California imposes some of the strictest and most numerous business tax regulations in the country. Among the newest regulations – and the most burdensome – are those surrounding internet sales tax compliance, which impact California and out-of-state companies alike.
At the Tax Law Office of David W. Klasing, our award-winning Orange County CPAs and Sales Tax Attorneys have extensive experience helping foreign and domestic companies navigate the complex web of California sales tax laws, which were recently overhauled by a major U.S. Supreme Court ruling affording states more power to enforce compliance among online sellers. We understand the practical considerations that impact your business and will work closely with you to develop a tax strategy that puts you in compliance with the laws, making it easier to avoid or mitigate penalties that could harm your bottom line. With tax offices conveniently located in Irvine, and across California we are here to support entities throughout the Orange County region and beyond.
Are Internet Sales Taxed in California?
There is currently no federal sales tax. Instead, each state imposes its own set of regulations, which can produce chaos and confusion – especially among internet merchants who sell products in multiple states. It is also important for taxpayers to understand that these laws apply to more than just the “major players” like Amazon, eBay, and Walmart.com: even small retailers, such as individuals who sell homemade goods on sites like Etsy, can be impacted.
In fact, online sellers are now more strictly regulated than ever before, due to a Supreme Court ruling in a case (South Dakota v. Wayfair) that was decided in 2018. In Wayfair, the U.S. Supreme Court decided 5-4 in favor of several new tax rules for companies that sell products online. These new rules effectively override older legal precedents, such as Quill Corporation v. North Dakota (1992). This has had the effect of granting individual states, including California, increased power to hold online retailers to the same standards as brick-and-mortar businesses in terms of calculating, collecting, and paying sales tax.
While the rules are still relatively new, online merchants are now more closely monitored to ensure that they are complying, with an increase in the frequency of sales tax audits. Make sure your business is prepared after the Wayfair ruling by working with an experienced tax attorney or CPA who understands how sales tax must be calculated and collected to satisfy California’s new requirements.
How Internet Sales are Regulated in California
In California, the sale of goods over the internet from anywhere in the world into the state is generally treated the same as item sales that take place at a physical retail store, over the phone, or through mail orders if the seller has sufficient economic contacts with the state of California under Wayfair to subject it to California’s power to tax or “nexus”. This means that retail internet sales within California or that will be delivered to California consumers will be subject to the state’s sales or use tax and will generate California source taxable income to the businesses making the sale from anywhere in the world.
California sales tax applies to retail sales for goods and other merchandise. The California use tax typically applies to the use, consumption, or storage in California of goods that were purchased from retailers in transactions where California sales tax did not apply. There is also a chance that the use tax will apply for purchases that are shipped to California consumers from another state, whether it was purchased online or through the mail.
If you or your company engages in the sale of merchandise in the State of California, you will need to collect and pay sales taxes on all your California internet sales. The calculation of internet sales tax should also include transactions that are made on online platforms like a website or an internet shopping venue. Its is also important to note that 47 states in the Union also have sales tax requirements and the use of an add on sales tax service like TaxJar can greatly simply this colossal compliance headache.
Some taxpayers may elect to use internet auction sites to make internet sales. An internet auction site is a platform where an individual or retailer could accept offers for their merchandise and coordinate the shipment of their goods to the highest bidders. Be advised that an owner of an internet auction site is typically not considered a retailer.
Nontaxable Internet Sales
Not all internet sales are considered taxable. Here are some internet sales that are not subject to California sales or use taxes:
- Sales for resale
- Sales of cold food products
- Sales that are delivered outside the State of California 1.
- But note may be subject to the shipping state’s sales tax.
You should also know that the sale of electronic data, digital images, eBooks, and other similar items are normally generally not subject to sales tax provided that the seller transmits the data to the consumer through the internet. On the contrary, when a seller provides a consumer with a tangible storage device like a flash drive or disc, the sale of data will be subject to California sales tax.
Additionally, if you have a customer download data from a sale and then you provide them with a backup of that data, the entire sale is considered taxable for California sales tax purposes. This means you should be careful with what services you offer for electronic data sales as you may inadvertently trigger some tax liability.
Deciphering California sales and use tax law could be a complicated task for a taxpayer that is not familiar with these matters. As a result, some taxpayers could make mistakes when calculating their sales and use and multi state income tax liability. These serious mistakes could result in draconian penalties being imposed by the State of California and the IRS. To avoid the possibility of being assessed one or multiple penalties due to a miscalculation of internet sales and California income tax, our Orange County dually licensed Internet Sales and Income Tax Attorneys and CPAs are ready to help you or your organization stay compliant with California sales and income tax regulations.
Sales Tax Requirements for Transactions Online
As stated above, different sales tax rules apply in different states. Some of the rules specific to California are discussed below.
Does California Have Sales Tax Nexus?
