California — Sales & Use Tax

California imposes sales tax on retailers for the privilege of selling tangible personal property at retail. The tax is measured by the retailer's gross receipts from such sales.

Source: Cal. Rev. & Tax. Code § 6051

The legal incidence of the tax falls on the retailer, not the consumer, though retailers may collect reimbursement from customers.

Source: Cal. Rev. & Tax. Code § 6051

"Gross receipts" means the total amount of the retail sale price, valued in money, whether received in money or otherwise, without deduction for the cost of property sold, labor or service costs, interest, losses, or other expenses.

Source: Cal. Rev. & Tax. Code § 6012

The statewide base sales and use tax rate is 7.25%. This base rate consists of a 6.00% state portion, a 1.00% local jurisdiction allocation (Bradley-Burns), and a 0.25% local transportation fund allocation.

Source: CDTFA – California City & County Sales & Use Tax Rates

In addition to the statewide base rate, local jurisdictions may impose district taxes. District tax rates range from 0.10% to 2.00%, and some areas have multiple district taxes in effect. Total rates (state base + district taxes) can reach 10.75% or higher depending on location.

Source: CDTFA – California City & County Sales & Use Tax Rates

The applicable rate for a transaction is generally determined by the location where the sale occurs (for over-the-counter sales) or the destination address (for shipped sales). Retailers engaged in business in California must register with the California Department of Tax and Fee Administration (CDTFA), obtain a seller's permit, and report and pay the tax.

Source: CDTFA – Sales & Use Tax in California

Scope of taxable property

Sales tax applies to retail sales of tangible personal property unless a specific exemption applies. Tangible personal property is defined as personal property that may be seen, weighed, measured, felt, or touched, or is otherwise perceptible to the senses.

Source: Cal. Rev. & Tax. Code § 6016

Services are generally not subject to sales tax in California, though certain labor charges that result in the creation or transfer of tangible personal property may be taxable.

Source: CDTFA Regulation 1501 – Service Enterprises

This section covers the foundational tax base and rate structure. See additional sections in this guide for nexus standards, exemptions, filing requirements, and specific taxability rules.

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Not yet human confirmed as of 2026-05-26.

California requires remote sellers without physical presence in the state to register and collect use tax if their total combined sales of tangible personal property for delivery into California exceed $500,000 during the current or prior calendar year.

Source: Cal. Rev. & Tax. Code § 6203(c)(4)

This economic nexus standard took effect April 1, 2019, following enactment of Assembly Bill 147 (AB 147) and has no retroactive effect.

Source: CDTFA Regulation 1684, subdivision (b)(4)

## Threshold calculation

The $500,000 threshold is measured by total combined sales of tangible personal property for delivery in California by the retailer and all persons related to the retailer. "Related" is defined by reference to Internal Revenue Code section 267(b).

Source: Cal. Rev. & Tax. Code § 6203(c)(4)

California does not impose a transaction-count threshold — only the dollar amount of sales matters.

Source: CDTFA Regulation 1684, subdivision (b)(4)

## Marketplace sales count toward the threshold

For purposes of determining whether a marketplace seller has economic nexus, the seller must include all sales of tangible merchandise for delivery into California, including sales made on the seller's own behalf, sales of related persons, and sales facilitated through a marketplace facilitator's marketplace.

Source: CDTFA Tax Guide for Marketplace Facilitator Act

A marketplace seller whose sales are entirely facilitated by a registered marketplace facilitator is generally not required to register solely for those marketplace sales. However, if the seller also makes direct sales (for example, through its own website), those marketplace sales still count when calculating the $500,000 threshold.

Source: CDTFA Tax Guide for Marketplace Facilitator Act

## Registration and collection obligation timing

A retailer becomes engaged in business in California — and must register and begin collecting use tax — immediately after the sale that causes total combined sales to exceed $500,000.

Source: CDTFA Regulation 1684, subdivision (b)(4), Example C

Once registered, a retailer is required to remain registered during the calendar year in which the threshold is exceeded and the following calendar year, even if sales fall below $500,000 in the subsequent year.

Source: CDTFA Regulation 1684, subdivision (d)(3)

## District tax collection

Retailers that meet the statewide $500,000 threshold must collect district (local) use taxes at the location of the purchaser on a statewide basis — not district by district. Once the state threshold is exceeded, the retailer must collect all applicable district taxes in every California location where goods are delivered.

Source: Cal. Rev. & Tax. Code § 6203(c)(4)

Not yet human confirmed as of 2026-05-26.

California requires marketplace facilitators that are registered or required to register with CDTFA to collect and remit sales or use tax on retail sales of tangible personal property facilitated through their marketplace on behalf of marketplace sellers. The marketplace facilitator is deemed the retailer for these sales effective October 1, 2019.

Source: Cal. Rev. & Tax. Code § 6043

A marketplace facilitator must register if it has physical presence or economic nexus with California. Economic nexus means total combined sales for delivery into California exceed $500,000 in the current or preceding calendar year, including both sales made on the facilitator's own behalf and sales facilitated for marketplace sellers.

Source: CDTFA Tax Guide for Marketplace Facilitator Act

California imposes an excise tax on the storage, use, or other consumption in California of tangible personal property purchased from any retailer for which California sales tax was not paid. This use tax applies at the same rate as the sales tax.

Source: Cal. Rev. & Tax. Code § 6201

Use tax applies when a purchaser buys tangible personal property from an out-of-state retailer who does not collect California sales tax, makes online or mail-order purchases where no tax was collected, or converts property initially purchased for resale to business or personal use. The purchaser owes the tax and must self-assess and remit it.

