Tax Guide for Grocery Stores
Industry Topics

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A grocery store is an establishment whose principal line of business is the sale of food products and related items. This term includes separate grocery departments, but does not include delicatessens, country or general stores, or businesses that only handle groceries as a sideline.

Sales of food products for human consumption are generally nontaxable. You should keep accurate and complete records of all purchases and sales to verify all exemptions claimed as exempt sales of food products.

For detailed lists of common taxable and nontaxable food products please consult publication 31, Grocery Stores, or you may call our Customer Service Center at 1-800-400-7115.

The Basics

Sales and Use Taxes in General

In California, all sales are taxable unless the law provides a specific exemption. In most cases, taxable sales are of tangible personal property, which the law defines as an item that can be seen, weighed, measured, felt, or touched.

Use tax is a companion to California's sales tax, and is due whenever you purchase taxable items without payment of California sales tax from an out-of-state vendor for use in California. You also owe use tax on items that you remove from your inventory and use in California when you did not pay tax when you purchased the items. To pay use tax, report the purchase price of the taxable items under "Purchases Subject to Use Tax" on your sales and use tax return. Those purchases become part of the total amount that is subject to tax.

If you consume or give away taxable non-food items such as soda or alcoholic beverages that you purchased without paying sales tax, you owe an equivalent use tax based on the cost of those items to you. The use tax rate is the same as the sales tax rate in effect at the location of use.

For more information on use tax, see publication 110, California Use Tax Basics.

Seller's Permit

Most people who sell taxable items in California, even temporarily, must register with the CDTFA for a seller's permit. Registering for a seller's permit is free, although in some cases a security deposit may be required. If you have multiple locations, you must register each location with us. You can register with the CDTFA for a seller's permit or consolidated seller's permit using our online registration service.

Be sure to let us know about any changes to your business, or to your mailing or email address so that we can keep your records up-to-date and inform you of important changes in law, tax rates, or procedure. You can easily update your account information by contacting our Customer Service Center or any one of our field offices throughout the state. Contact information is available in the Resources section of this guide.

Cigarettes and Tobacco Products

Retail sellers of cigarettes and tobacco products must have a California Cigarette and Tobacco Products Retailer's License before purchasing or selling cigarettes or tobacco products (for retail licensing purposes only, tobacco products include nicotine products that are intended for human consumption, electronic smoking or vaping devices, or any component, part, or accessory of a tobacco product) at retail. You must obtain this license in addition to your seller's permit. A retailer's license is valid for a 12-month period, is not assignable or transferrable, and must be renewed annually. A license fee payment is required for each retail location at initial registration and every year at the time of renewal and may not be prorated. See our Tax Rates – Special Taxes and Fees page for cigarette and tobacco product retailer's license fee amounts.

As a retailer of cigarettes and tobacco products, you must:

Note

  1. Does not apply to a tobacco product that is not subject to the tobacco products tax. For example, vape liquids that do not contain any nicotine are not subject to the tobacco products tax, however they are subject to the retail licensing requirement.

You can apply online for a cigarette and tobacco products license using our online registration service or at any of the CDTFA's field offices. Prospective licensees should consult with their local health department before applying for a California Cigarette and Tobacco Products Retailer's License to determine if there is a local licensing requirement in their community and to learn how to comply with its requirements. In some cases, local licensing requirements may be more restrictive than state licensing requirements.

Please visit the Cigarette and Tobacco Products tax guide for more information on the cigarette and tobacco products tax and licensing program.

Transferring Products Between Stores

If you own more than one store and hold the necessary licenses for each location, you may be allowed to transfer cigarettes and tobacco products between stores, in specific instances. When transferring cigarettes and tobacco products, legible transfer records and copies of the original purchase invoice must be kept at each location involved in the transfer.

The transfer records must be prepared at the time of transfer and must include the address and tobacco license number of each retail location, the purchase invoice date, the purchase invoice number, the supplier's name on the invoice, the brand, type of packaging, flavor, and/or style, and the quantity of items transferred.

You must provide such documentation upon request by CDTFA staff or law enforcement.

