Applying Tax to Your Sales and Purchases
- What is taxable?
- Who is responsible for paying sales tax to the Board of Equalization?
- Can I collect sales tax from my customer?
- What tax rate do I use?
- How do I know if I am required to report district taxes?
- How can I find out where special tax districts are located?
- What if I collect too much sales tax reimbursement from my customer?
- Are barters and exchanges taxable?
- Are trade-ins taxable?
- Are delivery and handling charges taxable?
- I make drop shipments on behalf of out-of-state retailers. Am I liable for sales tax?
- If I accept foreign currency as payment, how do I figure tax?
- Where can I get more information?
What is taxable?
Retail sales of tangible personal property in California are generally subject to sales tax. Examples of tangible personal property include such items as furniture, giftware, toys, antiques, clothing, and so forth. In addition, some service and labor costs are subject to sales tax if they result in the creation of tangible personal property.
In some instances, retailers must pay use tax, rather than sales tax, to the Board. The most common example of a purchase subject to the use tax is a purchase of an item for use in California from an out-of-state retailer. Out-of-state retailers who are engaged in business in this state are required to collect the use tax, whenever applicable, from the consumer at the time of making the sale.
The tax rate for sales and use taxes is the same.
Some sales and purchases are exempt from sales and use tax. Examples of exempt sales include, but not limited to, sales of certain food products for human consumption, sales to the U.S. Government, and sales of prescription medicine. For more information on exempt sales, please refer to publication 61, Sales and Use Taxes: Exemptions and Exclusions.
Who is responsible for paying sales tax to the Board of
As a seller, you owe the sales tax and are responsible for paying the correct amount to the Board. If you do not pay the correct amount, you are subject to additional tax charges plus applicable penalties and interest charges.
Can I collect sales tax from my customer?
Yes. Although you are required to pay and report sales taxes to the Board, you may be reimbursed by your customer for the amount of tax you owe on a sale. For example, if you are required to pay $1.75 in sales tax on a sale, you may pass that cost on to your customer, provided it is agreed to as part of the sale. It is presumed that the customer agrees to pay the addition of the tax if:
- You list a separate amount of sales tax reimbursement on your receipts or invoices;
- You post a sign on your premises stating that sales tax reimbursement will be added to all prices of taxable merchandise, or make a similar statement on price tags, advertising material, and other printed material directed to the purchaser; or
- The sales agreement specifically calls for the addition of sales tax reimbursement.
If you include sales tax reimbursement in your prices, rather than itemizing it separately on your invoices or receipts, you must inform the buyer that tax is included. You can post this information at your premises in a location that is visible to purchasers; or you can include it on a price tag or in an advertisement (whichever is applicable). Use one of the following statements:
- All prices of taxable items include sales tax reimbursement computed to the nearest mill; or
- The price of this item includes sales tax reimbursement computed to the nearest mill.
What tax rate do I use?
The sales and use tax rate varies statewide. The statewide sales and use tax rate is currently 7.50 percent. However, the rate is higher in locations where voters have approved additional "district" taxes. Most of these districts encompass an entire countywide area; however, some districts are limited to a single city. District taxes may be used for special services such as transportation or libraries, or they may be used to support general services.
- In Santa Barbara County the tax rate is 8.00 percent. This rate reflects the 7.50 percent statewide base rate plus 0.50 percent for the Santa Barbara County Transportation Authority. The rate applies countywide.
- In the City of Sonora, located in Tuolumne County, the tax rate is 8.00 percent. This rate reflects the 7.50 percent statewide base plus 0.50 percent for a city transactions and use tax. The 8.00 percent rate applies only within the city limits of Sonora. The tax rate in areas of Tuolumne County outside the City of Sonora is 7.50 percent.
More than three-fourths of all businesses in the state are located in or do business in special tax districts.
How do I know if I am required to report district
As a seller, you must collect, report, and pay district sales tax (called a transaction tax) or use tax on your taxable sales and leases if you:
- Have a business location or are engaged in business within the district;
- Lease, store, or consume tangible personal property in the district; or
- Sell or lease vehicles, undocumented vessels, or aircraft that will be registered in the district.
You are engaged in business in a district if you are a retailer who:
- Maintains, occupies, or uses any type of office, sales room, warehouse, or other place of business in the district, even if it is used temporarily, indirectly, or through an agent; or
- Has any kind of representative operating in the district for the purpose of making sales, making deliveries, or taking orders; or
- Receives rental income from leases or tangible personal property located in the district.
There are some differences between the rules that apply to the payment of taxes in districts and the payment of sales and use taxes in general. You should refer to publication 44, Tax Tips for District Taxes, for more information.
If you are not subject to a district tax, you should report tax at the statewide rate, which is currently 7.50 percent.
How can I find out where special tax districts are
There are several sources of information, including the following:
- The information is included with your sales and use tax return.
- You can read publication 71, California City and County Sales and Use Tax Rates, which provides a detailed listing of applicable rates.
- You can call our Information Center during working hours and speak to a representative at 1-800-400-7115.
