Doing Daily Business with Out-of-State Retailers

Sales tax applies to sales of tangible personal property made within California. The use tax applies to the use, storage, or other consumption of tangible personal property purchased from a business located outside California for use in California. As a registered out-of-state retailer, the tax you collect will generally be use tax.

Resale Certificates

If you sell tangible personal property to a California customer who plans to resell the property in the normal course of business, you are not required to collect any sales or use tax provided the sale is properly documented. However, you may be required to register and file returns if you have nontaxable sales.

Once you register, you may accept a resale certificate, in good faith, from your California purchaser that relieves you of the liability to collect and report the sales or use tax.

The certificate may be in any form, must be timely, and it must contain:

The name and address of the purchaser.
The number of the seller's permit or a note indicating why they are not required to hold a seller's permit.
The description of the property to be purchased.
A statement indicating the property is being purchased for resale.
The date of the document.
The signature of the purchaser or someone authorized to act on their behalf.

Timely is considered to be:

Before you bill the purchaser for the property
At any time within your normal billing cycle
At any time prior to delivery of the property to the purchaser.

For your convenience, you can download or print form CDTFA-230

You should always note the general character of the purchaser's business and question the use of certificates presented for items not normally sold in their line of business. You should not accept a certificate if you know or have reason to believe the property is being purchased for other than resale. You can verify whether the seller's permit supplied on the resale certificate is current by looking it up on our website at Permit, License or Account.

For more information, please see Publication 103, Sales for Resale.

Exemptions

In California, all sales are taxable unless the law provides a specific exemption. Similarly, use tax applies to the purchase of tangible personal property purchased outside of California that will be used, consumed, stored, or given away in California, provided no tax was paid at the time of purchase.

Exemptions claimed should be properly documented. California has specially prescribed exemption certificates for certain kinds of property or transactions. Sample exemption certificates can be reviewed on our website.

Some common exempt sales transactions include:

Sales to Other Retailers

When you sell to California customers who plan to resell the property, you may accept a resale certificate and be relieved of the obligation to collect and report tax. For more information, see Regulation 1668, Sales for Resale.

Nontaxable Sales of Food Products

Sales of food for human consumption are exempt from sales tax. Sales of food served as meals, consumed on premises, or sold at places where admission is charged are generally taxable.

For more information on how tax applies to food sales, please see Regulation 1602, Food Products and ourTax Guide for Restaurant Owners or our Tax Guide for Grocery Stores.

Sales to the United States Government

Your sales and leases made to the United States Government and its instrumentalities are generally exempt from California sales and use tax.

The following documentation must be retained to support the tax exempt sale:

Purchase orders
Copy of U.S. government credit card or credit card number
Documents showing direct payment by the U.S. government
Shipping and related documents to substantiate that the merchandise was sold to the U.S. government and not an individual in the armed service

Keep in mind that this is only the United States government. State, city, and county government agencies are not exempt from sales tax. For more information, see Publication 102, Sales to the United States Government.

Nonprofit Organizations

Nonprofit and religious organizations are exempt from federal and state income tax; however, they are not generally exempt from sales tax. There are some exceptions, for more information see our Nonprofit Tax Guide.

Manufacturing

Beginning July 1, 2014, purchases of manufacturing and research and development equipment may be partially exempt from sales and use tax. The purchaser must meet certain conditions and provide a partial exemption certificate to the retailer. For more information on this exemption see Manufacturing Exemption.

Other Partial Exemptions

Partial exemptions are transactions exempt from the state portion of the sales and use tax rate. To claim a partial exemption on your return, you must obtain a valid and timely partial exemption certificate from your customer. Below is a list of the most common partial exemptions:

Exemptions can vary between states, for complete information on California exemptions see Publication 61, Sales and Use Taxes: Tax Expenditures.

Drop Shipments

If you drop-ship items into California, you may be responsible for collecting and reporting the tax.

A drop shipment generally involves two separate sales. First, a retailer not engaged in business in California, makes a sale to a California customer. They are the “true retailer”. The true retailer then purchases the property from a supplier and requests that supplier (the drop shipper) to directly ship the item to the customer on their behalf. The true retailer never physically possesses the property.

When a true retailer uses a drop shipper that has nexus in California, the drop shipper becomes the retailer and they are responsible for collecting and reporting the tax. Tax is based on the amount the retailer invoices the California customer.

The retailer may accept a valid resale certificate from the California customer if the property is being purchased for resale. For more information, see regulation 1706, Drop Shipments and Publication 121, Drop Shipments.

Delivery and Shipping Charges

Tax does not apply to separately stated delivery charges when delivery is made by common carrier, U.S. mail, or an independent contractor as long as the cost is the actual charge for the delivery.

Tax generally applies to delivery charges when delivery is made using your own vehicles. See Publication 100, Shipping and Delivery Charges for more detailed information.

Use Tax

Use tax is collected on your sales to California customers, however, there may also be situations in which you will report use tax for yourself.

