Who needs to collect district sales and use tax in California
If you’re engaged in business in California, you’re required to register with the California Department of Tax and Fee Administration (CDTFA), collect applicable sales and use tax, remit the tax, and file returns. And you need to ensure you collect and remit local and district sales and use taxes as required, in addition to state sales and use tax.
First, it helps to know who’s required to register in the state.
Do you need to register for California sales and use tax?
You need to register for sales and use tax in California if you have nexus with the state, which is simply a connection that creates a tax obligation.
Nexus is created when you have a physical presence in California, such as a brick-and-mortar store, employees, or inventory. This includes having a representative acting on your behalf in California for the purpose of making sales, taking orders, installing merchandise, or otherwise establishing or maintaining a market for your products.
As of April 1, 2019, nexus can also be created solely through economic activity in California (aka, economic nexus).
Like all states with economic nexus — which is all states with a general sales tax — California provides an exception for companies selling beneath a certain threshold. The economic nexus threshold in California is relatively high at $500,000 in total combined sales of tangible personal property in the state (by the retailer and persons related to the retailer) in the preceding or current calendar year.
After crossing that threshold and registering with the CDTFA as required, you’re responsible for collecting and remitting all applicable sales and use taxes in the state. There are three different tax levels: state, local, and district.
Local and district sales and use taxes in California
The state sales and use tax rate is 6%. On top of that, there’s a mandatory local sales and use tax (1%) and local transportation tax (0.25%). So, all businesses generally collect a minimum of 7.25%.
In addition to the statewide 7.25% sales and use tax, many local districts in California levy one or more district sales and use taxes. For example, the combined rate of sales and use tax in Long Beach is 8.25%: the 7.25% statewide tax plus a 1% district tax.
Not every seller is required to collect every district tax.
Who needs to collect district tax in California?
If you’re a remote seller (i.e., no physical presence) and you have economic nexus with California, you’re liable for applicable district use tax on all sales into California. The district tax rate is determined by the delivery address. Once you’ve determined you have economic nexus and an obligation to collect, this is fairly straightforward.
If you have a physical presence in California and you make sales from a place of business in California for on-site pickup or for delivery within that district, you’re liable for district sales tax on those sales. Here, the district tax rate is determined by the location of the place of business or delivery.
Yet if you have a physical presence in one or more districts in California from which you make sales for delivery into different districts, whether you’re liable for district tax in those districts depends on the following factors:
Are you engaged in business in the district? This includes but isn’t limited to:
- Having a permanent or temporary physical place of business in the district
- Having a representative, agent, or independent contractor operate in the district on your behalf
- Owning or leasing tangible merchandise in the district (e.g., a computer server)
- Making deliveries in your own vehicles
- Having inventory stored in the district
Do your statewide sales in California exceed the $500,000 economic nexus threshold?
Here’s where it gets complicated.
As with remote sellers, you’re required to collect district taxes throughout the state only if your statewide sales in California exceed the $500,000 economic nexus threshold. If you sell beneath the threshold today, you’re not liable for district tax today. If you cross the threshold tomorrow, you likely need to start collecting all applicable district taxes tomorrow and keep doing so through the end of the calendar year, at least.
If you sell below the $500,000 threshold, you’re only responsible for collecting district taxes in districts where you have a physical presence. But remember, this includes delivering products in your own vehicles. It also includes having inventory in the district, like inventory stored in a fulfillment center that may be owned and operated by a third party.
Allocating local and district sales and use tax in California
For each transaction, businesses must allocate the local portion of the tax to the applicable local jurisdiction, “either directly or through a countywide pool.” The 0.25% portion always goes to the county where the sale occurred, while the 1% local rate goes to the city or county where the sale or use occurred.
If the sale occurred through one place of business in the state, the 1% local sales tax should be allocated to that location. If more than one place of business in the state is involved in the sale, the 1% local tax must be allocated to the place “where the principal negotiations are carried on” — unless, of course, the retailer isn’t required to have a seller’s permit for that location. In such instances, the local sales tax is allocated to that jurisdiction’s countywide pool.
If you’re a remote company selling through the internet and have nexus with the state, you must allocate local use tax based on the location where the property is shipped, as that’s presumed to be the place where it’s first “functionally used.”
You may or may not need to worry about collecting and allocating sales and use tax if you sell through a marketplace. Marketplace facilitators are generally required to collect and remit tax on behalf of third-party sellers in California. However, selling through marketplaces can also complicate compliance, particularly for sellers with inventory located in fulfillment houses throughout California.
Allocating district taxes can be a bit more complicated because you need to be sure each district gets its due. To help ensure retailers allocate district taxes correctly, the CDTFA provides several examples in its Local and District Tax Guide for Retailers. Additional information can be found at CDTFA Publication 109, which was updated in October 2021. The CDTFA has also created this helpful Online Seller Flowchart, for registration and local tax allocation.
Calculating and remitting sales and use tax as required can be an onerous task in states where there’s no local tax. Compliance activities can reduce you to tears in states like California, where there are numerous local taxes and different requirements for different businesses, depending on the circumstances. I mean, if you need a flowchart.
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