Collecting sales tax

TL;DR

• Once you've registered your business, you need to collect sales tax from your customer at the point of sale.
• Collecting CA sales tax depends on whether you have nexus (a commercial connection with the state), sell taxable goods and services, and whether your buyer has to pay sales tax.
• Tangible personal property and services that are vital to the manufacture and sale of a product are taxable.
• Some buyers—governmental and non-profit organizations, buyers with a resale certificate, and buyers with a Direct Pay Permit— don't have to pay tax to you even when their purchase is taxable.
• Online and remote sellers have to register for a permit and collect sales taxes if the sales amount crosses $500,000 in the previous calendar year or current year.
• The sales tax rate in CA depends on your and your customer's location. City, county, and state taxes are origin-based, but district sales taxes are destination-based.
• If you don't collect sales tax, you will have to pay the amount yourself, and will have to face penalties and fines.
• After collecting sales tax, you need to file returns and pay the collected amount to CDTFA.

Once you identify that you have nexus in a state and register for a permit, the next step in becoming compliant is collecting sales tax for taxable goods and services and remitting the tax amount to the tax authorities.

Timely sales tax collection is necessary to be compliant. This guide will explain the process of collecting sales taxes in California, what a permit holder has to do, as well as shipping and handling charges.

When to collect sales tax

You can collect sales taxes from your customer at the point of sale, as long as the following conditions are fulfilled:

• You have nexus
• You sell tangible personal property
• Your buyer has to pay sales tax

You have nexus
If you have a significant presence in a state and are directly (through employees or a store) or indirectly (through third-party contractors or agents) engaged in business with a state, you have nexus there. Even if you're located out-of-state or are an online seller, but are engaged in business with the state, you have nexus there and must collect sales tax. So, if a seller is located in Texas and has a leather business based there, but also has a branch in California, the seller has nexus in both Texas and California.

You sell tangible personal property

In California, tangible personal property (like furniture and books) is taxed, while services are not taxed unless they are vital to the product being sold. For example, property-related services and manufacturing services are both taxable since they are directly related to a tangible product. 

Sales tax collection can also be determined based on the nature of the sale. For example, if a product is sold at a discount, the sales tax is calculated based on the discounted price and not the original, pre-discount price of the product.

Your buyer has to pay sales tax

Not everyone has to pay sales tax when making a purchase as some buyers are exempt.

• Foreign and state governments, and some non-profit organizations, religious, educational, and charitable organizations are exempted from having to pay California sales tax. These entities will have an exemption certificate to prove that they don't have to pay CA sales tax.
• If your buyer intends to sell your product again and has a resale certificate to prove this, you should not charge and collect sales taxes. The person who sells the product to the end consumer should collect sales taxes instead. For example, manufacturers or wholesalers often don't collect sales tax, as their goods are bought by a retailer to sell to a direct consumer.
• Buyers with a Direct Pay Permit (a permit that allows a buyer to pay taxes to the tax authority directly) do not need to pay taxes to you.

 
For all these transactions, it is important to examine the document to prove the buyer's tax exemption and maintain records of these.

Collection of sales tax for online and remote sellers

Remote and online sellers having nexus in California need to register with the CDTFA (California's tax authority) and collect sales taxes if their sales exceed $500,000. This threshold is applicable to everyone who owns at least 50% of the business, and is applicable if sales have reached this amount in the previous calendar year or in the current year.

• If you have made sales exceeding $500,000 by the end of the previous fiscal year, you should be registered by the next year so that you can collect taxes.
• If the sales exceed the amount during the current fiscal year, you should register for a permit and begin collecting taxes as soon as possible.

Hosted stores like Shopify offer options for integrated sales tax rate determination and collection. There's a dashboard where you can manage the tax you have collected. Marketplaces usually collect sales tax on the seller's behalf, but if sales are made directly through your own website, you will be in charge of collecting the tax.

How to collect sales tax

If you are selling to a customer who is within California but is in a different city or county, the sale will be origin-based, but with some modification—while your location will be considered for local tax rates (city, county, or state taxes), your customer's location will be considered for the district sales tax rate.

District sales taxes: Some areas in California have voter-approved special sales and use taxes. These areas are referred to as 'districts' in California, where local jurisdictions have added district taxes. For this reason, they're considered as supplementary local taxes. The district sales tax rates may be anywhere between 0.10% to 1.00%.

Therefore, city, county, and state taxes are origin-based (based on your location), but district sales taxes are destination-based (based on the buyer's location), making California a mixed sourcing state with a hybrid system. Remote sellers (those who have nexus in California, but are situated elsewhere) also follow the origin-based tax system. For example, if you are situated in Florida, but have nexus in California, the tax amount will be charged based on California's rates.  

What happens if you don't collect sales tax?

If you don't collect sales tax from your buyers for a certain period, the total tax amount owed will be calculated and you will have to pay the uncollected tax amount owed during this entire period. Furthermore, you could face penalties, fines, and even seizure of assets for not paying the collected amount to the state.

If you are an online seller whose customer does not pay sales tax, you will have to collect use tax instead. This is usually done when the product has been bought out-of-state, but will be used within California. This tax is considered for the use and storage of a product, and generally extends to long-lasting goods like automobiles or rental transactions. It is calculated by applying the use tax rate (the same as the sales tax rate) to the purchase price of the good or service.

To avoid any consequences for failing to collect sales tax, keep track of your sales and maintain records of them.

Shipping and handling charges in California

In California, shipping charges may be non-taxable, partially taxable, or fully taxable, based on the kind of sale. Handling charges are taxable, unless you're making a non-taxable sale (such as a resale).

Shipping charges are non-taxable if you ship your goods directly to the customer via common carrier, U.S. mail, or an independent contractor. You should also separately state your delivery and shipping charges in your invoice, and the charge shouldn't be greater than the actual delivery cost to your customer.

If you get to meet all the conditions except the last, your shipping cost will be partially taxable. The amount that crosses the actual delivery cost will be taxable. For instance, if you charge $5 for shipping, but shipping via U.S. mail charges you only $4 for shipping, the remaining $1 will be taxable.

Delivery-related charges are taxable if you:

• Deliver goods in your own vehicle
• Don't have documents to prove your actual shipping costs
• Separately state fuel or handling charges
• Include the delivery charge in the unit price of the item, without separately stating it.
• Include the freight-in costs
• Charge the customer the shipping costs for shipping the goods from elsewhere to your business location.

Handling charges apply only to the taxable sale of goods, even if you've separately stated them in your invoice. If the sale is partly taxable and non-taxable, handling charges will be pro-rated between the taxable and non-taxable part of the sale (if the charge relates to both parts of the sale). If the handling charge relates only to the taxable part of the sale (a retail sale, and not intended for resale), it is fully taxable even if it's part of a mixed invoice. For example, if you sell a shirt for $30 and also sell non-taxable services for $30 (which isn't related to the former taxable sale), you would only have to add a handling charge of $3 to your invoice which relates to the sale of the shirt.

For more details on applying sales tax to your shipping and handling charges, visit the CDTFA site.

What's next?

After sales tax collection, you should file tax returns with the CDTFA and remit the tax amount.

Keeping track of your sales and the many taxes you have to pay can be a little difficult. Instead of handling it all yourself, let your accounting software do the work for you! Zoho Books is a financial platform driven to make your accounting process and sales tax management as smooth as ever. Staying tax compliant has never been easier!