These requirements do not apply to tobacco products that are not subject to the tobacco products tax. For example, vape liquids that do not contain any nicotine are not subject to these requirements, however they are subject to the retail licensing requirement.

For more information about licensing requirements for sellers of cigarettes and tobacco products, see CDTFA publication 78, Sales of Cigarettes and Tobacco Products in California. You may also attend a tobacco class for retailers or view our online tobacco seminar.

Cigarette Buy-Downs

If a cigarette manufacturer or distributor offers a "buy-down" promotion, where you agree to sell certain cigarettes at a reduced price and receive compensation from the manufacturer or distributor, sales tax applies to the total received from the customer plus any amount received from the manufacturer or distributor.

For more information, please see CDTFA publication 113, Coupons, Discounts, and Rebates, or Regulation 1671.1, Discounts, Coupons, Rebates, and other Incentives.

Pharmacy and Drug Store Sales

Prescription Drugs

In general, you are not required to report and remit tax on sales of prescribed drugs and other preparations used to treat, diagnose, cure, mitigate, or prevent disease.

To qualify for the exemption, the drug or preparation must be prescribed by a person authorized to prescribe the medicines such as a licensed physician, dentist, or podiatrist, and the prescription must be filled by a registered pharmacist.

A registered pharmacist is a person to whom a certificate has been issued by the Board of Pharmacy.

Over-the-Counter Medicines

Sales of over-the-counter medicines are generally taxable.

Examples of over-the-counter medicines include aspirin, cough syrups, cough drops, throat lozenges, etc. If an over-the-counter is prescribed by a physician and purchased from a pharmacist, the sales may not be taxable.

Diabetic Supplies

Tax does not apply to the sales or use of insulin and syringes, glucose test strips, or skin puncture lancets that are furnished by a pharmacist as directed by a physician to a diabetic patient for treating diabetes.

The items must be furnished by a pharmacist for testing the patient's own blood sugar levels. Sales to anyone other than a diabetic patient or furnished by other than a pharmacist are taxable.

For more information on what qualifies as a medicine, see Regulation 1591, Medicines and Medical Devices.

Sales

Taxable sales

Sales tax generally applies to sales of:

  • Alcoholic beverages
  • Books and publications
  • Cameras and film
  • Carbonated and effervescent water
  • Carbonated soft drinks and mixes
  • Clothing
  • Cosmetics
  • Dietary supplements
  • Drug sundries, toys, hardware, and household goods
  • Fixtures and equipment used in an activity requiring the holding of a seller's permit, if sold at retail
  • Food sold for consumption on your premises (see Food service operations)
  • Hot prepared food products (see Hot prepared food products)
  • Ice
  • Kombucha tea (if alcohol content is 0.5% or greater by volume)
  • Medicated gum (Nicorette, Aspergum)
  • Newspapers and periodicals
  • Nursery stock
  • Over-the-counter medicines, such as aspirin, cough syrups, cough drops, throat lozenges, and so forth
  • Pet food and supplies
  • Prepaid Mobile Telephony Services
  • Soaps or detergents
  • Sporting goods

Nontaxable Sales

Sales tax generally does not apply to sales of:

  • Baby formulas (including Isomil)
  • Cooking wine
  • Edge Bars, Energy Bars, Power Bars
  • Food products
  • Granola Bars
  • Kombucha tea (if less than 0.5% alcohol by volume and naturally effervescent)
  • Martinelli's Sparkling Cider
  • Noncarbonated sports drinks ( Gatorade, Powerade, All-Sport)
  • Pedialyte
  • Water — Bottled noncarbonated, non-effervescent drinking water

Diapers and Menstrual Hygiene Products

Effective January 1, 2020, the sale and use of specified diapers and menstrual hygiene products are exempt from tax. If you are a retailer who sells these items, you should not charge or collect sales or use tax on these items. Please Note: This exemption was made permanent by legislation effective July 16, 2021.

The exemption provides for the following specified products:

  • Diapers means diapers that are designed, manufactured, processed, fabricated, or packaged for use by infants, toddlers, and children.
  • Menstrual Hygiene Products means tampons, sanitary napkins primarily designed and labeled for menstrual hygiene use, menstrual sponges, and menstrual cups.

