Publication 109, Internet Sales

July 2019

Basic Internet Sales and Leases

Yours may be among the many businesses taking advantage of changing technology to market products over the Internet. Despite all of the publicity surrounding Internet commerce, one essential fact is often overlooked—there is no general tax exemption for sales of tangible personal property (merchandise) made over the Internet (Internet sales). This publication is intended to help you determine if you must pay California's sales and use taxes on your Internet sales.

California sales and use tax

California's sales tax is imposed on retailers, and generally applies to retailers' gross receipts from retail sales of merchandise in the state.

California's use tax is imposed on consumers. When sales tax does not apply, California use tax generally applies to the sales price paid for the purchase of merchandise from a retailer for storage, use or other consumption in the state. Also, a sale occurs in the state where the merchandise is physically located at the time the act constituting the sale takes place, and a sale generally takes place outside of California when the merchandise is delivered to a common carrier outside the state for shipment to the consumer in California. Therefore, California's use tax will generally be the applicable tax when there is a retail sale of merchandise to a California consumer and the merchandise is delivered to a common carrier outside the state for shipment to the consumer in California.

Retailers making sales of taxable merchandise in California are required to register for a seller's permit with the California Department of Tax and Fee Administration (CDTFA), and report and pay tax to the CDTFA. Also, retailers engaged in business in this state are required to register with the CDTFA, collect the use tax from their California customers, and report and pay the tax to the CDTFA.

Internet sales are treated just like sales made at retail stores, by sales representative, over the telephone, or by mail order. Therefore, California sales and use tax generally applies to your retail Internet sales to California consumers; unless the sales qualify for a specific tax exemption or exclusion (see Nontaxable Sales). Also, if you are making sales of merchandise in California or you are engaged in business in this state, you must register with the CDTFA and report and pay tax on your retail Internet Sales to California consumers, the same as any other retailer.

The use tax rate is the same as the sales tax rate for any given California location; please see California City and County Sales and Use Tax Rates. Transactions that are exempt from sales tax are usually exempt from use tax.

Engaged in business in this state

You are engaged in business in California if you are a retailer that:

  1. Owns or leases real or tangible personal property, including a computer server, in California, or
  2. Maintains, occupies, or uses, directly or indirectly, or through a subsidiary or agent, a permanent or temporary office, place of distribution, sales or sample room, warehouse or storage place, or other physical place of business in California (whether or not it is related to your sales activities), or
  3. Has persons operating in California under its authority for the purpose of selling, delivering, installing, assembling, or the taking of orders for tangible personal property, or
  4. Derives rentals from a lease of tangible personal property (including vehicles, vessels and aircraft) situated in California, or
  5. Beginning April 1, 2019, has total combined sales of tangible personal property for delivery in California by the retailer and all persons related to the retailer that exceed $500,000 during the preceding or current calendar year.

Offering merchandise for sale over the phone, by mail order, or online will generally not, by itself, cause a retailer to be engaged in business in California. Also, using a website hosted on servers located in California will generally not, by itself, cause a retailer to be engaged in business in California.

For more information, please see Regulation 1684, Collection of Use Tax by Retailers, publication 77, Out-of-State Sellers: Do You Need to Register in California?, and our online guide Use Tax Collection Requirements for Out-of-State Retailers.

District use tax collection requirement

The total sales and use tax rate is not the same throughout California. Total sales and use tax rates may be higher than the statewide base rate in areas where there are voter-approved district taxes. Only retailers engaged in business in a taxing district are required to collect that district's use tax on their sales for delivery into the district.

You are engaged in business in a district if you are a retailer who:

  • Maintains, occupies, or uses, directly or indirectly, or through a subsidiary or agent, a permanent or temporary office, place of distribution, sales or sample room, warehouse or storage place, or other physical place of business in the district, or
  • Has a representative, agent, or independent contractor operating in the district on your behalf or under your authority, or under the authority or your subsidiary, for the purpose of making sales, taking orders, assembling or installing merchandise, training customers, making deliveries, or otherwise establishing or maintaining a market for your products, or
  • Receives rental payments from the leases of tangible personal property that is located in the district, such as leases of machinery, equipment, and furniture, or
  • Owns or leases real or tangible personal property in the district, such as machinery, equipment, furniture, or a computer server, or
  • Sells or leases vehicles or undocumented vessels which will be registered in a district, or
  • Has total combined sales of tangible personal property in California or for delivery in California by you and all persons related to you exceeding $500,000 in the preceding or current calendar year.*

