While the statewide base rate for California online sales tax is 7.25 percent, the truth is that the state has complicated tax laws when it comes to online transactions. Morgan Stanley reports that global e-commerce increased from 15 percent of total retail sales in 2019 to 21 percent in 2021, and it currently sits at 22 percent today.
The California Department of Tax and Fee Administration (CDTFA) Publication 109 relates to internet sales and provides guidelines on navigating online marketplaces, required licenses and permits, and how internet sales will be taxed. Many businesses in California are now engaging in online sales, so it is important to understand how state law works.
Exemptions for Online Purchases
The CDTFA also publishes a list of exemptions, which include:
Food Products — Sales of food for human consumption are generally exempt from tax unless sold in a heated condition, served as meals, consumed at or on the seller’s facilities, ordinarily sold for consumption on or near the seller’s parking facility, or sold for consumption where there is an admission charge.
Candy, Confectionery, Snack Foods, and Bottled Water — The exemption for sales of food products includes candy and confectionery, snack foods, and bottled water.
Animal Life, Feed, Seeds, Plants And Fertilizer, Drugs, and Medicines — The sale and use of animal life or feed for animal life, seeds, and plants that produce products normally or human consumption are exempt from tax.
Medicated Feed and Drinking Water — The sale and use of drugs or medicines administered to animal life as an additive to feed or drinking water, the primary purpose of which is the prevention and control of disease of food animals or of nonfood animals which are to be sold in the regular course of business, are exempt from tax.
Purchases Made With Calfresh Benefits — When otherwise taxable purchases are made with CalFresh benefits, only the amounts paid with CalFresh benefits are exempt from tax. Amounts paid with forms of consideration other than CalFresh benefits, such as cash or manufacturer’s coupons, remain taxable.
Meals Furnished by Institutions — Sales of meals and food products served to residents and patients of a health facility, a community care facility, a residential care facility for the elderly, or any housing that is financed by state or federal programs and that primarily serves older persons, any house or institution supplying board and room for a flat rate to persons 62 years and older, an alcoholism recovery facility and a drug abuse recovery or treatment facility are exempt from tax.
Prescription Medicines — Sales of medicines are exempt from sales and use taxes if:
- prescribed for the treatment of human beings and dispensed by a registered pharmacist
- furnished by or sold to a licensed physician and surgeon, podiatrist, or dentist for patient treatment
- furnished by a health facility for patient treatment pursuant to the order of a licensed physician
- sold to this state or any political subdivision or municipal corporation for use in treating human beings
- dispensed by prescription for the treatment of human beings and furnished without charge by a pharmaceutical manufacturer or distributor to a doctor, a health facility for the treatment of human beings, or to an institution of higher education for instruction or research
- furnished by a medical facility or clinic operated by this state or any political subdivision or municipal corporation
- sold to outpatient clinics, as defined under Health and Safety Code Section 1200, for the treatment of any person pursuant to the order of a licensed physician and surgeon, dentist, and podiatrist.
The California Sales Tax Nexus
California taxes involve both a physical presence nexus and an economic nexus. The physical presence nexus involves a seller using an office space or distribution center located in California, while a business that completes over $500,000 worth of transactions to buyers located within California satisfies the economic nexus element, and the state collects taxes on any sales from California customers.
The two types of taxes relevant to online sales are origin-based, in which the sales tax rate is collected based on where a seller is located, and destination-based, which means the sales tax rate will be based on where the buyer is located. Remote sellers in California have to charge a cumulative rate that takes into account the local tax rates of a customer’s location, including the local state, county, city, and district taxes.
The California use tax applies to purchases made to out-of-state sellers, and it only applies when a seller does not collect California use or sales taxes and a party consumes, stores, sells, or gives away a purchase in California. Exemptions could include food for human consumption and electronic downloads without physical storage media.
Many online retailers also become responsible for income taxes. South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 201 L. Ed. 2d 403 (2018) was a Supreme Court of United States case that the California Tax Board has said is relevant to online business activities.
Income tax rates vary depending on the type of business entity involved, as banks and financial institutions may pay as much as 10.74 percent, while S-corporations may only be liable for 1.5 percent. In general, a business must determine the type of nexus its operations falls under, the location of the business and its customers, and the types of business activities that are affected by income taxes.
Contact Our Mountain View Startup & Small Business Attorney
If you are hoping to make a big splash in online sales in California, you will want to make sure you are doing everything right. Make sure you reach out to Kalia Law P.C. for help understanding all of the tax implications of running an online business.
Our firm understands how challenging it can be for most people to navigate the complex state tax laws, and we help people understand what will be required. You can call (650) 701-7617 or contact our Mountain View startup & small business attorney online to set up a free consultation.