You should also continue to include your sales of these items in the reported total gross sales on your sales and use tax return and then claim the deduction as “diapers” and/or “menstrual hygiene products” for your sales on and after January 1, 2020.

Prepaid Mobile Telephony Services (MTS)

Sellers of prepaid mobile telephony services (MTS), such as prepaid minutes and airtime, have certain surcharge and local charge collection requirements.

Beginning January 1, 2020, sellers of prepaid mobile telephony services (MTS) will be required to collect, report, and pay the Emergency Telephone Users (911) Surcharge as a flat fee on each purchase of prepaid MTS made by a prepaid MTS consumer. The 911 Surcharge will be due on each retail transaction that involves a sale of prepaid MTS to a California consumer, unless otherwise exempt.

Sellers of prepaid MTS must continue to collect local charges as a percentage of total prepaid MTS retail sales (if local charges apply).

The 911 Surcharge and local charges (if local charges apply) generally applies to amounts charged for:

  • Prepaid wireless airtime cards
  • Prepaid wireless cards compatible with pay-as-you-go cell phones
  • Prepaid wireless minutes
  • Prepaid wireless plans
  • Prepaid wireless refill or top-off cards
  • Prepaid wireless ‘e-Cards’
  • Prepaid mobile data or any other services when sold with any of the above
  • Any product or service (except a cell phone), when sold with prepaid MTS for a single non-itemized price
  • A cell phone sold with prepaid MTS for a single non-itemized price, unless only a minimal amount of prepaid MTS is transferred. (A minimal amount of prepaid MTS is $5 or less, or 10 minutes or less)

The current 911 Surcharge rate and local charge rates may be found on our 911 Surcharge and Local Charge Rates webpage.

If you sell prepaid wireless products and services to California consumers, you must register with the CDTFA as a prepaid MTS seller. The prepaid MTS account is a separate account from your seller's permit. For more information about your collection requirements as a sellers of prepaid MTS, please see our Tax Guide for Sellers of Prepaid Mobile Telephony Services (MTS) and Telecommunication Service Suppliers.

Nutritional Drinks

In general, tax does not apply to the sale of food products for human consumption, including most nutritional drinks. Nutritional drink products are generally milk or juice based products that often promote themselves as having additional nutrients.

Sales of nutritional drinks are generally not subject to tax when they have Nutrition Facts on their label or package unless; the label or package describes the product as a food supplement, or adjunct; or the product is prescribed or designed to remedy specific dietary deficiencies or to increase or decrease: vitamins, proteins, minerals or caloric intake.

Sales of nutritional drinks are generally subject to tax when they have Supplement Facts on their label or package and/or are described as a food supplement, food adjunct, dietary supplement, or dietary adjunct on the label or package.

For more information, please see our Special Notice, Sales of Nutritional Drinks Are Generally Not Taxable.

Newspapers and Magazines

Newspapers, magazines, and other periodicals you sell to your customers are taxable.

Newspapers, magazines, and other periodicals you provide without charge are not taxable. If you request payment or suggest a donation for such items, but do not require a payment or donation, you are considered to be providing the items without charge.

Hot Prepared Foods

Heated food is usually taxable whether or not it is sold to-go or for consumption on your store premises.

A food product is hot when it is heated to above room temperature, and is still considered hot even after it has cooled, because it is intended to be sold in a heated condition.

Notable Exception: Hot Baked Goods

Hot baked goods, such as hot baked pretzels or croissants, sold to-go are exempt from sales tax. If sold in a combination package with hot prepared foods or with a hot beverage, however, the entire combination package is taxable. Hot baked goods purchased for consumption at your store are taxable.

Combination Packages

When you sell two or more food items together in a package to-go for a single price, tax may apply depending on the components of the package.

Including hot food or hot beverages with a combination package makes the entire package taxable.

If you sell a combination package to-go that includes cold food and a soda, the amount of the selling price of the soda is taxable.

Sales of food and beverages for your patrons to eat in your store are always taxable.

Bag Fees

The minimal amount required to be charged by retailers when they provide their customers with certain carryout bags is not subject to tax and should not be included in the retailer’s gross receipts for sales tax reporting purposes, even when itemized on receipts.