*Beginning April 1, 2019, any retailer required to be registered with the CDTFA, whether located inside or outside of California, that meets the $500,000 threshold, is engaged in business in every district in California whether or not they have a physical presence in those districts. As such, these retailers are required to collect the district use tax on taxable sales made for delivery in those districts that impose a district tax. Retailers that do not meet the $500,000 threshold are still engaged in business in any district(s) in which they have a physical presence. For more information, please see publication 44, District Taxes (Sales and Use Taxes), and the online guide, Use Tax Collection Requirements Based on Sales into California Due to the Wayfair Decision.

Courtesy collection of use tax

California consumers are responsible for paying the state, local, and district use tax on purchases from retailers that do not collect the tax. If you are not required to register with the CDTFA, you may choose to voluntarily register with the CDTFA for a Certificate of Registration—Use Tax to collect and pay use tax as a courtesy to your California customers. If you hold such a certificate, you will be required to collect and pay tax from purchasers in the same manner as retailers engaged in business in this state. Your obligation to pay tax will continue until you close out your Certificate of Registration—Use Tax.

Please note: This publication summarizes the law and applicable regulations in effect when the publication was written, as noted above. However, changes in the law or in regulations may have occurred since that time. If there is a conflict between the text in this publication and the law, decisions will be based on the law and not on this publication.

If you are not currently registered with the CDTFA, you may register with us online.

From our Taxpayer Online Services Portal, scroll down to Registration, select Register a New Business Activity or Location, and follow the prompts.

Nontaxable Sales

Some Internet sales are not taxable

Common exempt transactions

Some of your Internet sales—including sales for resale, sales of cold food products, and sales delivered outside of California—may not be subject to California sales or use tax. Common exemptions are described in publication 73, Your California Seller’s Permit. More detailed information is found in publication 61, Sales and Use Taxes: Exemptions and Exclusions.

Products electronically transmitted to customers

Your sale of electronic data products such as software, data, digital books (eBooks), mobile applications, and digital images are generally not taxable when you transmit the data to your customer over the Internet. However, if as part of the sale, you provide your customer with a printed copy of the electronically transferred information or a backup data copy on a physical storage medium, such as a flash drive, your entire sale is usually taxable.

An eBook is an electronic version of a traditional print book that can be read by using a tablet computer, or by using an eBook reader. Users can purchase an eBook on tangible media, such as CD or flash drive, but the most popular method of getting an eBook is to purchase a downloadable file of the eBook without purchasing any physical storage medium. A mobile application, also known as a “mobile app,” is computer software designed for use on a smartphone or tablet computer. The transfer of a downloadable file such as an eBook or an “app” without purchasing any physical storage medium is not a taxable transaction.

If your company sells canned (noncustom) software programs to customers who download them from a server, those sales are generally not subject to tax. However, if you also provide your customers with a backup copy on a flash drive, the entire transaction is taxable. Similarly, if you transmit a stock (noncustom) database to your customers over the Internet and also provide a printed copy of the contents, the entire sale is subject to tax. For more information regarding the sale of computer programs and data processing services, you may obtain a copy of Regulation 1502, Computers, Programs, and Data Processing.

Online Marketplaces and Fulfillment Centers

Many retailers are choosing to use online marketplaces (also referred to as eCommerce marketplaces or eMarketplaces) to sell their products instead of, or in addition to, selling through their own websites. An online marketplace is a website where third-party sellers (marketplace sellers) list products for sale, and the sales of such products are processed by the operator of the website (also known as a marketplace operator). Some online marketplaces offer products for sale by the marketplace operator as well as marketplace sellers. Others exclusively serve as a marketplace for marketplace sellers.

A fulfillment center is a location, generally a warehouse facility, where orders for tangible personal property are received, packaged, and picked up by common carrier for shipment to the customer. Some sellers use their own fulfillment centers to fulfill all of their orders, including orders processed by marketplace operators. Other sellers contract with a third-party that operates a fulfillment center (fulfillment center operator) to fulfill their orders. In some instances, the fulfillment center operator is a retailer itself that provides fulfillment services to third-party sellers at the same facilities from which it ships its own products.