Source: CDTFA – California Use Tax

Items exempt from sales tax are also exempt from use tax. Businesses holding a seller's permit report use tax on their sales and use tax return; individuals without a permit may report use tax on their California income tax return.

Source: CDTFA – California Use Tax

California law presumes all gross receipts are subject to sales tax until the contrary is established. The burden of proving that a sale of tangible personal property is not a retail sale rests on the seller unless the seller timely takes in good faith a certificate from the purchaser stating the property is purchased for resale.

Source: Cal. Rev. & Tax. Code § 6091

## Effect of a valid resale certificate

When a seller accepts a resale certificate that is timely taken, in proper form, in good faith, from a person engaged in the business of selling tangible personal property who holds a California seller's permit (as required by Regulation 1699), the certificate relieves the seller from liability for the sales tax and the duty of collecting the use tax on that transaction.

Source: Cal. Code Regs. tit. 18, § 1668(a)

## Required elements of a resale certificate

Any document—including a purchase order or letter—timely provided by the purchaser to the seller qualifies as a resale certificate if it contains all of the following essential elements:

(A) Signature. The signature of the purchaser, purchaser's employee, or authorized representative.

(B) Purchaser identification. The name and address of the purchaser.

(C) Seller's permit number. The number of the seller's permit held by the purchaser. If the purchaser is not required to hold a permit because the purchaser sells only property of a kind the retail sale of which is not taxable (e.g., food products for human consumption) or because the purchaser makes no sales in California, the purchaser must include on the certificate a sufficient explanation as to the reason the purchaser is not required to hold a California seller's permit in lieu of a permit number.

(D) "For resale" statement. A statement that the property described in the document is purchased for resale. The document must contain the phrase "for resale." The use of phrases such as "non-taxable," "exempt," or similar terminology is not acceptable.

(E) Property description. The property to be purchased must be described either by an itemized list of the particular property to be purchased for resale, or by a general description of the kind of property to be purchased for resale.

Source: Cal. Code Regs. tit. 18, § 1668(b)(1)

The California Department of Tax and Fee Administration publishes Form CDTFA-230 (General Resale Certificate) as a convenience, but sellers are not required to use that specific form. Any document containing the five essential elements listed above qualifies.

Source: CDTFA Publication 103 – Sales for Resale

## Timeliness

A certificate is considered timely if it is taken at any time before the seller bills the purchaser for the property, or any time within the seller's normal billing and payment cycle, or any time at or prior to delivery of the property to the purchaser. A resale certificate that is not timely taken is not retroactive and will not relieve the seller of liability for the tax.

Source: Cal. Code Regs. tit. 18, § 1668(a)

## Blanket certificates

A resale certificate remains in effect until revoked in writing. This means a single certificate can cover multiple purchases from the same seller over time (a "blanket" certificate), rather than requiring a new certificate for each transaction.

Source: Cal. Code Regs. tit. 18, § 1668(a)

## Good faith requirement

When a seller accepts a valid resale certificate in good faith and in a timely manner, the seller does not owe tax on that sale. The "good faith" requirement means the seller must not have knowledge of facts indicating the purchaser will not resell the property. If a seller knows or should know that the purchaser will use the property rather than resell it, the seller cannot accept a resale certificate in good faith.

Source: CDTFA Publication 103 – Sales for Resale

## Purchaser liability for misuse

A person may be guilty of a misdemeanor under Revenue and Taxation Code section 6094.5 if the purchaser knows at the time of purchase that he or she will not resell the purchased item prior to any use (other than retention, demonstration, or display while holding it for resale) and furnishes a resale certificate to avoid payment to the seller of an amount as tax. Additionally, a person misusing a resale certificate for personal gain or to evade the payment of tax is liable, for each purchase, for the tax that would have been due, plus a penalty of 10 percent of the tax or $500, whichever is greater.

Source: Cal. Code Regs. tit. 18, § 1668, Appendix A

Purchasers may be found guilty of a misdemeanor under Revenue and Taxation Code section 7153 if they give a completed resale certificate to the seller with the intent to evade reporting or paying tax to the seller. Intent is shown if the purchaser knew at the time of purchase the item would be used rather than resold.

Source: CDTFA Publication 103 – Sales for Resale

When the California Department of Tax and Fee Administration (CDTFA) determines that a taxpayer owes additional sales or use tax, it issues a Notice of Determination under Cal. Rev. & Tax. Code § 6481 (deficiency determination) or § 6511 (determination for failure to file a return). The notice states the amount of tax, interest, and any applicable penalties proposed to be assessed.

A taxpayer who disagrees with any item in the notice may file a petition for redetermination within 30 days after service of the notice. This 30-day deadline is set forth in Cal. Rev. & Tax. Code § 6561, which provides: "Any person against whom a determination is made under Article 3 or 4 of this chapter may petition for a redetermination within 30 days after service upon the person of notice thereof." If the taxpayer does not file a petition within the 30-day period, the determination becomes final, and collection proceedings may commence.

Filing requirements

The petition for redetermination must be filed with the CDTFA and must include the following elements:

• Identification of the notice being contested (typically by notice number and date)
• Amounts contested — the taxpayer may challenge all or a portion of the determination
• Specific grounds or reasons why the determination should be reconsidered
• Signature by the taxpayer or the taxpayer's authorized representative

The taxpayer may also request an appeals conference in the petition. Filing a completed CDTFA-provided form (e.g., CDTFA form 489, Claim for Refund or Petition for Redetermination) satisfies the statutory requirements. The taxpayer may submit copies of supporting written arguments or documentary evidence along with the petition.

