Sales Tax Obligations of a Seller in California

April 13, 2006

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As a seller, your obligation to pay California sales taxes will depend on a couple of different factors. For instance, you may not have to pay sales tax for customers that are resellers. Also, if you're an out-of-state seller, you may avoid paying sales taxes if you satisfy certain requirements. In the following discussions we address these and other issues which may help you formulate strategies to reduce your sales tax liability.

Procedure for accepting a resale certificate. If your customers purchase goods or products for resale in their business, California provides a resale exemption from sales tax. California does not set forth any specific procedures for accepting a resale certificate. However, you should require that the purchaser present, in good faith, a resale certificate that includes the following information:

your and your customer's name and address
an indication of the general character of the property your customer is purchasing
your customer's registration number or resale number
your customer's foreign certificate of resale if your customer is an out-of-state purchaser

Procedure for accepting blanket resale certificates. California allows you to accept blanket resale certificates from your customers. A blanket resale certificate is a resale certificate provided to you by those customers who make numerous exempt resale purchases from you. The idea is that by maintaining a blanket resale certificate, both you and your customer can avoid the hassle of having to present a certificate every time your customer makes a purchase. The law does not set forth any specific procedures for accepting a blanket resale certificate. However, you should require that the purchaser present a blanket resale certificate that contains the same information as the regular resale exemption certificate.

Sales and use tax liability for out-of-state mail order and catalogue retailers. California has a statute that specifically taxes out-of-state mail order and catalogue sellers. However, you will be responsible for paying this tax only if your business has physical presence within California. To determine if you have a physical presence, ask yourself the following:

Do I have retail facilities, a warehouse or any office space in California? Maintaining retail or warehouse facilities means that your business has a physical presence within the state. Also, if you have an office for employees, even for business activities unrelated to mail order sales, your business will have a physical presence within the state.
Do my employees or I enter California for purposes of taking and transmitting orders from customers in California? If your employee or independent contractor enters California for purposes of taking or transmitting orders, your business has a physical presence in California. However, contracting with a common carrier to deliver mail order goods does not constitute physical presence within the state.
Do my delivery vehicles frequently enter California for purposes of delivering property? Frequent deliveries in California by your trucks will give you physical presence in California. An occasional delivery, however, may not constitute a physical presence within the state.

Passing on the sales tax to your customers. You will be responsible for paying California sales taxes, but the law gives you the option of either paying the tax yourself (absorption) or passing it on to your customers.

Calculating sales taxes. You calculate sales taxes by taking the tax rate, which is a minimum of 6 percent, and multiplying it by your gross receipts. Gross receipts are based on your total retail sales of tangible personal property.

Claiming a refund of overpayment for sales and use taxes. If you frequently audit your sales transaction reports, you may discover that through an error, sales or use tax was overpaid on a transaction. If you discover such an overpayment, the state allows you to file a claim for a credit or refund. You should submit the claim on forms furnished by the California State Board of Equalization.

When you prepare the claim you need to make sure that you give a complete and accurate explanation for the basis of your claim. This is important because if you later decide to sue the California State Board of Equalization, the judge will usually not let your attorney raise any issues that were not included in the original claim form.

Time limitations for filing a refund claim. If you're going to file a refund claim for overpayment of sales or use tax, you'll have to do it within three years from the date you paid the tax. If you file a refund claim after that time, the Board of Equalization will not approve it.