General Information and Collection Requirements for the Use Tax Collection Requirements Based on Sales into California Due to the Wayfair Decision

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California Sales and Use Tax

Sales tax is imposed on retailers, and generally applies to the retailers' gross receipts from their retail sales of tangible personal property made within California.

Sales tax does not apply to charges for services, unless the services are part of the sale of tangible personal property. Also, sales tax does not apply to charges for computer programs or other digital products that are transferred electronically if the purchaser does not obtain possession of any tangible personal property, such as storage media, in the transaction.

Use tax is imposed on consumers. When sales tax does not apply, use tax generally applies to the sales price of tangible personal property that was purchased from a retailer for storage, use, or other consumption in California and is actually stored, used, or otherwise consumed in the state. In general, if California sales tax would apply when tangible personal property is purchased from a retailer in California, then the California use tax would apply to a California consumer's purchase of the same merchandise from a retailer located outside California for delivery in California.

Collection of California State Use Tax

Even though use tax is owed by consumers, Revenue and Taxation Code (RTC) section 6203 requires retailers who are "engaged in business in this state" to collect the California use tax owed on their sales to California consumers and remit the tax directly to CDTFA.

RTC section 6203 expressly provides that the term retailer engaged in business in this state "means any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution" and this definition is also incorporated into Regulation 1684, Collection of Use Tax by Retailers.

Prior to South Dakota v. Wayfair, Inc., 585 U.S. (2018) (Wayfair), the U.S. Supreme Court had held in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (Quill) that a retailer does not have a substantial nexus with a state for purposes of the U.S. Constitution's Commerce Clause, unless it has a physical presence in the state. So, retailers with a physical presence in this state are generally required to collect and remit the use tax. Examples of a physical presence in California include having a warehouse, an office, or a sample room in California, or any agent, representative or salesperson operating in California under the retailers' authority to sell, deliver, or install tangible personal property. Wayfair does not affect the collection requirements for retailers that were already required to collect the state use tax. If you were already required to be registered to collect California use tax, there will be no change in your registration obligations as a result of the recent Wayfair decision.

In the Wayfair decision, the U.S. Supreme Court considered a South Dakota law requiring a seller to collect South Dakota sales tax if during the previous or current calendar year the seller's gross revenue from sales into South Dakota exceeded $100,000 or the seller made sales into South Dakota in 200 or more separate transactions. In upholding the South Dakota law, the Court overruled Quill's physical presence requirement for substantial nexus and held that the amount of sales required by the South Dakota law is sufficient to establish a substantial nexus with a state. Accordingly, CDTFA determined that any retailer whose sales into California created a substantial nexus with California based on the sales thresholds upheld in the Wayfair decision was a retailer engaged in business in the state for purposes of RTC section 6203 and Regulation 1684. CDTFA also issued a special notice in December 2018, which required such retailers to register and collect California state use tax on their sales on and after April 1, 2019, regardless of whether they had a physical presence in California (see Special Notice L-565).

AB 147 was enacted by the California Legislature to modernize California law consistent with the holding of Wayfair. AB 147 amended RTC section 6203, operative April 1, 2019, to provide that a retailer engaged in business in this state also includes any retailer that, in the preceding or current calendar year has total combined sales of tangible personal property for delivery in this state by the retailer and all persons related to the retailer that exceed $500,000. For purposes of amended RTC section 6203, a person is related to another person if both persons are related to each other pursuant to section 267(b) of the Internal Revenue Code and the regulations thereunder.

Accordingly, operative April 1, 2019, any retailer whose sales of tangible personal property for delivery in California meet the $500,000 sales threshold in the preceding or current calendar year is a retailer engaged in business in the state. As such, these retailers are required to register with CDTFA, collect California state use tax, and report and pay the tax to CDTFA. These retailers include remote sellers located outside of California that sell tangible goods for delivery into California through the Internet, mail-order catalogs, telephone, or by any other means.

Collection of Local Use Tax

The current statewide California sales and use tax rate of 7.25 percent includes the rates of the 1.25 percent local use taxes imposed throughout California under the Bradley-Burns Uniform Sales and Use Tax Law.

Retailers engaged in business in the state, as defined in RTC section 6203, are required to collect local use tax pursuant to RTC section 7202 and section 7203 and remit it to CDTFA so it can be distributed to the appropriate local jurisdictions. Accordingly, any retailer engaged in business in this state pursuant to RTC section 6203 as amended by AB 147, operative April 1, 2019, will have the same local tax collection obligation as any other retailer engaged in business in California. AB 147 does not affect the allocation of local sales and use tax or the collection requirements for retailers that were already required to collect local use tax.

For more information about allocating local use 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. More specific information on local tax reporting requirements for online retailers is available on the Online Retailers: Registration and Local Tax tab of our Local and District Tax Guide for Retailers.

Collection of District Use Tax

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

Unlike with local 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 and remit it to CDTFA so it can be distributed to the taxing district. This is because RTC section 7262 requires district use tax ordinances to incorporate the provisions of RTC section 6203 requiring retailers engaged in business in the state to collect the use tax, and also requires the name of the taxing district to be substituted for the word "state" in the phrase "retailer engaged in business in this state" and in the definition of that phrase.

Prior to the Wayfair decision and AB 147, a retailer was engaged in business in a district if its business was located in the district or if it had some other form of physical presence in the district, for example, if the retailer:

Maintains, occupies, or uses any type of office, sales room, warehouse, or other place of business in the district, whether the use is temporary or permanent, direct or indirect, or through an agent,
Has any representative, agent, salesperson, canvasser, etc., operating in the district for the purpose of taking orders, making sales or deliveries, installing, or assembling tangible personal property,
Receives rentals from a lease of tangible personal property located in the district, or
Sells or leases vehicles or undocumented vessels which will be registered in the district.