Service and finality

Service of the notice is governed by Cal. Rev. & Tax. Code § 6511 and related provisions. The CDTFA typically serves notices by mail to the taxpayer's last known address; service by mail is complete at the time of deposit in the United States mail. Once the petition is received, the CDTFA will promptly mail an acknowledgment letter with contact information for assigned staff.

Filing a timely petition for redetermination stays collection action on the amount contested while the petition is pending. If the taxpayer fails to file within the 30-day window, the determination becomes final and the CDTFA may proceed with enforcement remedies, including liens, levies, and seizure.

Source: Cal. Rev. & Tax. Code § 6561

Source: Cal. Code Regs. tit. 18, § 5210 (CDTFA regulations on petitions for redetermination)

California sales and use tax disputes follow a two-tier administrative appeals route before reaching the courts: first to the California Department of Tax and Fee Administration (CDTFA) for reconsideration, and then to the Office of Tax Appeals (OTA) for independent review.

Step 1: CDTFA reconsideration

After a taxpayer files a timely petition for redetermination under Cal. Rev. & Tax. Code § 6561, the matter remains with the CDTFA for internal review. The CDTFA's assigned appeals staff will consider the taxpayer's grounds for protest, may conduct an appeals conference, and will issue an order or decision on the petition. The CDTFA may affirm, modify, or cancel the original determination.

The order or decision of the CDTFA becomes final 30 days after service upon the taxpayer unless the taxpayer files an appeal to the Office of Tax Appeals within that period. Cal. Rev. & Tax. Code § 6562 provides: "The order or decision of the department upon a petition for redetermination shall become final 30 days after service upon the petitioner of notice thereof."

Step 2: Office of Tax Appeals (OTA)

If the taxpayer disagrees with the CDTFA's decision on the petition for redetermination, the taxpayer may appeal to the California Office of Tax Appeals (OTA), an independent state agency established to hear tax appeals. The OTA replaced the former State Board of Equalization's administrative appeals function for most taxes effective January 1, 2018, under Government Code § 15673 and related provisions.

The appeal to the OTA must be filed within 30 days after the CDTFA serves its decision on the petition for redetermination. The OTA conducts de novo review of the tax dispute. Cases are typically heard by a panel of three administrative law judges, though for smaller disputes (under specified thresholds) a taxpayer may elect to appear before a single administrative law judge.

The OTA issues a written decision affirming, modifying, or reversing the CDTFA's determination. The OTA's decision becomes final 30 days after it is served, unless a party seeks rehearing or judicial review.

Step 3: Judicial review

A taxpayer dissatisfied with the OTA's decision may seek judicial review by filing a petition for writ of mandate in superior court under Cal. Code Civ. Proc. § 1094.5 within the applicable statutory period. The superior court reviews the administrative record for substantial evidence and legal error. Further appeal may lie to the California Court of Appeal and the California Supreme Court under normal appellate procedures.

Source: Cal. Rev. & Tax. Code § 6562

Source: Cal. Gov't Code § 15673 (Office of Tax Appeals)

Source: OTA Overview, California Office of Tax Appeals

California imposes separate statutes of limitations on the California Department of Tax and Fee Administration's (CDTFA's) authority to assess additional sales and use tax and on taxpayers' authority to file refund claims.

Assessment statute of limitations

The general assessment period is three years from the last day of the calendar month following the close of the quarterly period for which the amount is proposed to be determined, or from the last day of the calendar month following the period for which the amount is proposed to be determined if the taxpayer is authorized or required to report on a basis other than quarterly. Cal. Rev. & Tax. Code § 6487 provides this general three-year limitation on deficiency determinations.

Extended assessment periods

The assessment statute extends to eight years in specific circumstances:

• Failure to file a return: If a retailer or other person liable for tax fails to make a return, the CDTFA may issue a deficiency determination at any time within eight years after the last day of the calendar month following the close of the quarterly period for which the amount is proposed to be determined. Cal. Rev. & Tax. Code § 6487.

• Fraud or intent to evade: If any portion of a deficiency is due to fraud or an intent to evade tax, the CDTFA may issue a determination at any time within eight years.

• Waiver: The taxpayer and the CDTFA may agree in writing to extend the limitations period before it expires. Such waivers are common during audits and voluntary disclosure negotiations.

The shorter three-year period applies when a retailer or qualifying purchaser has timely filed all required returns. For qualifying purchasers who are not retailers, Cal. Rev. & Tax. Code § 6487.06 limits the deficiency determination period to three years from the last day of the calendar month following the quarterly period for which the amount is proposed.

Refund claim statute of limitations

A taxpayer seeking a refund of sales or use tax paid must file a claim for refund with the CDTFA within three years from the date of overpayment or, if the tax was prepaid, within three years from the last day of the calendar month following the close of the quarterly period for which the overpayment was made. Cal. Rev. & Tax. Code § 6902 governs refund claim filing deadlines.

If the CDTFA disallows the claim or fails to act within six months, the taxpayer may file suit in superior court for a refund, but the suit must be filed within 90 days after the mailing of the notice of disallowance or within 90 days after the expiration of the six-month period if the CDTFA has not acted. Cal. Rev. & Tax. Code § 6933.

Effect of federal adjustments

If a taxpayer's federal income tax liability is adjusted by the IRS and that adjustment affects California sales or use tax liability (which is uncommon but possible in nexus or allocation disputes), the taxpayer generally must report the federal change to the CDTFA within six months. The CDTFA then has one year from the date of the report to assess any additional tax attributable to the federal adjustment.

Source: Cal. Rev. & Tax. Code § 6487

Source: Cal. Rev. & Tax. Code § 6902

Source: Cal. Rev. & Tax. Code § 6933

California offers both a voluntary disclosure program for unregistered taxpayers seeking to come into compliance and a private ruling process for taxpayers needing advance guidance on specific tax issues.