As required by state law, retailers who provide their customers a reusable grocery bag or a recycled paper bag must charge an amount not less than 10 cents per bag. Local laws may require the retailer to charge its customer a different amount per bag. This charge is imposed upon the customer. As such, this charge is not included in the seller's gross receipts and is not subject to sales tax.

For more information about the ban on single-use carry out bags, please visit CalRecycle's Ban on Single-Use Carryout Bags FAQ page.

California Redemption Value (CRV)

Generally, if the beverage you sell is taxable, tax also applies to the separate charge for CRV. The amount subject to tax is the combined selling price of the beverage, the container, and the CRV.

If you are bottling, producing, importing or selling beverages in California, you may need to register with CalRecycle under the California Beverage Container Recycling and Litter Reduction Act. Contact the CalRecycle registration unit to register.

Note: The CRV program is administered by CalRecycle. Questions regarding the fee should be directed to them. This guide covers only how sales tax applies to CRV charges.

For more information about the CRV fee, visit the CalRecycle's Beverage Container Recycling page

EBT Card – CalFresh Benefits

CalFresh is federally known as the Supplemental Nutrition Assistance Program or SNAP and provides benefits to qualified individuals who meet federal income eligibility rules. Electronic Benefits Transfer (EBT) cards containing CalFresh benefits are issued to qualified individuals by their respective county's human or social services department. CalFresh benefits may be used by qualified individuals to purchase eligible food items at authorized retail food stores. Sales of eligible food items purchased with CalFresh benefits are exempt from tax, even if the sale of the food item is normally taxable. For example, the sales of carbonated beverages, ice, and food coloring are exempt from tax when purchased with CalFresh benefits.

If your customer has CalFresh benefit redemptions that exceed the total amount of eligible taxable food items, the remainder should be applied only to nontaxable food items. Tax applies to all sales of taxable items that are not eligible to be purchased with CalFresh benefits.

Under SNAP, items purchased with CalFresh benefits are considered to be sold to the United States Government and are exempt from tax in California. However, items purchased with CalWORKs cash aid benefits are not considered sales to the United States Government and are subject to tax, unless another exemption applies.

You are allowed to take a sales and use tax deduction for CalFresh benefits redeemed. You may report the deduction of CalFresh benefit sales on an actual basis (itemization of sales including CalFresh benefit sales) if you separately account for those sales. Alternatively, there are two approved methods for computing the allowable deduction instead of separately accounting for CalFresh benefit sales:

  • Method 1: You may take a deduction on your sales and use tax return of two percent of the total amount of CalFresh benefits redeemed during the period for which the return is filed.
  • Method 2: You may take a deduction of a greater percentage if the total of taxable items purchased with CalFresh benefits divided by the total of taxable items purchased with CalFresh benefits plus exempt food purchases is greater than two percent. See example below:
Example:
Taxable items purchased with CalFresh benefits $ 5,000 (a)
Exempt food products $130,000 (b)
Total Sales $135,000 (c)

Allowable percentage for CalFresh benefits deduction: $5,000 ÷ $135,000 = 3.7%

Customers may not use CalFresh benefits to buy items such as alcoholic beverages, tobacco products, pet food, soaps, paper products, vitamins, food that will be eaten in the store, or hot foods. If you are using Method 2, please make sure that these items are not included in your total of items that are normally taxable and may be purchased with CalFresh benefits.

Manufacturer's Coupons, Rebates, and Other Promotions

If you accept discount coupons that allow your customers to purchase merchandise at a reduced price, tax is due on the amount you receive for the sale, plus any amount you receive from a third party as payment.

In cases where you offer your customers a store discount on taxable merchandise but you are not being paid by any third party, you owe tax only on the amount received from your customer.

A manufacturer's discount is one where you receive money from a manufacturer or other party as reimbursement. The amount you receive from a manufacturer or other third party as reimbursement for a discount is considered part of your gross receipts and is taxable, along with the amount you receive from your customer.

For more information, please see CDTFA publication 113, Coupons, Discounts, and Rebates.

