California Sales & Use Tax Guide 2025 | Nexus, Exemptions & Rates

Sales and Use Tax Basics in California

Sales Tax

California's sales and use tax legislation states that sales tax applies to all retail sales of tangible personal property, meaning goods and products, such as furniture, giftware, toys, antiques, clothing, and vehicles, except those explicitly listed as exempt.

Use Tax 

The use tax, which complements the sales tax, generally applies to the storage, use, or other consumption in California of goods purchased from retailers for which sales tax was not charged, collected, or remitted. 

Transactions subject to use tax in California include consumer or retailer purchases from out-of-state, including foreign sellers who do not collect tax on their sales. Furthermore, retailers must pay use tax when they use items bought under a resale certificate for personal or business purposes. This may occur when a retailer uses an item before selling it or using it for manufacturing without it becoming part of the final product.

California Sales and Use Tax Rates

California's statewide sales and use tax rate is 7.25%, a combination of the state sales tax rate of 6% and a statewide county tax of 1.25%. Additionally, counties and cities have district taxes. To add to the complexity of California's sales and use tax rates, some districts may have more than one district tax. 

To determine effective sales and use tax rates, taxable persons should consider the location of the sales, which is the address where the goods are sold.

For example, knowing that the goods were bought from an address in Los Angeles is not enough. The applicable rate in Alameda is 10.75%, and in Beverly Hills, 9.5%, both of which belong to the city of Los Angeles. Therefore, linking the address with the relevant district is essential to determining the applicable tax rate.

Tax-Exempt Transactions

Transactions not subject to sales and use taxes in California include sales of food products for human consumption, sales to the US Government, and sales of prescription medicine.

Additionally, the first purchase of goods or products valued up to USD 800 from a retailer in a foreign country by an individual who personally carries them into California from the foreign country within 30 days is exempt from use tax. However, this exemption does not apply to property sent or shipped to this state.

Also, if the sale is documented correctly, goods and products bought for resale are exempt from sales and use tax. Resellers must provide their suppliers with a resale certificate for exempting these transactions.

Additionally, sales, storage, use, or other consumption of liquefied petroleum gas, or LPG, when delivered in a tank of 30 gallons or more, are exempt from sales and use tax if bought for household activities in a qualified residence.

Besides this, California also defined a partial exemption from sales and use tax for diesel fuels, farm equipment and machinery, racehorses, and timber harvesting.

Nexus Rules in California

In California, there are three types of nexuses relevant for sales and use tax purposes: physical nexus, economic nexus, and marketplace nexus.

Interestingly, click-through and affiliate nexus rules were in effect between 2012 and 2019. However, these were repealed with the introduction of economic and marketplace nexuses.

Physical Nexus

There are several ways to establish a physical nexus in California. One of the most common is to have an inventory or offices in California. However, if out-of-state businesses have representatives in California who take orders, make sales or deliveries, or install or assemble tangible personal property within California, that is considered a physical presence or nexus.

In addition, releasing equipment, including computer servers, in California also counts as having a physical presence there; thus, it establishes a physical nexus.

Economic Nexus

In January 2019, following the 2018 Wayfair Decision, California amended its Revenue and Taxation Code to require and introduce an economic nexus. Remote sellers who sell tangible personal property to California consumers must register for sales and use tax purposes in California once they exceed the economic nexus threshold.

The threshold, initially set at USD 100,000 or 200 transactions, was changed in April 2019, and the transaction threshold was removed entirely. Therefore, if an out-of-state seller exceeds the USD 500,000 threshold in the preceding or current calendar year, it must charge, collect, and remit sales tax in California.

Marketplace Nexus

The marketplace nexus went into effect in October 2019 after California adopted the Marketplace Facilitator Act. Under this Act, California requires marketplace facilitators or operators to collect and remit sales tax on behalf of any marketplace sellers whose sales exceed USD 500,000.

Taxable Goods and Services in California

Any taxable person who sells to consumers in California must know what constitutes a taxable transaction. The general rule is that retail sales of tangible personal property are subject to sales tax.

Services are generally exempt from sales and use tax. However, if a service is an integral part of a product and essential to its use, it may be taxable. Examples include the sale of machinery that the seller must calibrate as a condition of the sale.

True Object of Transaction Test 

Sometimes, it is difficult to determine whether a particular transaction involves the sale of tangible personal property or a service. True objections of transaction tests help determine whether the transaction is classified as a taxable sale or a non-taxable service. The primary factor is whether the buyer's main goal is to obtain the service itself or a tangible product resulting from that service.

If, after reviewing all the aspects of the transaction, the primary purpose is service, the transaction is non-taxable, even if some physical item is provided to the consumer as part of it.

E-Commerce Framework

When we say e-commerce framework or rules, we primarily refer to the rules and requirements for remote sellers who can be located in another US state or a foreign country and do not have a physical presence in California.

Remote sellers are subject to economic nexus rules, which state that any individual or business that in the preceding or current calendar year exceeds the USD 500,000 threshold from making retail sales of tangible goods to California consumers must register for a seller's permit.

Once the threshold is exceeded and the seller's permit is obtained, taxable persons must charge, collect, and remit sales tax on all in-state taxable sales.

Nevertheless, remote sellers who sell tangible goods through the online marketplace could be subject to different or additional requirements.