Voluntary Disclosure Agreement (VDA) Program

The California Department of Tax and Fee Administration (CDTFA) administers a Voluntary Disclosure Program that allows eligible taxpayers to voluntarily report and pay previously unreported sales and use tax liabilities in exchange for penalty relief and a limited look-back period. The program is codified in the CDTFA's administrative procedures and published guidance.

Eligibility: A taxpayer is generally eligible if:

• The taxpayer is not currently registered with the CDTFA for sales and use tax purposes
• The CDTFA has not contacted the taxpayer regarding the tax liability being disclosed
• The taxpayer has not filed sales or use tax returns for the periods being disclosed

Taxpayers already under audit or who have been contacted by the CDTFA regarding a specific tax liability are generally ineligible for the voluntary disclosure program for those liabilities.

Look-back period: Under California's standard voluntary disclosure terms, the look-back period is typically limited to three years from the date the voluntary disclosure application is submitted, although the CDTFA retains discretion to negotiate different terms.

Anonymous filing: California permits anonymous preliminary inquiries through authorized third-party representatives (typically tax attorneys or CPAs) to determine eligibility before the taxpayer formally identifies itself. Once eligibility is confirmed, the taxpayer must formally identify itself to enter into a binding voluntary disclosure agreement.

Penalty waiver: Taxpayers who successfully complete the voluntary disclosure program generally receive a waiver of negligence and fraud penalties. However, the taxpayer remains liable for the tax and applicable interest. Late-payment penalties and failure-to-file penalties are typically waived under the agreement. The specific penalty relief is negotiated as part of the voluntary disclosure agreement.

The voluntary disclosure agreement is binding once executed and generally requires the taxpayer to register for a sales and use tax permit, file returns for the look-back period, pay all tax and interest due, and remain in compliance going forward.

Private ruling requests

California taxpayers may request written advice from the CDTFA on the application of sales and use tax law to specific factual situations. These requests are governed by Cal. Rev. & Tax. Code § 6251 and related provisions.

A taxpayer may submit a written request for advice to the CDTFA's Audit and Information Section or Tax Policy Bureau. The request should:

• State the specific facts of the transaction or proposed transaction
• Identify the specific tax issue or question
• Include copies of relevant contracts, invoices, or other documents
• Provide the taxpayer's analysis or position if desired

The CDTFA may issue a written opinion in response. Written advice issued by the CDTFA is binding on the CDTFA with respect to the taxpayer and the specific transaction described, provided the facts as represented are accurate and complete. The CDTFA generally issues such advice within 90 to 120 days, though complex requests may take longer.

The CDTFA also publishes Annotations to its regulations, which provide interpretive guidance on sales and use tax issues, and issues Tax Policy Memoranda and Special Notices addressing specific tax policy questions and recent statutory or regulatory changes. While not binding private letter rulings, these publications provide authoritative guidance.

Source: CDTFA Voluntary Compliance Initiative Overview

Source: Cal. Rev. & Tax. Code § 6251 (Authority to issue opinions)

California assigns every registered seller a filing frequency — quarterly prepayment, quarterly, monthly, fiscal yearly, or yearly — based on reported or anticipated tax liability at the time of registration. The CDTFA may subsequently adjust a seller's filing frequency if actual tax collections differ materially from the original estimate.

Source: CDTFA — Filing Dates for Sales & Use Tax Returns

## Quarterly filing (standard)

Due dates. The general statutory rule is that sales and use tax is due and payable quarterly on or before the last day of the month next succeeding each quarterly period. The four quarterly periods are January–March, April–June, July–September, and October–December. Returns are due April 30, July 31, October 31, and January 31, respectively.

Source: Cal. Rev. & Tax. Code § 6451

Return required. On or before the last day of the month following each quarterly period, a return must be filed with the CDTFA in the form prescribed by the CDTFA. A filing is required even if the seller has no sales to report during the period.

Source: Cal. Rev. & Tax. Code § 6452

## Quarterly prepayment filing

Threshold. Upon written notification by the CDTFA, any person whose estimated measure of tax liability averages $17,000 or more per month must make prepayments of sales and use tax for the first two months of each quarter before filing the quarterly return.

Source: Cal. Rev. & Tax. Code § 6471(a)

Prepayment schedule. Prepayments are due on or before the 24th day next following the end of each of the first two monthly periods of each quarterly period. For example, a prepayment for January activity is due by February 24, and a prepayment for February activity is due by March 24. The quarterly return reconciling the full quarter (January–March) is then due by April 30.

Source: Cal. Rev. & Tax. Code § 6472

Prepayment amount. In the first, third, and fourth calendar quarters, the seller must prepay not less than 90 percent of the state and local tax liability for each of the first two monthly periods of the quarter. In the second calendar quarter (April–June), special rules apply: the first prepayment (for April) is due May 24 and must be at least 90 percent of April liability; the second prepayment is due June 24 and must cover 90 percent of May liability plus either (A) 90 percent of the first 15 days of June, or (B) 50 percent of 90 percent of May liability (i.e., 45 percent of May).

Sellers engaged in the same business during the corresponding quarter of the preceding year may instead prepay one-third of the prior-year quarter's liability (multiplied by the current rate) for the first, third, and fourth quarters, and a formulaic fraction for the second quarter.

Source: Cal. Rev. & Tax. Code § 6471(a), (b)

Application. Prepayment requirements apply only to sellers filing quarterly returns; they do not apply to persons filing on monthly, yearly, or fiscal yearly schedules.