Lottery Sales

Sales of tickets for California Lottery games are not taxable, and you should not include them on your sales and use tax return as part of your gross receipts.

Remember, it is important to keep your receipts for nontaxable sales – such as lottery tickets – separate from receipts for taxable sales.

Service Charges

Service charges you make to your customers for money orders and returned checks are not taxable.

You should not include service charges for money orders or returned checks on your sales and use tax return as part of your gross receipts.

Bad Debt Deductions

If a check or credit card transaction is returned unpaid and you find it to be uncollectible and write it off for income tax purposes, you may claim a bed debt deduction for the amount of the taxable sale.

You must claim the deduction on your sales and use tax return for the reporting period in which you wrote it off. If you find it uncollectible at a later time, you must submit a claim for refund and amend your return for the appropriate period. You may only take the bad debt deduction if you previously reported the sale as taxable.

Generally, a single sale can include both taxable and nontaxable items. The bad debt deduction can only be claimed for the taxable items in which you reported tax at the time of the sale. For example, you receive a $100 check for $75 of nontaxable items and $25 of taxable items. If the check is returned, you may only take a bad debt deduction for the $25 of taxable items you originally reported. When checks are cashed for an amount over the sale for cash back, that excess amount is not deductible as bad debt.

If you later collect the debt, any amount claimed as a deduction must be reported as a taxable sale in the period collected. You cannot deduct fees paid to collect the debt. For more information see Regulation 1642, Bad Debts.

Sales of Fixtures and Equipment

If you sell any fixtures or equipment used in your business, you should pay taxes on the selling price. Sales of fixtures and equipment you use are taxable even if they occur as part of the sale, reorganization, or closure of your business.

For more information, please see Regulation 1595, Sale of a Business – Business Reorganization.

Purchases

Items Purchased for Resale

When you issue a resale certificate to purchase taxable items for resale, you don't pay sales tax at the time of purchase. Instead, sales tax applies when you sell the items at retail.

If you purchase an item with a resale certificate and use it, you owe a use tax on the cost of the item – at the same rate as the sales tax at the location of use – to the CDTFA.

Supplies, Equipment, and other Business Expenses

Items you purchase for use in your business (displays, advertising materials, bookkeeping and maintenance supplies, storage equipment, and refrigeration units, among others) are subject to tax at the time of purchase.

Normally such items are purchased from local suppliers who add and report sales tax. However, if you purchase equipment or supplies from an out-of-state seller, the sale is subject to use tax (see use tax below).

If the out-of-state seller does not charge California use tax, you should report the purchase price on your tax return (under "Purchases Subject to Use Tax").

Note: Wrapping and packaging supplies used to wrap merchandise or bags in which you place items sold to your customers may be purchased for resale. All other purchases of supplies, however, are generally subject to tax.

Use tax

If you purchase taxable property without paying California tax and use the property for a purpose other than for resale, you owe a use tax. For example, if you issue a resale certificate to purchase soda but give it away or consume it, you owe use tax based on its purchase price.

The use tax rate is the same as the sales tax rate in effect at the location of use.

To pay use tax, report the purchase price of the taxable items under "Purchases Subject to Use Tax" on your sales and use tax return. Those purchases become part of the total amount that is subject to tax.

Inventory

Inventory Controls

Keeping good books and records will help you detect any losses early. We strongly recommend that you:

  • Keep records of all merchandise removed from inventory.
  • Keep accurate and complete records of sales and purchases.
  • Take a physical inventory at least once a year.
  • In the period between inventories, compute the cost of merchandise sold, add the expected percentage of mark-up, and deduct discounts for the period of time involved. Your computed figure should be very close to the sales made for the same period the prior year.
  • Ensure that your records of purchases for resale are accurate and complete and do not include supplies or other items not for resale.
Common Inventory Losses

Keep your eye out for the following types of losses:

  • Money pocketed by employees and covered up by not ringing up the sale or ringing it up at a lesser amount.
  • Merchandise stolen by employees, clean-up crews, or other persons with access to the store.
  • Short deliveries or theft by delivery persons.
  • Shoplifting by customers.

Note: thefts of cash are not deductible for sales tax purposes because tax is measured by sales.