Online Retailers: Registration and Local Tax
You may have a business making sales over the Internet. Online retailers have similar reporting and registration requirements as other retailers. You may find the additional information below helpful to make sure that your business is correctly registered and that you are properly reporting and allocating local tax. How your business is registered is important so that you receive and use the correct schedules to report and allocate your sales for local tax reporting purposes.
A flowchart that includes general registration and local tax reporting information is available.
General Rules
General Registration Requirements
Under Regulation 1699, Permits, subdivision (a), a person that is actively engaged in selling tangible personal property in this state of a kind the gross receipts from the retail sale of which are required to be included in the measure of the sales tax is required to register for a seller's permit for each place of business in California at which the person customarily negotiates transactions relating to sales with customers. In general, permits are not required for a seller's warehouse or other places where merchandise is merely stored (that is, storage locations) if they are maintained in conjunction with a place of business for which a seller's permit is held and customers do not customarily visit the storage location to make purchases. However:
- At least one permit must be held by every person that maintains stocks of merchandise for sale at a storage location in this state; and
- Seller's permits are required for storage locations from which retail sales negotiated out of state are delivered or fulfilled.
Retailers selling tangible personal property for storage, use, or other consumption in this state that are not required to hold a seller's permit but that are a “retailer engaged in business in this state” as defined in Revenue and Taxation Code (R&TC) section 6203, subdivision (c), are generally required to register for a Certificate of Registration – Use Tax (R&TC section 6226; Regulation 1684, Payment and Collection of Use Tax, subdivision (a)). A retailer is engaged in business in this state if it has a sufficient physical presence, examples of which include, but are not limited to, maintaining a place of business in this state, having an agent, representative or salesperson under the retailer's authority for purposes of selling, delivering, or installing tangible personal property in this state, or owning or leasing real or personal property located in this state.
Additionally, as of April 1, 2019, a retailer is engaged in business in this state if, in the preceding or current calendar year, the total combined sales of tangible personal property for delivery in California by the retailer and by all people related to the retailer exceeds $500,000.
Registration Requirements for Marketplace Facilitators and Marketplace Sellers
The general registration requirements discussed in the General Registration Requirements heading above apply to all retailers. However, there are additional rules for marketplace facilitators and marketplace sellers, as defined in R&TC section 6041. Beginning October 1, 2019, a marketplace facilitator that is registered or required to be registered for a seller's permit or Certificate of Registration – Use Tax is the retailer for sales and use tax purposes with respect to all the retail sales it facilitates on behalf of marketplace sellers through its marketplace (marketplace sales) (R&TC section 6043), unless R&TC section 6047, subdivision (a) applies.
Note: The term “marketplace sale” used in this section specifically means a retail sale facilitated by a marketplace facilitator that is registered or required to be registered for a seller's permit or Certificate of Registration – Use Tax, and is, therefore, the seller and retailer with respect to that sale pursuant to R&TC section 6043.
For purposes of this section, “marketplace sale” does not include a sale facilitated by an unregistered marketplace facilitator, that is not the seller and retailer with respect to that sale. Such sales would be included in the meaning of “direct sale,” which means any sale with respect to which a marketplace facilitator is not the seller and retailer.
A marketplace facilitator must consider both its own sales and the sales it facilitates for marketplace sellers in determining whether it is required to register for a seller's permit or Certificate of Registration – Use Tax (R&TC section 6042). A marketplace facilitator must include sales it facilitates on behalf of marketplace sellers through its marketplace in addition to any sales made on its own behalf when determining if it is a retailer engaged in business in this state based on the $500,000 sales threshold (R&TC section 6044, subdivision (a)).
A marketplace seller, whether located inside or outside California, is not required to register for a seller's permit or Certificate of Registration – Use Tax if all of its sales in this state or for use in this state are marketplace sales. However, a marketplace seller may be required to register if it also makes direct sales, such as sales made through its own website or sales facilitated by unregistered marketplace facilitators (R&TC section 6045). Also, even though a marketplace seller is not the seller or retailer with respect to its marketplace sales, it still must include its marketplace sales, along with its direct sales, when determining if it is a retailer engaged in business in this state based on the $500,000 threshold (R&TC section 6044, subdivision (b)).