Source: Cal. Rev. & Tax. Code § 6470

Penalty for failure to prepay. Failure to make either of the required prepayments prior to filing a timely quarterly return may result in a 6 percent penalty based on 90 percent of the tax liability for each prepayment not received.

Source: CDTFA — Make a Prepayment

## Monthly filing

The CDTFA assigns monthly filing to sellers whose tax liability exceeds the prepayment threshold or whose compliance history warrants more frequent reporting. Monthly returns cover calendar months and are due on or before the last day of the following month (e.g., January sales are reported by February 28 or 29). Monthly filers do not make prepayments; the full month's liability is due with the return.

Source: CDTFA — Filing Dates for Sales & Use Tax Returns

## Yearly and fiscal yearly filing

Sellers with minimal California sales (generally very low tax liability) may be assigned yearly or fiscal yearly filing frequency. Yearly filers report on a calendar-year basis with returns due January 31 of the following year. Fiscal yearly filers report on a 12-month fiscal period designated by the CDTFA and must file by the last day of the month following the close of the fiscal year.

Sellers authorized to file on a yearly basis who transfer or discontinue the business before the end of the yearly period must file a closing return by the last day of the month following the close of the calendar quarter in which the business was transferred or discontinued.

Source: Cal. Code Regs. tit. 18, § 1699(h)

## Weekend and holiday extensions

If a statutory due date falls on a weekend or California state holiday, the due date is extended to the next business day.

Source: CDTFA — Filing Dates for Sales & Use Tax Returns

## Electronic funds transfer (EFT) requirement

Any person whose estimated measure of tax liability averages $10,000 or more per month must remit payments by electronic funds transfer. Payment by EFT is deemed complete on the date the transfer is initiated if settlement to the state's demand account occurs on or before the banking day following initiation; otherwise, payment is deemed to occur on the date settlement occurs. EFT accounts must initiate payment by 3:00 p.m. Pacific time on the due date for the payment to be considered timely.

Source: Cal. Rev. & Tax. Code § 6479.3

Source: CDTFA — Filing Dates for Sales & Use Tax Returns

## Special reporting periods

The CDTFA permits sellers on monthly or quarterly prepayment filing frequencies who maintain accounting records for special fiscal periods (for example, a 13-period year or a 4-4-5 retail calendar) to request that the CDTFA assign a customized reporting schedule. Requests must be submitted on Form CDTFA-715 (Request for Special Reporting Periods) and will be approved only if the proposed periods conform to the requirements of the seller's current filing frequency.

Source: CDTFA Form CDTFA-715, Special Reporting Periods for Sales and Use Tax

California distinguishes between tangible personal property and nontaxable services when determining the taxability of software, software-as-a-service (SaaS), and digital products. The controlling rule is whether the customer receives tangible personal property—generally, physical storage media—as part of the transaction.

## Prewritten software transferred electronically: not taxable

The sale or lease of a prewritten program (also called "canned" software) is not taxable if the program is transferred by remote telecommunications from the seller's place of business to or through the purchaser's computer and the purchaser does not obtain possession of any tangible personal property, such as storage media, in the transaction.

Source: Cal. Code Regs. tit. 18, § 1502(f)(1)(D)

A prewritten program is defined as "a program held or existing for general or repeated sale or lease," including a program developed for in-house use that is subsequently offered for sale or lease as a product.

Source: Cal. Code Regs. tit. 18, § 1502(b)(9)

## Prewritten software on tangible media: taxable

When a prewritten program is transferred to the customer in the form of storage media—such as a CD, DVD, USB drive, or other physical device—tax applies to the sale or lease of the storage media on which the prewritten program has been recorded. The entire amount charged for the program, including all license fees and end-user fees, is subject to tax.

Source: Cal. Code Regs. tit. 18, § 1502(f)(1)(A) and (B)

## The "backup copy" rule: entire transaction becomes taxable

If a seller electronically transfers software and also provides the customer with a backup copy on a physical storage medium (such as a flash drive), the entire transaction is taxable. Similarly, if a seller transmits a stock (noncustom) database to customers over the Internet and also provides a printed copy of the contents, the entire sale is subject to tax.

Source: CDTFA Publication 109 – Internet Sales, Nontaxable Sales

Publication 109 is CDTFA interpretive guidance. The backup-copy rule reflects the agency's application of Regulation 1502's principle that furnishing any tangible personal property in the same transaction causes the transaction to be characterized as a sale of tangible personal property.

## Custom software: not taxable regardless of delivery method

Tax does not apply to the sale or lease of custom programs (software prepared to the special order of the customer), regardless of the form in which the programs are transferred. A program prepared to the special order of the customer qualifies as custom even if it incorporates preexisting routines, utilities, or similar program components. Custom programming is treated as a nontaxable service.

Source: Cal. Code Regs. tit. 18, § 1502(f)(2)

Separately stated charges for modifications to an existing prewritten program that are prepared to the special order of the customer are also treated as custom programming and are not taxable, provided the charges are separately stated or the modifications are so significant that the new program qualifies as a custom program.

Source: Cal. Code Regs. tit. 18, § 1502(b)(4)

## SaaS and cloud-based access: generally not taxable

Software-as-a-Service (SaaS) arrangements—in which a customer accesses software hosted on the vendor's servers via the Internet or other remote connection—are generally not taxable when the customer does not receive physical storage media. Although Regulation 1502 does not use the term "SaaS," these transactions fall under the electronically transferred prewritten software rule in Regulation 1502(f)(1)(D): the program is transferred by remote telecommunications and the purchaser does not obtain possession of any tangible personal property.

