How Does Sales Tax Work in California?
Explains how California's sales tax system works in practice, covering the CDTFA as the administering agency, the base rate plus district taxes, what goods are taxable vs. exempt, when a Seller's Permit is required, and the $500,000 economic nexus threshold for out-of-state sellers.
California has a single sales tax system administered by one agency, but the rate you charge depends on where your customer is located. This article explains how the system works and what it means for your business.
Who Administers California Sales Tax
The CDTFA (California Department of Tax and Fee Administration) runs California's sales tax program. Their website is cdtfa.ca.gov. All registration, filing, and remittance goes through the CDTFA, and there is no separate federal sales tax in the US.
The Rate
California's base sales tax rate is 7.25% (6% state + 1.25% local base). Most cities and counties add district taxes on top of that. Depending on where your customer is located, the total rate typically ranges from 7.25% to 10.75% or higher.
The rate that applies is based on the location of the sale, generally the ship-to address for delivered goods, or the business location for in-person sales.
What's Taxable
California sales tax applies to tangible personal property, physical goods. Most services are not taxable in California. This is a major difference from Canada's GST/HST system, which broadly covers both goods and services.
Common taxable items:
- Retail goods and merchandise
- Prepared food, restaurant meals, hot food to go
- Over-the-counter drugs and health products
- Cannabis products
Common exempt items:
- Grocery food (cold, unprepared food for home consumption)
- Prescription drugs and certain medical devices
- Sales to government agencies
Digital products: Complex and varies by type, confirm with your NCO advisor before assuming taxable or exempt.
When You're Required to Register
You need a Seller's Permit from the CDTFA before making any retail sales of taxable goods in California. The permit is free.
Economic nexus for remote sellers: If you sell taxable goods into California from outside the state and you exceed $500,000 in California sales in the current or previous calendar year, you're required to register and collect California sales tax even without a physical presence here.
How the System Works in Practice
Collecting: When you make a taxable sale, you charge the applicable California rate on top of your price and collect it from the customer at the point of sale.
Holding: The sales tax you collect is not your money, it's a liability you hold on behalf of the state until you remit it.
Remitting: On your filing schedule, you file a return with the CDTFA and send them the full amount of sales tax you collected. Unlike Canada's GST/HST system, there are no input tax credits, you remit every dollar you collected, with no offset for tax you paid on your own purchases.
Net remittance = Full sales tax collected from customers (no credits or offsets)
Filing Frequency
The CDTFA assigns your filing frequency based on your average monthly taxable sales:
|
Average Monthly Sales |
Frequency |
|
Over ~$17,000/month |
Monthly |
|
Moderate volume |
Quarterly |
|
Low volume |
Annual |
Returns are due by the last day of the month following the close of each filing period. Your NCO advisor will confirm your assigned frequency when they register you.
Abnormal Procedures
You've been selling taxable goods without a Seller's Permit.
Stop selling taxable goods without registering first. Obtain your Seller's Permit from the CDTFA immediately, it's free and typically issued same-day online. Let your NCO advisor know. There may be back taxes owed from the date you started selling, and penalties may apply.
You sell into multiple California jurisdictions at different rates.
The rate varies by the customer's address, not your business address. QBO can handle this automatically using address-based calculation, but you need to be registered and have sales tax configured correctly. If you're unsure which rates apply to your transactions, contact your NCO advisor before assuming a single flat rate.
You're an out-of-state seller approaching the $500,000 economic nexus threshold.
Don't wait until you cross it. If your California sales are trending toward $500,000, get ahead of registration. Your NCO advisor can help you determine exactly when and how to register.
You sell both taxable goods and exempt goods.
You'll need to track taxable and exempt sales separately. Your returns require you to break down gross receipts by category. QBO can do this if your items are coded correctly, confirm setup with your NCO bookkeeper.
FAQ
Does California sales tax apply to services?
Generally no. Most services are not subject to California sales tax. However, some service-product combinations are, for example, if you sell a taxable product alongside a service, or if you sell software in certain forms. When in doubt, confirm with your NCO advisor.
Do I charge sales tax on B2B sales?
It depends on how the buying business uses the goods. If a business buys goods for resale, they should give you a resale certificate, and you don't collect tax. If they're buying for their own use, you collect tax. Always get a resale certificate in writing before exempting a B2B sale.
What if I charge the wrong rate?
If you undercharged, you're still on the hook for the correct amount to the CDTFA, you absorb the difference. If you overcharged, you generally owe that amount back to the customer. Either way, correct it going forward and let your NCO bookkeeper know so your records are clean.
How often do I file and remit?
Your CDTFA account will show your assigned frequency. Your NCO team monitors this and will alert you when returns are due.