When Sales Tax or Use Tax Applies
Generally, sales tax applies if an in-state place of business of the retailer, such as a local office, branch, outlet, or other place of business, participates in the sale and the sale occurs in this state (see Regulation 1620, Interstate and Foreign Commerce, subdivision (a)). This section primarily relates to in-state participation, but if either of these conditions are not met, sales tax does not apply. When sales tax does not apply, use tax applies to the use of property that was purchased from a retailer for use in this state.
Place of Business
The participation required by Regulation 1620 must be by a place of business of the retailer. A place of business of the retailer includes any location that comes within the description in R&TC section 6203, subdivision (c)(1), which refers to “an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business” in this state.
Generally, the location of a third party (a separate person as defined in R&TC section 6005) would not be a place of business of the retailer, even if the third party is a related entity. The presence of the retailer's employees at such a location would not, by itself, make it a place of business of the retailer. The presence of the retailer's property at a third-party storage location would also not generally make the storage location a place of business of the retailer. However, a third-party storage location can contain a place of business of the retailer if it contains dedicated storage of the retailer's property that is separate from other retailer's property (that is, non-commingled property, see Reynolds Memo Opinion [May 31, 2007]). Note, a storage location could contain places of business for multiple retailers for which it maintains dedicated storage of non-commingled inventory.
A marketplace sale is a sale facilitated through a marketplace facilitator and the retailer is the registered marketplace facilitator, not the marketplace seller. Therefore, a location of the marketplace seller is not a place of business of the retailer.
Participation
Regulation 1620, subdivision (a)(2)(A), states that participation in the transaction in any way by the in-state place of business is sufficient for the transaction to be subject to sales tax. However, to constitute participation, an activity must serve some real purpose and have some meaningful effect in the actual sales process and involve some genuine physical human interaction with the sale from that location.
Generally, activities taking place after the sale has occurred are not participation in the sale. There are also activities that a retailer might conduct from a California location to support its operations that do not constitute participation in the sale for purposes of Regulation 1620, subdivision (a)(2)(A), including price setting, purchase of resale inventory, web design, and general marketing.
Internet transactions are generally designed and intended to be processed online, without direct human intervention until the property is picked, packed, and shipped at the storage location. As such, a storage location is often the only place of business that participates in an Internet transaction. Activities related to creating and maintaining the automated online processes would generally be considered the type of support operations that do not constitute participation in any particular transaction. The location of the server where the website is hosted or maintained is also immaterial; see Annotation 710.0013.600, Internet Transactions.
Participation Examples
Note: These examples are based on specific facts and circumstances and do not address all scenarios. All of the cities in the examples are located in California.
Example 1
An online retailer has a corporate headquarters in City A where its employees solicit advertising, maintain accounting records, design and manage its webpage, and work on software programing, and where it maintains servers that process orders.
The activities performed at the headquarters indirectly support sales but are not sufficient to constitute participation in a specific sale. Therefore, the retailer's corporate headquarters does not participate in the transactions.
Example 2
A retailer maintains a separate, dedicated stock of goods at an in-state warehouse of its supplier. There are no employees of the retailer at this location. 15% of the retailer's California sales are fulfilled from the retailer's stock of goods and 85% are fulfilled from the other portions of the supplier's warehouse. The stock of goods constitutes a place of business of the retailer, which participates in the 15% of sales that are fulfilled from it. However, that place of business does not participate in the 85% of total sales that are fulfilled from the other portion of the supplier's warehouse.
Example 3
A retailer sells medical supplies pursuant to master contracts with hospitals. Sales are fulfilled from its in-state warehouse located in City A. The master contracts are negotiated by salespeople working out of an office located in City B. The locations in both City A and City B participate in the sales. However, the place of sale would be City B, where the principal negotiations occur.