The distinction is straightforward: if the customer accesses the application via a web browser, mobile app, or API without downloading or receiving a physical copy, the transaction is treated as a nontaxable service. The customer's subscription or usage fee for cloud-based access is not subject to sales or use tax.

Source: Cal. Code Regs. tit. 18, § 1502(f)(1)(D)

Source: CDTFA Publication 109 – Internet Sales, Nontaxable Sales

## Digital products generally: eBooks, apps, images, data

Sales of electronic data products such as software, data, digital books (eBooks), mobile applications, and digital images are generally not taxable when the seller transmits the data to the customer over the Internet without providing physical media. The transfer of a downloadable file such as an eBook or a mobile app without any physical storage medium is not a taxable transaction.

Source: CDTFA Publication 109 – Internet Sales, Nontaxable Sales

However, if the seller provides the customer with a printed copy of the electronically transferred information or a backup data copy on a physical storage medium (such as a flash drive) as part of the sale, the entire sale is usually taxable under the backup copy rule described above.

Source: CDTFA Publication 109 – Internet Sales, Nontaxable Sales

## Installation and training charges

Labor charges for installation of prewritten programs are excluded from the measure of tax. Installation includes the actual installation of software and the testing of the prewritten programs on the purchaser's computer to ensure that the programs operate as required. This exclusion does not encompass other services, such as converting a customer's data into a format suitable for use with the new software; conversion services are part of the sale of the prewritten program and charges attributable to such services remain taxable when the underlying software sale is taxable.

Source: Cal. Code Regs. tit. 18, § 1502(f)(1)(E)

Charges for training services are nontaxable, except when the training services are provided as part of the sale of tangible personal property. Tax applies to charges for training materials, including books, furnished to trainees for a charge separate from the charge for training services.

Source: Cal. Code Regs. tit. 18, § 1502(e)(1) and (2)

## Optional software maintenance contracts

For reporting periods commencing on or after January 1, 2003, if the purchase of a maintenance contract is optional with the purchaser (that is, if the purchaser may purchase the prewritten software without also purchasing the maintenance contract) and there is a single lump-sum charge for the maintenance contract, 50 percent of the lump-sum charge is for the sale of tangible personal property and tax applies to that amount; the remaining 50 percent is nontaxable charges for repair services.

If the purchase of the maintenance contract is not optional—that is, if the purchaser must purchase the maintenance contract in order to purchase or lease a prewritten computer program—then the full charges for the maintenance contract are taxable as part of the sale or lease of the prewritten program.

Source: Cal. Code Regs. tit. 18, § 1502(f)(1)(D)

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Key distinctions for practitioners:

• Delivery method controls: The same prewritten software is taxable if delivered on a USB drive and nontaxable if delivered via electronic download—so long as no physical media is provided in the download scenario.
• SaaS ≠ licensed software for taxability purposes: A customer who downloads and installs software on their own device may receive a nontaxable electronic transfer; a customer who accesses software via a browser (SaaS) without downloading anything also receives a nontaxable service. But if either transaction includes a physical backup, the entire transaction becomes taxable.
• Custom vs. prewritten: The characterization as "custom" (nontaxable) or "prewritten" (conditionally taxable) depends on whether the software was prepared to the special order of the customer, not on whether it was delivered electronically or physically. Custom software is always nontaxable regardless of delivery method.
• Bundling risk: Including even a nominal physical component (backup disc, printed manual, flash drive) in an otherwise-electronic transaction can subject the full transaction price to tax under CDTFA's published guidance.

California courts have scrutinized portions of Regulation 1502 as applied to technology transfer agreements involving patent or copyright licenses (see Lucent Technologies, Inc. v. State Board of Equalization, 241 Cal. App. 4th 19 (2015)), but the electronically-transferred-software exemption stated in Regulation 1502(f)(1)(D) remains in effect for typical software sales and SaaS transactions and is reinforced by CDTFA Publication 109.

California requires every person engaged in the business of selling tangible personal property at retail in California to hold a seller's permit for each place of business in California at which transactions relating to sales are customarily negotiated with customers. Both wholesalers and retailers must obtain a permit. The permit authorizes the holder to collect sales tax from customers and to issue resale certificates to suppliers for goods purchased for resale.

Source: Cal. Code Regs. tit. 18, § 1699(a)

## Who must register — "engaged in business" standard

Under California Revenue and Taxation Code section 6203(c), a "retailer engaged in business in this state" means any retailer that has substantial nexus with California for purposes of the Commerce Clause of the United States Constitution and any retailer upon whom federal law permits California to impose a use tax collection duty. This broad constitutional standard specifically includes—but is not limited to—any retailer:

(1) Maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary or agent, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business in California;

(2) Having any representative, agent, salesperson, canvasser, independent contractor, or solicitor operating in California under the authority of the retailer or its subsidiary for the purpose of selling, delivering, installing, assembling, or taking orders for tangible personal property;

(3) Deriving rentals from a lease of tangible personal property situated in California; or

(4) Having total combined sales of tangible personal property for delivery in California exceeding $500,000 during the preceding or current calendar year. This economic nexus provision took effect April 1, 2019 following enactment of Assembly Bill 147 (AB 147) and has no retroactive effect.

Source: Cal. Rev. & Tax. Code § 6203(c)(4)

On and after September 15, 2012, California presumes that a retailer with any physical presence in California is engaged in business in the state. The retailer may rebut the presumption only if the retailer can substantiate that its physical presence is so slight that the U.S. Constitution prohibits California from imposing a use tax collection duty.

