tax:
- Non-profit organizations
- Resellers who can show you a valid resale certificate
As of October 2016, only five states in the U.S. do not impose a state sales tax. The rest have a state sales tax with California charging the most. As a retailer, it is your responsibility to file and pay the sales taxes on products you sell within the state although most retailers simply charge it to the customer.
If you file on time according to the schedule you select, you avoid paying penalties and interest on late filing and payment.