Example 4
Office employees of a multi-location department store in City C download a spreadsheet of all California orders daily. The employees then organize columns on the spreadsheet to separate out sales that require fraud review. The employees conduct the fraud review for those sales, but often goods are already shipped before the review is completed. There is no participation in sales not subject to fraud review and there is also no participation in sales reviewed since the review is not actually necessary to complete the transaction.
Example 5
A retailer sells fixtures and supplies (cash registers, display racks, among others.) to a customer for use in its stores pursuant to a master contract. The customer's orders are completed online or over the phone with the retailer's out-of-state office, with delivery from both in-state and out-of-state warehouses. The employees at the retailer's in-state office in City H receive approval lists from the retailer's out-of-state office but have no contact with customers and do not do anything with the approval lists other than file them. The employees do not have any actual participation in the transaction. Therefore, these activities do not constitute participation.
Local Tax Allocation
When state sales tax applies to a transaction, the Bradley-Burns Uniform Local Tax (local) sales tax also applies, and if state use tax applies to a transaction, then local use tax also applies (Regulation 1803, Application of Tax).
Local sales tax is allocated to the jurisdiction where the sale occurs. If only one place of business of the retailer in this state participates in a sale, the sale occurs at that place of business. If more than one place of business of the retailer in this state participates in a sale, the sale occurs at the place of business where the principal negotiations are carried on (see Regulation 1802, Place of Sale and Use for Purposes of Bradley-Burns Uniform Local Sales and Use Taxes, subdivisions (a)(2)(B) and (d)). Local sales tax is usually allocated directly to the jurisdiction where the place of sale is located using Schedule C. However, if the retailer is not required to have a seller's permit for the place of business where the sale occurs, then the local sales tax is allocated to the countywide pool of the jurisdiction's county using Schedule B.
Local use tax is allocated to the jurisdiction where the property is first functionally used. (Regulation 1802, subdivision (d)). The location to which the property is shipped is generally presumed to be the place of first functional use. Local use tax is generally allocated on Schedule B to the countywide pool of the county in which the first functional use occurred.
- Regulation 1802, Place of Sale and Use for Purposes of Bradley-Burns Uniform Local Sales and Use Taxes, subdivision (d), describes when local use tax is reported directly to the jurisdiction of use, but it would generally not apply to the type of Internet transactions discussed in this section.
Marketplace Sales
The rules and information discussed in the sections above regarding the application of sales and use tax and the allocation of local tax apply to marketplace facilitators since they are the retailer with respect to marketplace sales. As such, for sales tax to apply, a place of business of the marketplace facilitator, not the marketplace seller, must participate in the marketplace sale. Likewise, the local sales tax is allocated based on participation in the marketplace sale by a place of business of the marketplace facilitator. In both instances, “participation” has the same meaning as it does for all other retailers.
Application of Tax to Internet Transactions
The following sections provide scenarios and information about how tax applies, including the allocation of local tax, to common Internet transactions. Assume the sales in the scenarios are processed online and are not negotiated at an in-state place of business of the retailer. Also, assume that sales fulfilled from an in-state location occur in this state at the time of shipment and that any in-state storage location of the retailer that participates in a sale is required to have a seller's permit under Regulation 1699.
Direct Sales Fulfilled from Third-Party California Storage Locations
A retailer with no place of business in California that maintains commingled inventory at a third-party California fulfillment center or warehouse would generally be regarded as a retailer engaged in business in this state, and be required to register for a Certificate of Registration – Use Tax, because of the presence of its inventory in the state. The third-party storage location, however, is not a place of business of the retailer.
- When the retailer's direct sale to a California customer is fulfilled by the third-party's in-state storage location, the sale occurs in this state, but cannot be subject to sales tax because the retailer has no in-state place of business. The transaction is subject to state and local use tax which the retailer is required to collect. The local use tax should be allocated to the countywide pool of the jurisdiction where the property is shipped using Schedule B.
