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.
Other recent “California (CA)” posts by Monika Miles, CPA:
- Wayfair and California – Where Are We?
- Reminder: California Manufacturers' Sales Tax Exemption
- Technology Companies and the California Partial Sales Tax Exemption
- CA Board of Equalization: Changes to Sales-Use Tax Administration
- SaaS Taxation in California - An Overview