How to Charge Sales Tax in California

Sales tax is a fundamental aspect of retail operations for businesses in California, requiring careful understanding and compliance. This tax is levied on the retail sale of tangible personal property. Businesses engaged in selling such goods within the state must navigate specific regulations to ensure proper collection and remittance. Adhering to these requirements helps businesses avoid penalties.

Understanding California Sales Tax Basics

California sales tax primarily applies to the retail sale of tangible personal property. Businesses selling these physical goods, including retailers, wholesalers, and manufacturers, are generally required to collect this tax from their customers.

Certain exemptions exist. Common non-taxable items include most food products for human consumption, prescription medications, and certain medical devices. Services are generally not subject to sales tax unless they result in the creation of tangible personal property, such as custom furniture making or fabrication labor. The California Department of Tax and Fee Administration (CDTFA) is the state agency responsible for administering and collecting sales and use taxes.

Obtaining a California Seller’s Permit

Before collecting sales tax, businesses must obtain a California Seller’s Permit. This permit is required for anyone selling or leasing tangible personal property, including temporary sellers, like those at craft fairs, and established brick-and-mortar or online businesses. The application process is generally free and can be completed online through the CDTFA website.

To apply, businesses need to gather specific information:
Legal business name, physical and mailing addresses, and type of ownership (e.g., sole proprietorship, corporation, LLC).
Federal Employer Identification Number (FEIN) or Social Security Number (SSN), and driver’s license number of owners or officers.
Estimated amount of monthly taxable sales, a description of their business activity, and bank account information.
Details about suppliers may be requested during the application.

The application can be submitted through the CDTFA’s online services portal by selecting “Register a New Business Activity.” Many applicants receive their permit immediately after submitting the online application, allowing them to commence collecting sales tax promptly.

Determining the Correct Sales Tax Rate

California’s sales tax structure includes a statewide rate combined with various local district taxes. The statewide sales and use tax rate is 7.25%, with 6% allocated to the state and 1.25% distributed to county and city funds. The total sales tax rate varies significantly across California due to additional district taxes imposed by counties, cities, and special districts. These district taxes can range from 0.10% to 2.00%, leading to combined rates that can exceed 10% in some areas.

The correct sales tax rate depends on the “place of sale,” or situs, which is generally the location where the tangible personal property is delivered to the customer. For in-person sales, this is typically the business location, while for shipped items, it is the customer’s delivery address. Businesses can accurately determine the combined sales tax rate for any specific address or ZIP code using the CDTFA’s online “Find a Sales and Use Tax Rate by Address” tool. This tool ensures compliance by providing the precise rate applicable to each transaction.

Collecting, Reporting, and Paying Sales Tax

Businesses with a California Seller’s Permit collect sales tax from customers at the point of sale. While the sales tax is legally owed by the seller to the CDTFA, businesses are permitted to collect reimbursement from customers. It is advisable to show the sales tax as a separate line item on receipts or invoices to clearly inform customers of the amount collected. If sales tax is included in the price, the customer should be informed through signage or other printed material.

Accurate record-keeping is essential for sales tax compliance. Businesses must maintain detailed records, including sales invoices, purchase invoices, and exemption certificates, for at least four years. These records enable the CDTFA to verify returns during audits and determine if the correct tax was paid. Inadequate records can lead to penalties and the use of estimated assessments by the CDTFA.

Reporting collected sales tax involves filing sales and use tax returns with the CDTFA. The CDTFA assigns a filing frequency—monthly, quarterly, or annually—typically based on the business’s volume of taxable sales. Returns must be filed electronically through the CDTFA’s online services, even if no sales occurred during the reporting period. The online system guides users through entering total sales and any non-taxable sales or deductions, such as digital product sales, which are not subject to sales tax.

Once the return is filed, businesses must remit the collected sales tax to the CDTFA. Accepted payment methods include electronic funds transfer (EFT), direct payment from a bank account via the CDTFA’s website, or credit card payments, though credit card payments may incur service fees. Payments must be made by the due date to avoid penalties and interest charges. Businesses required to pay by EFT need to initiate payments by 3:00 p.m. Pacific time on the due date for timely processing.