Marketplace Rules

Remote sellers selling their goods through online marketplaces are considered marketplace sellers. If marketplace sellers make all their sales through a marketplace, they are not required to register for a seller's permit or Certificate of Registration—Use Tax. The marketplace facilitator or platform is responsible for this situation.

On the contrary, if marketplace sellers also make direct-to-consumer sales through their websites, they may be required to register for sales and use tax purposes. Therefore, marketplace and direct-to-consumer sales are relevant to determining whether the threshold has been exceeded. 

Marketplace sellers who must register for sales and use tax must include all sales in their tax return, regardless of whether they were made directly to consumers or through the marketplace. However, they can claim a deduction from sales and use tax for sales facilitated by marketplace facilitators.

A requirement for marketplace sellers is to obtain and keep documents proving that marketplace facilitators are liable for sales and use tax. This can be achieved by concluding an agreement with the marketplace facilitator that indicates that the marketplace facilitator is registered for sales and use tax purposes as a retailer and is responsible for sales and use tax. Without such an agreement, any other document that states the same may serve as proof.

Digital Goods and Services

Digital goods such as software, data, digital books or e-books, mobile applications, and digital images are generally not taxable when transferred to consumers over the Internet. However, if only one part of the sale includes the provision of a printed copy of the digital product or a backup data copy on a physical storage medium, such as a USB, the entire transaction is taxable.

For example, the transaction is non-taxable if an e-book is purchased via the Internet and the consumer only downloads it. However, it is taxable if the consumer receives the e-book on a flash drive.

Selling canned or prewritten software, which is non-customizable, to consumers, where the whole transaction is completed by consumers downloading the software from a server, is generally not subject to tax. However, the same rule previously explained applies if a backup copy on the physical storage medium is provided to the consumer.

If the maintenance contract is mandatory with the purchase of canned or prewritten software, meaning that the consumer must accept it to buy or lease canned or prewritten software, the fees for the maintenance contract are taxable. Additionally, taxes apply to any consultation fees concerning the maintenance contract.

When the prewritten computer software is modified, the fees paid for such changes are not taxable if stated separately. If the consumer's costs for such modification are not stated separately, the modification fees are taxable as part of the sale of the prewritten program.

Digital Marketplace

California implemented the Marketplace Facilitators Act in 2019, establishing rules for marketplace facilitators. Under these rules and regulations, digital marketplace operators are generally considered facilitators.

Although the letter of the law states that relevant marketplaces can be physical or online, our focus will be on the online or digital marketplaces.

Digital Platform Operator

For a marketplace to fall under the scope of the Marketplace Facilitator Act, it must sell or offer for sale tangible goods and products for delivery in California. Following the letter of the Law, marketplace operators are liable to collect, remit, and pay sales and use tax on all retail sales for delivery in California, which are bought through their online marketplaces.

This means that the marketplace operator is liable for sales and use tax if they do so and for any sale of taxable products of a marketplace seller. Marketplace facilitators must register as retailers if they actively sell tangible goods in California or have physical or economic nexus in California.

Providing at least one of the following services may be sufficient to qualify as a marketplace facilitator. Those services include transmission or communicating the offer or acceptance between the buyer and seller, owning or operating infrastructure required to connect buyers and sellers, or providing a virtual currency that may or must be used to pay for purchased goods from sellers.

In addition, if a digital platform develops software or conducts research and development activities related to payment processing services, fulfillment or storage services, listing products for sale, setting prices, branding sales, order taking, providing customer service, or accepting and assisting with returns, it may also be considered a marketplace facilitator.

From 2022, digital platform operators registered for sales and use tax purposes may bear additional fees on retail sales of specific items. Furthermore, they may be required to register for the appropriate additional fees. These fees are eWaste Fees, California Battery Fees, Lumber Products Assessment, and California Tire Fees.

Filing and Payment Requirements in California

The California Department of Tax and Fee Administration, a tax governing body, regulates the filing frequency, which depends on the reported sales tax or anticipated taxable sales. The filing frequency is determined when registering for sales and use purposes and may be quarterly prepay, quarterly, monthly, for a fiscal year, or annual.

State, local, and district sales and use tax return submission is completed by electronically filing the CDTFA-401-A form.

Penalties for Non-Compliance with Sales and Use Tax Requirements

If taxable persons do not file a tax return on time or make a late payment, they could face a potential penalty of 10% of the due tax for violating any of the deadlines. However, if a taxable person misses both deadlines, meaning they file a tax return late and make a late payment, the penalty is limited to 10% of the tax due for the reporting period.

For example, if the due tax is USD 10,000 for the reporting period, and the taxable person files a late return and makes a late payment, the 10% penalty applies for both violations. This means that the penalty in this case will be USD 1,000.

In addition to penalties, interest may be imposed for making a late tax payment. Interest is calculated for each month or a fraction of the late tax payment.

If a taxable person pays due taxes on a prepayment basis and makes a late prepayment, a penalty of 6% to 10%  of the due tax, plus interest for each month, is calculated.

Those who fail to file a tax return may face penalties of 10% of the tax amount for each reporting period. An additional penalty of 25% applies if the CDTFA determines that the return was not filed due to fraudulent or evasion intentions.