What if I collect too much sales taxes reimbursement from
If you collect more than the amount of tax due, you must either return the excess amount to the customer or pay it to the state.
Are barters and exchanges taxable?
Yes. The use of barter or exchanges is considered the same as making sales or purchases under the Sales and Use Tax Laws. The fair market value of the property or services received is normally the amount to which tax will apply.
For example, assume that you are a retailer of electronic equipment and owe $500 for dental care. In place of cash, you provide a television set from your inventory as full payment. The transaction is considered a taxable sale, and you must report and pay tax based on the $500.
Are trade-ins taxable?
Yes. The value of a trade-in is considered taxable. For example, if you sold a car for $20,000 and accepted a trade-in valued at $4,000 as partial payment, tax would be based on the $20,000 selling price (that is, you would not deduct the value of the trade-in from the sales price of the car being sold when computing sales tax).
Are delivery and handling charges taxable?
- You have the property delivered directly to your customer using a common carrier, the U.S. Mail, or an independent contractor
Tax does not apply to the delivery charges under these conditions if the charges are clearly stated as a separate entry on the invoice or other bill of sale. If the delivery charges are not stated separately, they are taxable.
You sell a refrigerator and have it delivered by an independent contract carrier. On the invoice, you show a $750 charge for the refrigerator plus a separately stated $50 charge for delivery (the amount charged you by the carrier). Since the delivery charge is stated separately, tax applies only to the charge of the refrigerator ($750). If the invoice had shown a single charge of $800, tax would apply to the entire amount.
Note: If you charge more for delivery than your actual costs, the added amount is subject to tax. In the example above, if you had charged your customer $60 for delivery, but your actual delivery cost was $50 (the amount charged by the independent contract carrier), tax would apply to the additional $10 charge.
- You use your vehicle to make the delivery
Tax applies to the delivery charges if you use your own vehicle, whether or not those charges are separately stated on the invoice.
Example. You sell a refrigerator and deliver it to your customer using your own vehicle. On the invoice, you show a $750 charge for the refrigerator plus a separately stated $50 charge for delivery. Tax applies both to the delivery charge and the charge for the refrigerator.
Note: Tax does not apply to delivery charges using your own vehicle if there is a written contract of sale, signed before delivery, that transfers ownership of the property to the purchaser prior to delivery.
Handling charges. Handling charges are generally taxable.
Combined charges. If you charge a single amount for delivery and handling (for example, the invoice shows a single amount for "postage and handling" or "shipping and handling"), the portion of the charge that represents handling is generally taxable, while the portion that represents delivery may or may not be taxable.
Note: It is important to use terms such as "delivery," "shipping," or "postage" on the invoice to represent delivery charges. A separately stated charge that says only "handling", for example, is not considered a delivery charge and the entire handling charge is taxable--even if postage or shipment charges are indicated on the package.
For more information on delivery charges, or information on how tax may apply to a specific transaction, please see Regulation 1628, Transportation Charges or publication 100, Shipping and Delivery Charges. You can also contact the Board's Information Center at 1-800-400-7115 or your nearest Board office.
I make drop shipments on behalf of out-of-state retailers.
Am I liable for sales tax?
If you make drop shipments or courtesy deliveries to consumers in California on behalf of out-of-state retailers, you are not liable for tax if the out-of-state retailer holds a California seller's permit or a Certificate of Registration - Use Tax. An out-of-state retailer who is required to hold either permit is considered the retailer and is liable for tax.
However, you are considered the retailer and are generally liable for tax if:
- The out-of-state retailer is not required to hold a California seller's permit or Certificate of Registration-Use Tax, and
- The retail sale of the property is subject to California sales and use tax
If the California customer is purchasing the property for resale, you are not liable for tax if you obtain a valid resale certificate from the customer.
For reporting periods on and after January 1, 2001, drop shippers may report the selling price of drop-shipped merchandise using the methods described in Regulation 1706, Drop Shipments. This regulation includes a provision that for sales and use tax reporting purposes, a drop shipper may calculate the retail selling price of its drop shipments of property based on its selling price of the property to its direct customer, the out-of-state retailer, plus a markup of 10 percent.
If I accept foreign currency as payment, how do I figure
Tax is measured in United States dollars based on the conversion rate of the foreign currency as of the date of the contract for sale.
Where can I get more information?
It is not possible to explain what is taxable for every type of business. You are encouraged to use any of the resources listed below to obtain answers to your questions. You may:
- Call our Information Center at 1-800-400-7115.
- Request a tax tip booklet designed to explain what is taxable for your type of business.
- Request copies of the laws and regulations that apply to your business.
- Write to us for advice regarding the taxability of a particular sale or transaction. Note: For your protection, it is best to get the advise in writing. You may be relieved of tax, penalty, and interest charges that are due on a transaction if the Board determines that you reasonably relied on written advice from the Board regarding the transaction. For this relief to apply, a request for advice must be in writing, identify the taxpayer to whom the advice applies, and fully describe the facts and circumstances of the transaction.
- Attend a basic class on how to report sales and use taxes. Call your nearest Board office to find out when the classes are offered.
- Contact your local Board office and talk to a staff member.