A retailer that maintains commingled inventory at a third-party California fulfillment center or warehouse and also has a place of business in California would be engaged in business in this state because of its place of business and inventory in the state. The retailer may be required to obtain a seller's permit for its place of business under Regulation 1699; if not, it would be required to register for a Certificate of Registration – Use Tax. Similar to the scenario above, the third-party storage location is not a place of business of the retailer.
- When the retailer's in-state place of business does not participate in a direct sale to a California customer fulfilled by the in-state third-party storage location – for example, a fully automated Internet transaction with fulfillment by the third party storage location – then the sale occurring in this state is not subject to sales tax because there is no participation by the retailer's in-state place of business. The transaction is subject to use tax which the retailer is required to collect. The local use tax should be allocated to the countywide pool of the jurisdiction where the property is shipped to using Schedule B.
- When the in-state place of business of the retailer participates in the sale, then the transaction would be subject to sales tax. Whether the local sales tax is allocated using Schedule B or C depends on whether the retailer's participating location is required to have a seller's permit under Regulation 1699.
A retailer's dedicated, non-commingled stock of goods at a third-party storage location in California is considered to be an in-state place of business of the retailer. The retailer must hold a seller's permit for the location of the stock of goods.
- When the retailer's direct sale to a California customer is fulfilled from the in-state stock of goods and no other in-state place of business of the retailer participates in the sale, the sale is subject to sales tax. The local sales tax should be allocated directly to the jurisdiction where the stock of goods is located using Schedule C.
- When another in-state place of business of the retailer participates in the sale, the transaction would still be subject to sales tax, and the local sales tax should be allocated to the jurisdiction where there is more “significant” participation, depending on the facts and circumstances of the transaction. If it is the place where the stock of goods is located, local sales tax would be allocated to that location using Schedule C. If it is another location, whether the local sales tax would be allocated using Schedule B or C depends on whether that location is required to have a seller's permit under Regulation 1699.
- When discussing whether state and local sales or use tax applies, this section will state “sales tax” or “use tax.”
Marketplace Sales Fulfilled from Place of Business of Marketplace Seller
A marketplace seller maintains a stock of goods at its own in-state location from which it fulfills marketplace sales to California customers.
- Without In-State Participation – When the marketplace facilitator that facilitates the marketplace seller's sale has no in-state place of business that participates in the sale (again, “participation” has the same meaning as it does for any other retailer), the marketplace sale is subject to use tax because there is no participation by an in-state place of business of the retailer (the marketplace facilitator). The marketplace facilitator is required to collect the use tax, and allocate the local use tax to the countywide pool of the jurisdiction where the property is shipped to using Schedule B.
- With In-State Participation – When the marketplace facilitator has an in-state place of business that participates in the sale, sales tax applies because the sale occurs in this state and there is participation in the sale by a place of business of the retailer. The local sales tax should be allocated to the jurisdiction where the in-state place of business is located. Whether the local sales tax is allocated using Schedule B or C depends on whether the marketplace facilitator's location is required to have a seller's permit under Regulation 1699.
A marketplace seller maintains a stock of goods at its own out-of-state location from which it fulfills marketplace sales to California customers.
- Without In-State Participation – When the marketplace facilitator has no in-state place of business that participates in the sale, the sale is subject to use tax which the marketplace facilitator is required to collect. The local use tax should be allocated to the countywide pool of the jurisdiction where the property is shipped to using Schedule B.
- With In-State Participation – When the marketplace facilitator has an in-state place of business that participates in the sale, sales tax would only apply if the sale occurs in this state. If the sale takes place out of state, it would still be subject to use tax with allocation to the countywide pool of the jurisdiction of use using Schedule B. If the sale takes place in California (for example, the contract of sale has an F.O.B. destination clause and does not have a clause passing title prior to delivery), then the transaction would be subject to sales tax. The local sales tax should be allocated to the jurisdiction where the in-state place of business is located. Whether the local sales tax is allocated using Schedule B or C depends on whether the location is required to have a seller's permit under Regulation 1699.