“Nexus” is a legal term that describes a situation where a business entity has a relationship with a state (such as California) that triggers sales tax requirements in that state. For instance, if you operate a small business that sells products online to buyers in Irvine (or another city within Orange County), your company may have “sales tax nexus” with the state of California. The term “nexus” is sometimes described as “sufficient physical presence” or “economic connection.”
Orange County Sales Tax Rates
It is important for online merchants to keep in mind that sales tax rates differ based on geography, not just across state lines, but further, between individual cities or counties. Additionally, sales tax rates can fluctuate from year to year, which means business owners must regularly review their sales tax obligations to ensure they are familiar with the latest regulations. California sales tax and use rates, which are posted online by the California Department of Tax and Fee Administration (CDTFA), are as follows in Orange County as of October 1, 2018:
- Orange County cities with a sales tax rate of 750% include the following:
- Aliso Viejo, Anaheim, Atwood, Balboa, Balboa Island, Bolsa, Brea, Brookhurst Center, Buena Park, Capistrano Beach, Corona Del Mar, Costa Mesa, Coto De Caza, Cowan Heights, Cypress, Dana Point, East Irvine, El Modena, El Toro, Foothill Ranch, Fullerton, Garden Grove, Huntington, Huntington Beach, Irvine, Ladera Ranch, Laguna Beach, Laguna Hills, Laguna Niguel, Laguna Woods, Lake Forest, Los Alamitos, Mariner, Midway City, Mission Viejo, Monarch Beach, Newport Beach, Orange, Placentia, Rancho Santa Margarita, Rossmoor, San Clemente, San Juan Capistrano, Santa Ana, Seal Beach, Silverado Canyon, Sunset Beach, Trabuco Canyon, Tustin, Villa Park, Yorba Linda
- Orange County cities with a sales tax rate of 250% include the following:
- La Habra
- Orange County cities with a sales tax rate of 750% include the following:
- Fountain Valley, La Palma, Stanton, Westminster
Orange County Online Sales Tax Lawyer and CPA for Internet Retailers
Failure to comply with internet sales tax laws can subject your business to costly fines and penalties, for which you could potentially be held personally liable. Make sure your business has a trusted and reliable partner to deliver dependable tax guidance in all online sales tax matters. From internet sales tax audit representation to small business tax planning and bookkeeping services, the Orange County tax lawyers at the Tax Law Office of David W. Klasing possess the experience to answer your business tax questions and help you achieve your goals.
Contact us online today to book a reduced-rate tax consultation or call our Orange County office in Irvine at (949) 681-3502. Alternately, you can reach our main office by calling (800) 681-1295.
Note: If you have concerns about the privacy of our initial or subsequent communication and are unable to easily travel to our Irvine / Orange County Main Office, consider scheduling a GoToMeeting to safely and securely establish an initial or maintain an existing attorney client relationship. With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link. Call our office and request a GoToMeeting if you are an existing client. We are generally happy to travel to any of our appointment only satellite offices for a subsequent meeting in appropriate circumstances once a relationship is established via a signed engagement letter and the payment of an initial retainer or where enough retainer is available where a current client to cover the reasonable travel time and time required for the meeting.
Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company? Absolutely not! See our policies that address this issue here:
Sales Tax Questions and Answers
- Common issues encountered during sales tax audit
- What is a sales tax audit?
- Disagreeing with business audit conclusions
- Timeline to file Petition for Redetermination?
- What should Petition for Redetermination contain?
- Is the appeals conference formal or informal?
- Appeals Division’s Decision and Recommendation
- Are a mark-up percentage and a profit margin the same?
- Problems with the mark up audit
- Can State Board of Equalization ignore my business records
- What is a sales tax deficiency determination?
- Business being audited for sales tax. Should I be worried?
- Audit determined fraud to avoid sales and use tax
- Definition of “sale” for California Sales Tax
- What do California sellers need to know about sales tax?
- How do I apply for a sellers permit?
- What are my obligations as a permit holder?
- What is sales tax?
- What is tangible personal property?
- What is a sale?
- What are total gross receipts?
- What is use tax?
- Who is responsible for paying the use tax?
- Who is a retailer engaged in business in California?
- Who is a qualified purchaser?
- Do I need a Certificate of Registration Use tax?
- Do I need a Use Tax Direct Payment Permit?
- What types of sales are exempt from sales tax?
- How are Internet Transactions Taxed?
- How is California sales or use tax determined?
- What is the statewide sales and use tax rate?
- Are there other local and district sales and use taxes?
- Total sales and use tax rate calculation
- How to protect against successor liability in California
- Recourse when issued California sales tax liability notice
- CA Sales Tax liability extend to purchasers/successors?
- Waiting Until Audited to Take Action on Tax Matters
- Sales tax records needed in California
- What are California’s sales and use taxes?
- Why does the State of California audit businesses to ensure compliance with sales and use taxes? How does the State determine whether to audit my business?
- The BOE reviews the purchase invoices of my business