Understanding California Sales and Use Taxes
California assesses a sales tax on the retail sales price of tangible personal property. So, if your business sells tangible personal property in California, a sales or use tax liability will probably be incurred.
California assesses a sales tax on sellers for the privilege of doing business in California. This means those of you who are retailers are going to be required to pay a minimum 7.25 percent state sales tax on all sales you make in California. You calculate sales taxes by taking the tax rate, which is a minimum of 7.25 percent, and multiplying it by your gross receipts. Gross receipts are based on your total retail sales of tangible personal property.
You will be responsible for paying California sales taxes. However, California law gives you the option of either paying the tax yourself (absorption) or passing it on to your customers.
California municipalities may impose an additional local transactions and use (sales) tax at a rate of up to one percent. Also, other special taxing districts have authority to impose tax. You can find what the current rates are for the multitude of California taxing jurisdictions by visiting the Board of Equalization sale and use tax look-up.
California Does Not Tax Most Services
In California, most services may be provided without incurring any sales tax liability. Furthermore, this exclusion from sales tax also extends to any property or equipment that may be included in the price of the service you provide. However, if you're audited, the tax assessor may hit you with additional sales or use tax and interest and penalties for the services provided and any equipment installed if it looks like your customer was not buying your services, but instead was buying the equipment you were including in the cost of your services. To handle this determination, you're going to have to figure out what to look at in determining when the service you're providing is secondary in importance ("incidental") to the installation of the equipment.
To clear up some of the confusion that this determination causes, California uses an analysis called the "true objects test" which is applied to the total transaction. By using the true objects test, you can get a better idea of whether a transaction will be taxable by determining if the service provided or the property acquired was the main purpose, or the true object, of the transaction.
When you provide your patient with dental services as well as an x-ray or gold filling, the client is clearly paying you for the services performed. The actual tangible property received — an x-ray, gold filling or any other stuff you can actually hold in your hand — is incidental to the actual service provide.
On the other hand, if your computer repair business puts in a power supply and fan, a new RS232 cable, a new monitor and upgraded software for your customer, then you're probably going to have to pay sales tax. The computer equipment and software you installed is the object of the sale to the customer, not the actual labor it took you to put in this new equipment.
California Imposes Sales Tax on Most Leases
In general, all leased and rented property will be subject to sales taxes. The state treats leases and rentals as "continuing sales" and possession by the lessee as a "continuing purchase."
The leasing or rental of the following types of tangible personal property, however, will not be treated as a sale or purchase:
- motion pictures, including television, films, and tapes (except video cassettes rented for private use)
- linen supplies and similar articles by professional cleaners
- household furnishings included in a lease of living quarters
- mobile transportation equipment
- property for which sales or use tax has been paid by the lessor
California Provides Exemptions for Certain Sales
California allows exemptions from sales tax based on the type of transaction (such as a resale exemption), or the nature of the organization purchasing the product (such as a charitable organization).
In addition, the state provides a resale exemption to you if you're a service provider who purchases tangible property that will be transferred to your customers as incidental to the provision of your services. If you want this exemption, you must present the seller with a valid resale exemption certificate.
Resale Exemptions Are the Most Significant Type of Exemption
If you purchase goods or products and will resell them in your business, or include them as part of the service you provide, you may claim a resale exemption from sales or use taxes. However, you will have to collect sales tax from your customers when they purchase the goods or products.
Resale exemption certificate. In order to obtain a resale exemption, the seller may require you to present, in good faith, a resale certificate. The state doesn't provides a specific certificate form for you to use, so you're free to develop your own resale certificate document. With that said, though, the document should at least contain the following information:
- your and the seller's name and address
- an indication of the general character of the property you are purchasing
- your seller's permit number
- your or your agent's signature and the date the certificate was signed
Procedure for accepting a resale certificate. If your customers purchase goods or products for resale in their business, California provides a resale exemption from sales tax. California does not set forth any specific procedures for accepting a resale certificate. However, you should require that the purchaser present, in good faith, a resale certificate that includes the following information:
- your and your customer's name and address
- an indication of the general character of the property your customer is purchasing
- your customer's registration number or resale number
- your customer's foreign certificate of resale if your customer is an out-of-state purchaser
Blanket Resale Certificates Permitted
California allows you to use blanket resale certificates. A blanket resale certificate is a resale certificate that you provide to a seller from whom you make numerous exempt resale purchases. The idea is that by providing a blanket resale certificate, both you and the seller can avoid the hassle of having to deal with a new certificate every time you make a purchase. The law does not set forth any specific procedures for accepting a blanket resale certificate. However, you should present a blanket resale certificate to the seller that includes the same information as a regular resale certificate.
Procedure for accepting blanket resale certificates. California allows you to accept blanket resale certificates from your customers. A blanket resale certificate is a resale certificate provided to you by those customers who make numerous exempt resale purchases from you. The idea is that by maintaining a blanket resale certificate, both you and your customer can avoid the hassle of having to present a certificate every time your customer makes a purchase. The law does not set forth any specific procedures for accepting a blanket resale certificate. However, you should require that the purchaser present a blanket resale certificate that contains the same information as the regular resale exemption certificate.
California Imposed Use Tax on Out-of-State Purchases, Used In-State
In order to avoid losing tax revenues on sales transactions taking place outside the state, California also imposes a use tax. The use tax is assessed against all persons who store, use, or otherwise consume tangible personal property in California that was purchased out-of-state. California does provide a credit for use tax that is paid to other states, but only up to the amount of the California use tax for which you are responsible.
Sales and Use Tax Liability Turns on Physical Presence
California has a statute that specifically taxes out-of-state mail order and catalogue sellers. However, you will be responsible for paying this tax only if your business has physical presence within California. To determine if you have a physical presence, ask yourself the following:
- Do I have retail facilities, a warehouse or any office space in California? Maintaining retail or warehouse facilities means that your business has a physical presence within the state. Also, if you have an office for employees, even for business activities unrelated to mail order sales, your business will have a physical presence within the state.
- Do my employees or I enter California for purposes of taking and transmitting orders from customers in California? If your employee or independent contractor enters California for purposes of taking or transmitting orders, your business has a physical presence in California. However, contracting with a common carrier to deliver mail order goods does not constitute physical presence within the state.
- Do my delivery vehicles frequently enter California for purposes of delivering property? Frequent deliveries in California by your trucks will give you physical presence in California. An occasional delivery, however, may not constitute a physical presence within the state.
You Can Claim a Refund of Overpaid Taxes
If you frequently audit your sales transaction reports, you may discover that through an error, sales or use tax was overpaid on a transaction. If you discover such an overpayment, the state allows you to file a claim for a credit or refund. You should submit the claim on forms furnished by the California State Board of Equalization.
When you prepare the claim you need to make sure that you give a complete and accurate explanation for the basis of your claim. This is important because if you later decide to sue the California State Board of Equalization, the judge will usually not let your attorney raise any issues that were not included in the original claim form.
Time limitations for filing a refund claim. If you're going to file a refund claim for overpayment of sales or use tax, you'll have to do it within three years from the date you paid the tax. If you file a refund claim after that time, the Board of Equalization will not approve it.