Marketplace Sales Fulfilled by Marketplace Facilitator
A marketplace facilitator that maintains an in-state fulfillment center where it stores the marketplace sellers' merchandise and from which it fulfills marketplace sales generally must hold a seller's permit for the fulfillment center, whether or not it maintains its own inventory there as well. When a marketplace sale is fulfilled by the fulfillment center, sales tax applies because the sale occurs in this state and there is participation in the sale by a place of business of the retailer (fulfillment center).
- When the marketplace facilitator has no other in-state place of business that participates in the sale, the local sales tax is allocated to the local jurisdiction where the fulfillment center is located using Schedule C.
- When another in-state place of business of the marketplace facilitator participates in the sale, the local sales tax should be allocated to the jurisdiction where there is more “significant” participation.
A marketplace facilitator that maintains an out-of-state fulfillment center where it stores marketplace sellers' merchandise and from which it fulfills marketplace sales to California customers' generally must hold a Certificate of Registration – Use Tax. If the marketplace facilitator also has an in-state place of business, it may be required to obtain a seller's permit for that location under Regulation 1699.
- When the marketplace facilitator has no in-state place of business that participates in a marketplace sale fulfilled from its out-of-state fulfillment center, the sale is subject to use tax which the marketplace facilitator is required to collect. The local use tax should be allocated to the countywide pool of the jurisdiction where the property is shipped using Schedule B.
- When the marketplace facilitator has an in-state place of business that participates in the sale, sales tax would only apply if the sale occurs in this state. If the sale takes place out of state, it would still be subject to use tax with allocation of the local use tax to the jurisdiction of use using Schedule B. If the sale takes place in California, then the transaction would be subject to sales tax. The local sales tax should be allocated to the jurisdiction where the in-state place of business is located. Whether the local sales tax is allocated using Schedule B or C depends on whether the location is required to have a seller's permit under Regulation 1699.
Related Person Scenarios
In some instances, even if it is not apparent to the purchaser, there may be several separate related people involved in an Internet transaction, including a person that is a marketplace facilitator, and one or more other people that maintain the online marketplace, make retail sales through the marketplace, and/or provide fulfillment services. Generally, with regard to a marketplace sale, participation in a transaction by a place of business of a separate person, even if that person is a related entity, is not attributable to a marketplace facilitator.
- For example, when a marketplace facilitator and a company that provides fulfillment services to marketplace sellers are separate subsidiaries of the same corporate parent, an in-state storage location of the related fulfillment services subsidiary would not generally be considered a place of business of the marketplace facilitator. The marketplace sales to California customers fulfilled from that storage location would be subject to use tax unless an in-state place of business of the marketplace facilitator participates in the sales.
- When the marketplace facilitator maintains a dedicated, non-commingled stock of goods at the fulfillment entity's in-state storage location, then it is a place of business of the facilitator for which the marketplace facilitator must hold a seller's permit. However, it is important to note that the presence of the marketplace facilitator's stock of goods does not make the entire storage location a place of business of the marketplace facilitator. There is generally no participation by the marketplace facilitator's place of business for sales fulfilled from elsewhere in the fulfillment entity's storage location.
Finally, a marketplace facilitator means a person that contracts with marketplace sellers to facilitate sales. As such, a person that only facilitates sales for a single related entity is not a marketplace facilitator. However, a marketplace facilitator may facilitate sales on behalf of a related entity in addition to unrelated marketplace sellers. Marketplace sales facilitated on behalf of a related marketplace seller are subject to the same treatment as marketplace sales facilitated on behalf of unrelated marketplace sellers.
- For example, a marketplace facilitator is a subsidiary in a corporate family. Another subsidiary is a marketplace seller that uses the facilitator's online marketplace and maintains in-state storage facilities from which it fulfills its sales. The marketplace facilitator would be the seller and retailer for the marketplace sales it facilitates on behalf of all marketplace sellers, including the related entity. The in-state storage location of the related entity would not generally be considered a place of business of the marketplace facilitator. The marketplace sales to California customers fulfilled from that storage location would be subject to use tax unless an in-state place of business of the marketplace facilitator participates in the sales.