California imposes a sales tax on tangible personal property. This tax is imposed on a retailer’s gross receipts from selling tangible personal property within California. This basic tax rule is found in California’s sales and use tax code—the Revenue & Tax Code §6051—which provides, in relevant part: “For the privilege of selling tangible personal property at retail a tax is hereby imposed upon all retailers.” https://www.leginfo.ca.gov/cgi-bin/displaycode?section=rtc&group=06001-07000&file=6051-6055
The State Board of Equalization
Details on the specific tax rate that is imposed can be found at the State Board of Equalization’s website. Typically the imposed tax rate is 7.50%, but this figure can be higher depending on your specific district. Cities, counties, and special taxing districts may impose their own sales tax rate. It is for this reason that the rate varies from 7.5% to 10%. We reproduce the Board’s helpful table summarizing the breakdown:
|3.6875%||State||Goes to State’s General Fund||Revenue and Taxation Code Sections 6051, 6201|
|.25%||State||Goes to State’s General Fund||Revenue and Taxation Code Sections 6051.3, 6201.3 (Inoperative 1/1/01 – 12/31/01)|
|.25%||State||Goes to State’s Fiscal Recovery Fund, to pay off Economic Recovery Bonds (2004)||Revenue and Taxation Code Sections 6051.5, 6201.5 (Operative 7/1/04)|
|.50%||State||Goes to Local Public Safety Fund to support local criminal justice activities (1993)||Section 35, Article XIII, State Constitution|
|.25%||State||Goes to State’s Education Protection Account to support school districts, county offices of education, charter schools, and community college districts.||Section 36, Article XIII, State Constitution (Operative 1/1/13 to 12/31/16)|
|.50%||State||Goes to Local Revenue Fund to support local health and social services programs (1991 Realignment)||Revenue and Taxation Code Sections 6051.2, 6201.2|
|1.0625%||State||Goes to Local Revenue Fund 2011||Revenue and Taxation Code Sections 6051.15 and 6201.15|
|1.00%||Local||0.25% Goes to county transportation funds; 0.75% Goes to city or county operations||Revenue and Taxation Code Section 7203.1 (Operative 7/1/04)|
|State/Local||Total Statewide Base Sales and Use Tax Rate|
Sales tax is based on a “tax base.” That base is determined by the retailer’s total gross receipts. Rev. & Tax Code §6051. A retailer’s gross receipts is defined in Rev. & Tax. Code § 6012, which provides that “gross receipts” means the total sales, lease, or rental price, as the case may be, of “the retail sales of retailers, valued in money, whether received in money or otherwise, without any deduction” for:
There are various “sources” of a retailer’s sales. Sometimes the sales tax does not apply when, initially, you think it would. For example, California impose a sales tax when the sale happens in the state, when the property is delivered here—but it does not apply if the sales contract requires that the product be shipped outside California. See Sales and Use Regs §1620(a)(3)(B).
Rev. & Tax Code §6006 contains a complete list of transactions subject to sales tax. As a rule of thumb, the sale (a transfer for consideration) of tangible personal property should be presumed to be subject to the sales tax. Some people are surprised to learn that even leases of tangible personal property are deemed to be, more or less, “continuing sales” See §6006(g).
In addition to the above sales tax, California imposes a “use tax.” That is, California imposes a tax on the storage, use, or consumption in California of tangible personal property that is purchased from a retailer located outside the State. This basic tax rule is found in Rev. & Tax Code §6202(a).
The use tax can be thought of as a “backstop” to the sales tax. Essentially, if sales tax would apply if you were to purchase an item in California, then the use tax would kick in and apply when you make a similar purchase from a business located outside California.
By way of illustration, California use tax applies when you buy something from an online retailer located outside the State (and you do not pay sales tax to that retailer). The use tax also applies when you buy a car, boat, plane, or mobile home from someone who does not have a seller’s permit. Use tax can also be triggered by less obvious means, though. For example the use tax applies when you take taxable merchandise from the inventory of your business for your own personal use.
If your business is purely “service” based, then you are not likely considered a retailor such as to be subject to sales or use tax; rather, you would be viewed as a “consumer” of tangible personal property. Rev. & Tax Code 1501 provides, in relevant part:
Persons engaged in the business of rendering service are consumers, not retailers, of the tangible personal property which they use incidentally in rendering the service. Tax, accordingly, applies to the sale of the property to them.
The use tax is imposed on the sales price of the property that is stored, used, or consumed in California. Rev. & Tax Code §6201. For purposes of Section 6201, the sales price is defined similar to how gross receipts tax is defined for purposes of the sales tax. See Rev. & Tax Code §6011.
In a sentence, it is designed to protect California retailers by de-incentivizing people from buying items from non-California businesses in an attempt to avoid California’s sales tax. In other words, the State looks at the item you purchased out of State and asks, “Would you have paid sales tax on that if you had bought it here?” If so, then the use tax applies.
Whose liability is it to pay use tax—the buyer or the seller? Generally, it is the buyer’s liability. The buyer typically pays the liability to the seller directly; but if the seller is not required to collect and report tax to California then the buyer is required to pay the liability to Board of Equalization directly.
Why might an out-of-state retailer not be required to report/collect tax to California? Only when a retailer is “engaged in business” (a technical term) in California must it report/collect tax to California for the use tax on retail sales of its tangible personal property. And a non-Californian retailor is “engaged in business” in California when it has offices, warehouses, or sales representatives in California.