In 2018, CDTFA determined that any retailer whose sales into a taxing district exceeded the sales thresholds upheld in the Wayfair decision was a retailer engaged in business in the district for purposes of RTC section 7262.

AB 147 amended RTC section 7262 to provide that a retailer engaged in business in a district includes any retailer that, in the preceding or the current calendar year, has total combined sales of tangible personal property in this state or for delivery in the state by the retailer and all persons related to the retailer that exceed $500,000. Accordingly, beginning April 25, 2019 (the date AB 147 was signed into law), any retailer required to be registered with CDTFA, whether located inside or outside of California that meets the $500,000 threshold in RTC section 7262 is engaged business in every district in the state, whether or not they have a physical presence in those districts. 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 about reporting district use tax, visit our Local and District Tax Guide for Retailers.

Example 1 – Remote seller required to register with CDTFA:

You are a remote seller whose sales of tangible personal property for delivery in California exceeded $500,000 during calendar year 2018. Therefore, you are required to register with CDTFA and collect use tax on your sales of tangible personal property to your California customers on and after April 1, 2019. You are required to collect use tax at the 7.25 percent statewide rate, and on and after April 25, 2019, the rate of any district use tax when you make a taxable retail sale to a customer located in a district that imposes a district tax.

Example 2 – Retailer with a retail location in California and registered with CDTFA

You are a retailer located inside California with a single retail location in Los Angeles County, but not in a city that imposes a district tax. Most of your sales are made at your Los Angeles location, but you occasionally ship merchandise by common carrier directly to your customers throughout California. During calendar year 2018, your total sales of merchandise at your Los Angeles location and for delivery directly to your customers throughout California exceeded $500,000. You do not have any physical presence in other cities in Los Angeles County or to districts outside of Los Angeles County other than by shipping merchandise via common carrier to your customers. You collect the Los Angeles County and Los Angeles County MTA district transactions (sales) taxes on all sales made at your location.

For your sales prior to April 25, 2019, you were not considered engaged in business in any cities imposing a district tax or in any districts outside of Los Angeles County and you were not required to collect any district use tax on sales delivered to your customers in other districts.

However, beginning April 25, 2019, you are a retailer engaged in business in all districts in California pursuant to RTC section 7262. As such, in addition to the statewide tax rate of 7.25 percent, you are required to collect the applicable district use tax on all your taxable retail sales.

Example 3 – California retailer making sales in interstate commerce

You are a retailer located in the city of San Ramon in Contra Costa County. Most of your sales are over-the-counter sales made at your San Ramon location, but you also ship merchandise by common carrier directly to your customers both inside and outside of California. During Calendar year 2018, your sales of merchandise picked up by customers at your San Ramon location totaled $300,000, and for shipment by common carrier from San Ramon directly to your customers in California totaled $50,000 with an additional $200,000 shipped to customers outside of California. You do not have any physical presence in any other California location and you collect the Contra Costa County district transactions (sales) taxes on all sales picked up at your location or shipped within Contra Costa County.

For your sales prior to April 25, 2019, you were only responsible for the countywide rate of Contra Costa County because San Ramon did not have a district tax and you were not required to collect any district use tax on sales delivered to your customers outside of Contra Costa County or to other cities within Contra Costa County that imposed citywide district taxes.

However, beginning April 25, 2019, you may be considered a retailer engaged in business in all districts in California if your total combined sales of tangible personal property in this state or for delivery in the state by you and all persons related to the you exceed $500,000 threshold. Based on the given scenario, you have $350,000 worth of sales delivered in the state ($300,000 + $50,000), but whether the sales shipped to customers outside California are sales made in this state will need to be determined. In determining the place of sale, you must first determine if there is a title clause. Unless such a title clause passes title sooner, title passes and the sale occurs when the seller completes its duties with respect to physical delivery of the property (Cal UCC 2401). This means when you provide property to a common carrier for shipment the sale generally occurs at the time and place of shipment, e.g. delivery of the property to the carrier for delivery by the carrier to the purchaser, unless there is an FOB destination clause making it so you do not complete your duties with respect to physical delivery until the property is delivered at destination. When there is no FOB destination clause, the sale generally occurs in this state and would be included in the calculation of whether you meet the $500,000 threshold. If your sales contracts do not include an FOB destination provision, and the sales you have shipped outside California are therefore generally included in the threshold calculation, you would be considered a retailer engaged in business in all California districts in which you ship merchandise. You would be required to collect applicable district use tax(es) on sales shipped to California customers. For sales made to other jurisdictions in Contra Costa County, you would need to continue to collect the county transactions taxes and any citywide district use tax.

For more information about California city and county sales and use tax rates and to verify current tax rates, visit our California City & County Sales & Use Tax Rates webpage. You can also look up the tax rate by address using the Find a Sales and Use Tax Rate by Address tool.

Current Use Tax Rates

Our rate look-up tool allows you to find the tax rate by entering an individual address.

Our rate look-up service may also be integrated into your sales software to compute the tax rate for each of your sales. To determine if our service will operate with your application, please select the Looking for the Tax Rate API link at the bottom of the rate look-up tool page.

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 CDTFA, as a courtesy to your California customers, you may choose to register with CDTFA and collect the state, local, and district use tax from them and report and pay it to CDTFA.