As our California tax attorneys have discussed in previous articles, U.S. businesses are generally responsible for collecting and paying California sales taxes if they have economic ties to, or “nexus” with, the state of California. But what happens in scenarios where sales are being made not to residents of California, but rather, to residents of other countries? In this article, the international tax attorneys at the Tax Law Office of David W. Klasing explore the sales tax consequences of sales to non-U.S. residents by California businesses, including certain types of transactions that are exempt from California sales and use tax.
See our Sales Tax Q and A library
Background Information About California Sales and Use Taxes
Sales tax is a tax imposed at the point of sale, to be collected by the seller and timely remitted (i.e. paid over) to the appropriate government agency. Since sales taxes are state rather than federal taxes, it is administered by the California Department of Tax and Fee Administration (CDTFA), not the IRS.
Businesses that conduct transactions in California, including foreign and online businesses, are generally required to register with the CDTFA under the state’s sales tax compliance rules. The CDTFA reviews sales tax returns (Forms CDTFA-401-A) for errors and omissions – detection of which will likely trigger a California sales tax audit. For more information about California sales and use taxes, the following articles may prove helpful:
- Are online businesses subject to California sales tax?
- How is California sales tax determined?
- How is sales tax enforced in California?
- What are the top issues encountered during a sales tax audit?
- What is a sales tax audit?
- What types of sales are exempt from California sales tax?
- What types of sales tax records do I have to keep in California?
California Sales Tax on Sales to Non-U.S. Residents
The most reliable source of information on California sales tax regulations is the CDTFA itself. According to CDTFA Publication 104, Sales to Residents of Other Countries, “The sale of merchandise to a resident of another country is taxable if the buyer takes possession of the item in this state (California) – even temporarily – or uses the item before it is shipped abroad.” In other words, you are generally subject to California sales tax if the purchaser, though not a U.S. resident, used or received the product in California (prior to shipping).
Of course, as is often the case with tax regulations, there are exceptions to the general rule. As Publication 104 continues, “Some sales to foreign residents qualify as exports and are not subject to California sales or use tax.” For example, no sales tax is imposed on a product “that will be shipped abroad before use,” provided “you also ship it directly to a foreign destination or… qualified person who will export the item,” such as an export packer. “Export packers” are broadly defined by the CDTFA, in the same publication, as entities that “prepare property for export or arrange for its export.” As the report explains, “For purposes of the export exemption, an individual or firm must be in the foreign shipping business to qualify as a carrier, forwarding agent, export packer, or customs broker.”
As you may have noticed, the timing of the product’s use has major tax implications for sellers. In general, if the item is not used until after being shipped overseas, the sale is not taxable. Conversely, if the item is used before being shipped overseas, the sale generally is taxable.
As Publication 104 notes, other types of transactions that are generally not subject to California sales tax include:
- Certain “sales for resale to foreign merchants”
- Certain sales of cars and vehicles to residents of foreign countries
- Certain sales to foreign diplomats
California Sales Tax Audit Attorneys for Small Businesses
California sales tax regulations pose complex, continuously evolving challenges for business owners. Let the award-winning sales tax audit attorneys at the Tax Law Office of David W. Klasing handle all of your corporation, partnership, or LLC’s sales tax needs, allowing you to focus on growing your business while obtaining peace of mind about tax compliance. Our business tax attorneys & CPAs possess more than 20 years of combined tax and accounting experience serving entities throughout California, preparing us to efficiently resolve any CDTFA-related issue your business is facing. To arrange a reduced-rate consultation, contact the Tax Law Office of David W. Klasing online, or call 24 hours at (800) 681-1295.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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