Source: Cal. Code Regs. tit. 18, § 1684(b)(2)

## Number of permits required — place-of-business rule

A seller's permit is required for each place of business in California at which transactions relating to sales are customarily negotiated with customers. For example, Regulation 1699 states that a seller's permit is required for a branch sales office at which orders are customarily taken or contracts negotiated, whether or not merchandise is stocked there.

Warehouses and storage locations. No additional permits are required for warehouses or other places at which merchandise is merely stored, customers do not customarily visit for the purpose of making purchases, and which are maintained in conjunction with a place of business for which a permit is already held. However, the regulation expressly requires that at least one permit must be held by every person that maintains stocks of merchandise for sale at a storage location in California. Further, permits are required for warehouses or other storage places from which retail sales of merchandise negotiated out-of-state are delivered or fulfilled.

Co-located activities. If two or more activities are conducted by the same person on the same premises, even though in different buildings, only one seller's permit is required. For example, a service station operator having a restaurant in addition to the station on the same premises requires only one seller's permit for both activities.

Source: Cal. Code Regs. tit. 18, § 1699(a)

## Temporary seller's permits — sales for 90 days or less

The CDTFA's published guidance states that if a person plans to make sales at a single location for 90 days or less, the person must register for a temporary seller's permit. Generally, if a person makes three or more sales of items subject to California sales and use tax in a 12-month period, the person is required to register; however, a seller making sales at a location for less than 90 days is considered a temporary seller.

A person already holding a seller's permit for a permanent place of business who also makes sales at a temporary location does not need a separate temporary seller's permit. Instead, the person must register a sub-permit for each temporary location.

Temporary permits may be obtained up to 90 days prior to the business start date. The seller must provide a valid start and end date for each temporary sales location. Multiple temporary sales locations may be registered on a single temporary seller's permit as long as they operate within the same 90-day period.

Source: CDTFA Temporary Sellers Guidance

(Note: These temporary-seller rules are set forth in CDTFA administrative guidance, not statute or regulation.)

## Registration process and required information

The CDTFA offers free online registration through its Online Services portal. The system guides applicants through the process and assists with determining the types of permits needed.

Applicants must provide information about the business, including bank account details and estimated income. The applicant must also provide personal information, including a driver's license or state identification number (or other acceptable forms of identification such as a U.S. passport, U.S. military ID, consular identification card, or E-2 visa) and a Social Security number or substitute documentation.

If the business has partners or is managed by corporate officers or limited liability company managers, members, or officers, those persons must also furnish some of the required information.

Source: CDTFA Publication 73, Your California Seller's Permit

Source: CDTFA Obtaining a Seller's Permit FAQ

(Note: The registration process details are drawn from CDTFA publications, not from statute or regulation.)

## Permit validity and cancellation

Regulation 1699(f) provides that a seller's permit may only be held by a person actively engaged in business as a seller of tangible personal property. The CDTFA may revoke a seller's permit where it finds that the person holding the permit is not actively engaged in business as a seller. Any person who holds a seller's permit but is not actively engaged in business as a seller must promptly surrender the permit by notifying the CDTFA to cancel it.

California law makes it a misdemeanor to use a seller's permit if the permit holder is no longer actively engaged in business.

Source: Cal. Code Regs. tit. 18, § 1699(f)

## Exemptions from permit requirement

Regulation 1699(b) provides that a seller's permit is not required to be held by persons all of whose sales are made exclusively in interstate or foreign commerce. However, a seller's permit is required of persons notwithstanding that all their sales or leases are made to the United States or instrumentalities thereof.

Source: Cal. Code Regs. tit. 18, § 1699(b)

CDTFA Publication 107 states that when a person has a garage sale and sells used items, the person is generally not required to hold a seller's permit unless the person has more than two garage sales in a 12-month period or is required to hold a seller's permit for being engaged in the business of selling merchandise, goods, or items due to the number, scope, and character of selling activities. This two-garage-sale rule is CDTFA administrative guidance, not a statutory or regulatory safe harbor.

Source: CDTFA Publication 107, Do You Need a California Seller's Permit?

## Relationship to Certificate of Registration—Use Tax

Retailers located outside California who are engaged in business in California (for example, by exceeding the $500,000 economic nexus threshold) and who do not have an in-state place of business for which a seller's permit is required under Regulation 1699 must instead register for a Certificate of Registration—Use Tax and collect use tax on their taxable sales into California. This distinction—seller's permit for in-state places of business, Certificate of Registration—Use Tax for remote sellers without such a location—is explained in CDTFA Publication 107 and related guidance.

Source: CDTFA Publication 107, Required Registration to Report Use Tax

California distinguishes sharply between transportation charges (delivery by a third-party carrier, potentially nontaxable) and handling charges (packing, crating, or other seller services, always taxable when part of a taxable sale). Whether a separately stated charge is excluded from the sales price turns on three factors: (1) who performs the transportation, (2) when the sale occurs relative to the transportation, and (3) whether the charge is separately stated and does not exceed the actual cost.

## Statutory framework

Cal. Rev. & Tax. Code § 6011(a)(3) includes in "sales price" the cost of transportation of the property, except as excluded by other provisions of that section. Subdivision (c)(7) then provides that "sales price" does not include "separately stated charges for transportation from the retailer's place of business or other point from which shipment is made directly to the purchaser," subject to a cap: the exclusion shall not exceed a reasonable charge for transportation by facilities of the retailer or the cost to the retailer of transportation by other than facilities of the retailer.

However, if the transportation is by facilities of the retailer, or the property is sold for a delivered price, the exclusion is applicable only with respect to transportation which occurs after the purchase of the property is made. Cal. Rev. & Tax. Code § 6011(c)(7).

