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CA District Taxes – Are You Calculating the Full Rate?

author photo of Monika Miles

If you’ve found this blog today, you probably already know something about having to collect and remit sales tax in California. You’ve likely determined you have nexus (or taxable presence) in the state. You’ve also determined that your product is taxable. And, hopefully, you’ve given some thought to hiring someone to assist you in filing your sales tax returns. Now all you need to do is figure out which rate to charge your customers. How hard can that be? Well, as with most questions in the sales tax world, it depends!

Sales tax is normally collected on the sale of tangible personal property. Every state has their standard statewide sales and use tax, but some areas within the state may also be subject to county and district taxes, as is the case in California. A district tax is a voter-approved tax rate that applies only to addresses within the incorporated city limits (a “district”) that is assessed on the sale of tangible personal property. In addition, there can be more than one district tax per given location and the rate can vary between 0.1-1.0%. So a given city might tack on county rates and district rates. In my home city of San Jose, for example, here’s how we calculate our total sales tax rate of 8.75%:

  • State tax: 6.5%
  • County tax: 1.125%
  • District (transit) tax: 1.125%

Let’s assume your company is a “brick-and-mortar” clothing store with one location in San Jose. As a good corporate citizen, you’ve registered your business and you are effectively doing business within the district. As such, you would collect (and remit) sales tax at the full rate above on all sales.

But what if your clothing store also takes orders on-line and you start delivering merchandise to other areas within California? Well, the tax rate will again depend on the fact pattern. Are you using your own delivery vehicles to deliver the goods, or are you sending them via common carrier (US Mail, UPS, FedEx, etc.)? If the former, you technically have created nexus (and thus do business) within other districts as well. Thus, you are required to collect that city’s district taxes as well and remit them with your sales tax return. (There are special schedules to properly report the district taxes owed to each district.) If, however, you are using a common carrier and you don’t otherwise do business in the other delivery areas, then you are not required to collect the district taxes because you are not doing business there. Technically though, the purchaser is required to pay the difference in use tax. Unfortunately for the district, that doesn’t happen very often!

While all of this may seem relatively straightforward, there’s a 24 page BOE publication which provides many more examples of various scenarios. What the publication doesn’t really talk about is the burden on taxpayers that haven’t dealt with these issues before. It’s fairly simple if you have just one location, but once you have multiple locations, or sell on-line and also have salespeople traveling to (and engaging in business within) various districts, the lines can become blurry. Practically speaking, some companies using automated software just go ahead and collect the full amount of sales tax, county tax and district tax everywhere in California by “switching on” all the taxes in each district. They figure it protects them in case of an audit. But not all software is that simple, and oftentimes companies need to be able to accurately pin-point in which districts they have taxable presence (“nexus”). We get a lot of questions in this area and work with clients to help them get to the best answer for their situation. Still confused? Give us a call with your fact pattern, and we’ll try to help you get to the bottom of it and collect the right amount of tax, so you don’t find yourself exposed later.

Do you have questions about California (and/or multi-state) sales tax - or does your business need assistance with other tax issues? Monika welcomes inquiries from SalesTaxSupport.com users and offers a complimentary 30 minute consultation to companies with multi-state activities. Please use the "Request a Consultation" link on FIRM PROFILE page to submit your question or consultation request.

Other recent “California (CA)” posts by Monika Miles, CPA:

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Comments

2 Responses to CA District Taxes – Are You Calculating the Full Rate?

  • Posted by Author photo of Monika Milesmonikamiles on September 16, 2016 11:21am:

    Todd,
    Cross border transactions can obviously be tricky. One key is the transfer of title. In your scenario, it appears that title to the goods transfers in Germany (not in CA), and that the German company does not own product in CA. As such, based on these facts alone, your sale to the CA company would not create nexus or require you to charge US sales tax. However, if you are engaging in other activities here in the US (within or outside of CA), you'll want to do the nexus analysis at that time. Thanks for your comment/question.

  • Posted by Todd on August 10, 2016 12:41pm:

    We have a German company that will sell materials to a third party assembler in California. The CA company will take ownership of the materials in Germany, That company will assemble the product and drop ship the finished goods to a location within the US. The German company does not have nexus or is registered in the US. would this type of transaction give the German company nexus and therefore have to charge US sales tax

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