Table of Contents
Many exemptions have been granted that remove the liability for sales tax for various types of sales of tangible property and sales by certain individuals or organizations. In addition, exemption provisions have been enacted that reduce the tax base by defining certain persons to be consumers of property sold, or provide a partial exemption or credit. Other transactions are excluded from the imposition of sales and use taxes because of basic definitions contained in the law or because they do not involve the transfer of merchandise or tangible personal property.
- SALE FOR RESALE – The sale of property purchased for subsequent sale in the regular course of business of the purchaser (wholesale sales), and property purchased that will become a component part of such property, is not subject to sales tax provided the purchaser makes no use of it prior to its resale (in laymen’s the purchaser is not the end user of the property sold). A retailer has the burden to prove that a sale of tangible personal property is a sale for resale, unless the retailer timely accepts a properly completed “resale certificate” from the purchaser in good faith. A purchaser who misuses a resale certificate is liable for the unpaid sales tax plus interest, subject to a penalty, and may have their seller’s permit revoked. A resale certificate must contain:
- The name and address of the purchaser.
- The number of the seller’s permit held by the purchaser if the purchaser is not required to have a seller’s permit
- A description of the property to be purchased.
- A statement that the described property is being purchased for resale. The certificate must contain words that state the property will be resold or is for resale. The use of words such as nontaxable or exempt or similar terms is not acceptable.
- The date of the document.
- The signature of the purchaser or someone approved to act in his or her behalf.
- SELF-CONSUMED MERCHANDISE – Taxable merchandise, which was originally purchased by a seller for resale, but later diverted to a use other than resale (i.e. self-use), is subject to use tax measured by the sales price of the merchandise to the seller/consumer. Use tax due on self-consumed merchandise should be reported under “Purchases Subject to Use Tax” on the seller/consumers return.
- TAX-PAID PURCHASES RESOLD – A deduction is allowed a retailer who pays California tax or tax reimbursement on the purchase of property that is resold in California prior to any use. The deduction is equal to the cost of the property that was resold prior to use, but may be limited.
- SALES TO THE U.S. GOVERNMENT – Sale tax does not apply to sales to the U.S. Government and its instrumentalities. Use taxes do not apply to the use of tangible personal property in California by the U.S. Government and its instrumentalities. This requires documentation of either a government purchase order or documents demonstrating direct payment by the United States to support the claim.
- U.S. GOVERNMENT SUPPLY CONTRACTORS – U.S. Government supply contractors may purchase inventory for resale without paying tax, and then make an exempt resale of the inventory to the U.S. Government if the U.S. takes title to the property pursuant to a United States government supply contract, prior to any use of the property by the contractor to perform the function or act for which the property was designed or manufactured.
- EXEMPTION FOR FOOD PRODUCTS FOR HUMAN CONSUMPTION – Sales tax generally does not apply to sales of “food products”. “Food products” do not include medicines, cough drops, mineral oils, cigarettes, cigars, tobacco, coloring extract, ice, and dog, cat, bird and other animal foods. Nor does it apply to any product for human consumption in liquid, powdered, granular, tablet, capsule, lozenge, or pill form (A) which is described on its package or label as a food supplement, food adjunct, dietary supplement, or dietary adjunct, and to any such product (B) which is prescribed or designed to remedy specific dietary deficiencies or to increase or decrease generally one or more of the following areas of human nutrition. The tax, however, applies to sales of hot prepared food products that are intended to be sold in a heated condition, and heated at a higher temperature than the air temperature of the room or place sold i.e. hot sandwiches, soup, pizza, hot dogs, etc. Hot beverages such as coffee and hot chocolate are exempt if sold to go for a separate price but taxable if consumed on the premises, or if combined with a cold food product for a single price. Gratuitous payment such as tips are not subject to tax but mandatory payment designated as a tip, gratuity, or service charge is taxable, even if the amount is subsequently paid by the retailer to employees.
- MEDICINE – Tax generally applies to medicines, including nonprescription medicines sold of the counter. Nonetheless, Sales of medicines are exempt from sales and use taxes if (1) prescribed for treatment of human beings and dispensed by a registered pharmacist; (2) furnished by or sold to a licensed physician and surgeon, podiatrist, or dentist for patient treatment; (3) furnished by a health facility for patient treatment pursuant to the order of a licensed physician; (4) sold to this state or any political subdivision or municipal corporation for use in treating human beings; (5) dispensed by prescription for the treatment of human beings and furnished without charge by a pharmaceutical manufacturer or distributor to a doctor, a health facility for the treatment of human beings, or to an institution of higher education for instruction or research; (6) furnished by a medical facility or clinic operated by this state or any political subdivision or municipal corporation; or (7) sold to outpatient clinics for the treatment of any person pursuant to the order of a licensed physician and surgeon, dentist, and podiatrist.
- SALES IN INTERSTATE COMMERCE – Sales of property that, pursuant to the contract of sale, are shipped by the retailer to a point outside this state are exempt from sales tax. Generally, no exemption applies (and thus the sale is subject to sales tax) if the property is delivered to the purchaser or purchaser’s representative in this state, even if the purchaser subsequently removes the property from this state.
- SALES IN FOREIGN COMMERCE – Sales tax does not apply to California retailers’ sales of tangible personal property if the tangible personal property is intended for a destination in a foreign country and irrevocably committed to the exportation process at the time of sale, and is delivered to the foreign country prior to any use. It is important to document exempt sales with bills of lading, freight invoices, delivery receipts, and correspondence.