Use tax applies to property used, consumed, given away, or stored in California. For more information, see Publication 110, California Use Tax Basics

Inventory withdrawals

If you maintain inventory in California, and you remove inventory items for use in your business operations located in this state, you are responsible to report and pay use tax on your cost of the item.

Items purchased for use at California locations

If you have items shipped to your California business locations for use, such as equipment or office supplies, you must report use tax on the items if the seller did not charge you California sales or use tax. Report the cost of the items under “Purchases subject to use tax” on your sales and use tax return.

If you paid sales or use tax at the time of purchase, to another state and subsequently store, use, or otherwise consume the items in California, you are allowed to claim a credit for the amount of tax paid to the other state. The credit may not to exceed the amount of use tax you report.

Samples

When you or your representatives give away items, such as samples or gifts in California, you are the consumer of those items and will be responsible for reporting the use tax on your cost of those items.

If you ship these types of items directly to a customer from a point outside of California using a common carrier, use is considered to have occurred outside of California and you will not report use tax.

District and Local Taxes

The current California statewide sales and use tax rate is 7.25 percent. However, the sales and use tax rate is not the same throughout California. Total sales and use tax rates are higher in areas where there are voter-approved district taxes.

In those districts, the total tax rate includes the statewide tax rate plus the district tax rate (which varies from district to district). Current tax rates can be easily verified on our website.

As a retailer, you are required to collect and report district tax if you are engaged in business in a district that imposes district tax. You are considered engaged in business in a district if any of the following applies:

You maintain, occupy, or use, 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.
You have a representative, agent, or independent contractor operating in the district on your behalf or under your authority, or under the authority of 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.
You receive rental payments from the leases of tangible personal property located in the district, such as leases of machinery, equipment, and furniture.
You own or lease real property or tangible personal property in the district, such as machinery, equipment, furniture or a computer server.
You sell or lease vehicles or undocumented vessels which will be registered in the district.
Beginning April 1, 2019, you have 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.

Additional district use tax collection requirement

Beginning April 1, 2019, a retailer is engaged in business in a district if, during the preceding or current calendar year, the total combined sales of tangible personal property in California or for delivery in California by the retailer and all persons related to the retailer exceed $500,000. A person is related to a retailer if they have a relationship with the retailer described in Internal Revenue Code section 267(b) and the related regulations.

Accordingly, beginning April 1, 2019, any retailer required to be registered with 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, see Publication 44, District Taxes (Sales and Use Taxes), and our online guides Use Tax Collection Requirements Based on Sales into California Due to the Wayfair Decision and the Local and District Tax Guide for Retailers.

Local Tax

Local tax is generally reported at the location where you have your permanent place of business. When you are not located in California, but have inventory in this state, the local tax is reported to the area from where the property is shipped.

When you have no location and no inventory in California, the local tax is due based on the location where the property is delivered. You must allocate your sales to the correct locations on your sales and use tax return.

For more information about allocating local tax, visit our Local and District Tax Guide for Retailers.

Note: If you are an online retailer, you are required to collect, report, and pay tax like other retailers, but how you allocate your internet transactions can depend on several factors. For more specific information on local tax reporting requirements for online retailers, please see the Online Retailers: Registration and Local Tax tab of our Local and District Tax Guide for Retailers.

Recordkeeping

When you hold a California seller's permit or other CDTFA license or permit, you are required to maintain your business records to verify that you have properly paid any applicable taxes or fees.

Records must be kept for at least four years. If you are being audited, retain all records that cover the audit period until the audit is complete, even if it is longer than four years.

Your records should be adequate so CDTFA representatives may:

Verify the accuracy of your tax or fee returns; and
Determine if you have correctly paid the tax or fee due on your sales and purchases.

Your records need to show:

The gross receipts from all of your business income, including sales, leases, service charges, and labor income
All of the deductions claimed on your sales and use tax returns, along with supporting documents for those deductions
The total purchase price, including receipts, for all items you purchase for resale, lease, or your own use.

The level of detail required varies by industry. Records need to be adequate enough so CDTFA may determine the date of sale, what you sold, all taxable and nontaxable charges, and how much tax was applied to the sale. It is important that you keep all documents that support nontaxable sales.

Your Sales and Use Tax records should include, but are not limited to:

Normal books of account that show your business income and expenses.
Documents of original entry, such as invoices, receipts, job orders, purchase orders, contracts, or other documents used as the basis for your books of account; and
All schedules or working papers used in preparing your tax or fee returns.

Ledgers and sales summaries
Receipts and/or guest checks, invoices, cash register tapes
Paid bills and other documents that support the ledgers and summaries
Statements of taxes or fees collected
Resale certificates accepted, tax paid on purchases, tax paid, bank records, and records supporting your exemptions from sales and use tax.

Other taxes and fees programs have their own record keeping requirements. For specific information on record keeping for other taxes and fees, please see Special Taxes and Fees Programs

For more information, please go to Keeping Records or view our tutorial video Sales and Use Tax Record Keeping Requirements.