Engaged in business

Offering tangible personal property for sale in an online marketplace will generally not, by itself, cause an out-of-state retailer to be engaged in business in California, even if the marketplace operator or its website servers are located in California. However, beginning April 1, 2019, all retailers are engaged in business in this state and required to register with the CDTFA, if, in the preceding or current calendar year, the total combined sales of tangible personal property for delivery in California exceed $500,000, including sales made through a marketplace.

Retailers storing inventory in a California fulfillment center

Retailers that store tangible personal property in California are engaged in business in this state, required to register with the CDTFA, and responsible for reporting and paying tax on their sales of merchandise for delivery in California. This includes retailers that have inventory at a California fulfillment center owned and operated by a third-party.

For more information, please see our online guide, Fulfillment Centers.

Identifying the retailer of property sold through an online marketplace

When a seller utilizes an online marketplace and/or a third-party fulfillment center to make a sale of tangible personal property to a California customer, either the seller or the marketplace operator may be the retailer for sales and use tax purposes.

Some online marketplace operators display the property of various sellers, process the sellers' transactions, and provide various other services, but the terms of sale dictate and the receipts and other documents related to the sales reflect that the consumers are purchasing the property directly from the sellers. In these instances, the marketplace operators are generally just providing a service, and the seller that lists the property on the marketplace is the retailer making a retail sale to the consumer. If you are a seller making sales through an online marketplace in this manner, you are generally considered the retailer for purposes of such sales.

Consignment sales

If the marketplace operator is also providing fulfillment services, the marketplace operator will be considered the retailer if it has possession of the property at the time of sale and it can transfer ownership to the purchaser without further action by you. For additional information, please see publication 114, Consignment Sales.

Please note: If the marketplace operator has the authority to transfer ownership, but a different person, such as a fulfillment center operator, has possession of the property at the time of sale, then neither person would be a consignee, even if the two are related entities, and you would still be considered the retailer as the owner of the property being sold to a consumer and thus liable for the tax on the sale to the California customer.

When marketplace operators are retailers of property owned by marketplace sellers

Some online marketplace operators display the property of various sellers, manufacturers, and suppliers, and when a consumer purchases property through the marketplace the terms of sale dictate and the receipts and other documents related to the sale reflect that the consumer purchases the tangible property directly from the marketplace operator. In these instances, the marketplace operators are generally purchasing the property from the sellers, manufacturers, or suppliers for resale, and then making a retail sale of the property to the consumer.

If you are a seller making sales for resale to a marketplace operator in this manner, you should obtain a timely and properly completed resale certificate from your customer to support your claimed sales for resale, please see Regulation 1668, Sales for Resale.

Please note: If you are a retailer engaged in business in California, and you ship the property directly to the consumer on behalf of a marketplace operator that is not engaged in business in California, you will be responsible for reporting and paying tax as a drop shipper. For additional information, please see publication 121, Drop Shipments.

Obligation to pay or collect tax

As previously explained, either sales or use tax applies to the retail sale of tangible personal to a California consumer through an online marketplace, unless the sale is specifically exempt or excluded from tax. If you are a retailer that is engaged in business in California and you are the retailer for purposes of a sale, then you are liable for any applicable sales tax or you are responsible for collecting applicable use tax from the customer.

For additional information, please see Regulation 1700, Reimbursement for Sales Tax, publication 101, Sales Delivered Outside California, and publication 177, Internet Auction Sales and Purchases.

New requirements for marketplace facilitators beginning October 1, 2019

Please note: Beginning October 1, 2019, a marketplace facilitator (as defined in R&TC section 6041) is the seller and retailer for each retail sale facilitated for a marketplace seller through its marketplace (for example, an Internet shopping platform) for purposes of determining whether the marketplace facilitator is required to register with the CDTFA. Also, beginning October 1, 2019, a marketplace facilitator that is required to register with the CDTFA will be the retailer required to pay sales tax or collect and pay use tax on each retail sale facilitated for a marketplace seller through its marketplace. We will update our website and issue a special notice with more information about the new requirements for marketplace facilitators; please check back.

Additional Accounts, Licenses and Permits

If you are required to register in California for a Seller's Permit or a Certificate of Registration – Use Tax, you may meet other registration and fee collection requirements.

California tire fee

If you sell new tires or vehicles and equipment that include new tires, you are required to collect a California Tire Fee from the retail purchaser. The California Tire Fee is imposed on the retail purchase of new tires. A retailer is required to collect from the retail purchaser the amount of the fee on each tire when the retailer sells or leases new or used motor vehicles, trailers, farm equipment, or construction equipment that include new tires (including the spare), or sells new tires for use with, but sold separately from, on-road or off-road motor vehicles, trailers, motorized equipment, construction equipment, or farm equipment.

For more information on the California Tire Fee, please see publication 91, California Tire Fee.

Covered electronic waste recycling (eWaste) fee

If you sell covered electronic devices, you are required to collect a Covered Electronic Waste Recycling (eWaste) Fee from the retail purchaser/leasee. The eWaste Fee is imposed on the retail purchase or lease of “covered electronic devices,” which are video display products the Department of Toxic Substances Control (DTSC) determined to be hazardous when discarded. These devices include computer monitors, laptop computers, portable DVD players with LCD screens, “bare” cathode ray tubes (CRTs) and devices containing CRTs, televisions with LCD screens, plasma screens, or CRTs. The fee varies depending on the screen size. Please see the eWaste Fee rates posted on our website.

For more information on the eWaste Fee, please see publication 95, Electronic Waste Recycling Fee.

Lead-acid battery fee

If you sell or manufacture lead-acid batteries sold into California, you are required to register for the California Lead-Acid Battery Fee and/or the Manufacturer Battery Fee. The Lead-Acid Battery Fee is imposed on the retail purchaser of a replacement lead-acid battery in California. It is a fee that is collected by the retailer or a manufacturer making retail sales. A replacement lead-acid battery includes a new battery sold at retail to replace the battery that originally came with the vehicle, equipment, watercraft, or aircraft.

In addition to the Lead-Acid Battery Fee, there is a Manufacturer Battery Fee. This fee is imposed on the manufacturer for each lead-acid battery sold at retail in California, or sold to a dealer, wholesaler, distributor, or other person for retail sale in California. A person who imports lead-acid batteries into California from an out-of-state manufacturer, without jurisdiction in California, is considered the manufacturer.

For more information on the Lead-Acid Battery Fee and registration requirements, please see our Tax Guide for Lead-Acid Battery Fees.

Lumber products assessment

If you sell lumber products or engineered wood products, you are required to collect a lumber products assessment on sales of these items to consumers in California. The assessment is imposed on persons who purchase lumber products or engineered wood products for storage, use, or other consumption in California, at the rate of one percent (1%) of the sales price. In general, lumber products and engineered wood products subject to the one percent lumber products assessment are building products, usually used in construction, which are comprised of at least ten percent (10%) wood.

Retailers responsible for collecting the one percent lumber products assessment on sales of lumber products or engineered wood products are required to register for a Lumber Products Assessment account in addition to registering for a seller's permit or Certificate of Registration—Use Tax.

For more information, please see our online Tax Guide for California Lumber Products Assessment.

Additional Information

For more information

Additional regulations and publications that relate to this topic:

Regulations

1502 Computers, Programs, and Data Processing

1528 Photographers, Photocopiers, Photo Finishers, and X-Ray Laboratories

1620 Interstate and Foreign Commerce

1628 Transportation Chargers

1660 Leases of Tangible Personal Property—in General

1661 Leases of Mobile Transportation Equipment

1668 Sales for Resale

1684 Collection of Use Tax by Retailers

1685 Payment of Tax by Purchasers

1699 Permits

1700 Reimbursement for Sales Tax

1827 Collection of Use Tax by Retailers (for special district taxes)


Publications

61 Sales and Use Taxes: Exemption and Exclusions

68 Photographers, Photo Finishers, and Film Processing Laboratories

73 Your California Seller's Permit

77 Out-of-State Sellers: Do You Need to Register with California?

91 California Tire Fee

95 Electronic Waste Recycling Fee

100 Shipping and Delivery Charges

101 Sales Delivered Outside California

103 Sales for Resale

107 Do You Need a California Seller’s Permit?

114 Consignment Sales

121 Drop Shipments

177 Internet Auction Sales and Purchases