Source: Cal. Rev. & Tax. Code § 6011

## Transportation by independent carrier — potentially nontaxable

Tax does not apply to separately stated charges for transportation of property from the retailer's place of business or other point from which shipment is made directly to the purchaser, provided the transportation is by other than facilities of the retailer—that is, by United States mail, independent contract carrier, or common carrier. The place where the sale occurs (where title passes or the lease begins) is immaterial, except when the property is sold for a delivered price or the transportation is by facilities of the retailer.

Source: Cal. Code Regs. tit. 18, § 1628(a)

The amount of transportation charges excluded from the measure of tax shall not exceed the cost of the transportation to the retailer. If the retailer charges the customer more than the actual cost incurred by the retailer, the excess is taxable.

Source: Cal. Code Regs. tit. 18, § 1628(a)

## "Separately stated" requirement

Transportation charges will be regarded as "separately stated" only if they are separately set forth in the contract for sale or in a document reflecting that contract, issued contemporaneously with the sale, such as the retailer's invoice. The fact that the transportation charges can be computed from the information contained on the face of the invoice or other document will not suffice as a separate statement.

Source: Cal. Code Regs. tit. 18, § 1628(a)

For example, an invoice showing a single line item "Total with shipping: $150" does not separately state the transportation charge. An invoice showing "Subtotal: $120 / Shipping: $30 / Total: $150" does separately state the charge.

## Combined "shipping and handling" charges — partially taxable

If a separately stated charge is made designated "postage and handling" or "shipping and handling," only that portion of the charge which represents actual postage or actual shipment may be excluded from the measure of tax. Such amounts may be excluded from the measure of tax even though such amounts are not affixed to, or noted on, the package.

A separately stated charge designated "handling" or "handling charge" is not a separate statement of transportation charges and the entire handling charge is taxable.

Source: Cal. Code Regs. tit. 18, § 1628(a)

Practical application: A retailer charging "$25 shipping and handling" must segregate the actual carrier cost (e.g., $18 paid to UPS) from the handling component (e.g., $7 for packing labor and materials). Only the $18 carrier cost is excludable; the $7 handling component is taxable. If the retailer cannot substantiate the actual carrier cost, the entire $25 is taxable.

Source: CDTFA Publication 100 – Shipping and Delivery Charges

## Transportation by the retailer's own facilities — conditionally nontaxable

If the transportation is by facilities of the retailer (for example, the retailer's own delivery trucks or employees), the transportation-charge exclusion is applicable only with respect to transportation which occurs after the purchase of the property is made. In other words, title must pass before the transportation begins in order for the separately stated transportation charge to be excluded from tax.

If title passes after shipment (for example, the sale is F.O.B. destination, or the invoice states "title passes on delivery"), the transportation charge is fully taxable even if separately stated, because the transportation occurred before the sale.

Source: Cal. Rev. & Tax. Code § 6011(c)(7)

Source: Cal. Code Regs. tit. 18, § 1628(b)(2)

## Delivered-price sales — transportation charge taxable

When property is sold for a delivered price (that is, a single all-inclusive price with no separate transportation charge, or a contract stating the price includes delivery), the delivery charge is part of the sales price and tax applies to the full amount, regardless of who performs the transportation.

Source: Cal. Rev. & Tax. Code § 6011(c)(7)

Source: Cal. Code Regs. tit. 18, § 1628(b)(1)

## What constitutes "handling" (always taxable)

Charges for the following services are treated as handling charges and are fully taxable when part of a taxable sale:

• Packing, crating, boxing, or other preparation for shipment
• Loading onto the carrier's vehicle
• Fuel surcharges separately stated by the retailer (distinct from fuel surcharges passed through as part of the carrier's invoice)
• Insurance charges related to shipment
• Unloading at the destination
• Stacking, spreading, or placement charges (for example, placing firewood, wallboard, or roofing materials)

These charges are taxable under Cal. Rev. & Tax. Code § 6011(b)(1), which provides that the total amount for which property is sold includes "any services that are a part of the sale."

Source: CDTFA Annotations 557.0573 – Stacking and Spreading Charges

Source: CDTFA Publication 100 – Shipping and Delivery Charges

## Drop shipments and multi-leg transportation

When a retailer arranges for shipment directly from a third-party supplier to the customer (a drop shipment), the transportation-charge exclusion still applies provided the charge is separately stated and reflects the actual cost. The retailer need not physically possess the property; the exclusion applies so long as the transportation is from "the retailer's place of business or other point from which shipment is made directly to the purchaser."

If the property moves through a warehouse or transloading point before reaching the customer, the transportation charge remains excludable provided the movement is a continuous transit directly to the purchaser and the charge is separately stated. If the retailer takes possession at an intermediate point and then re-ships, the subsequent leg must satisfy the separate-statement and title-passage tests independently.

Source: CDTFA Annotations 557.0570 – Shipment via Warehouse

## Recordkeeping requirements

To claim the transportation-charge exclusion, the retailer must maintain documentation showing the actual cost of transportation for each shipment (or for each customer, if the retailer uses a blanket freight contract with determinable per-shipment costs). Acceptable documentation includes:

• Invoices from the carrier (UPS, FedEx, USPS, freight companies)
• Certified mail receipts
• Bills of lading
• Freight contracts showing per-pound or per-zone rates

If the retailer cannot produce contemporaneous records showing the actual transportation cost, the CDTFA will treat the entire stated transportation charge as part of the taxable sales price.

Source: CDTFA Publication 100 – Shipping and Delivery Charges

## Summary — practitioner checklist

A separately stated transportation charge is excludable from the measure of tax only if all of the following are true:

1. The charge is separately stated on the invoice or contract of sale (not merely computable).
2. The transportation is directly to the purchaser (not to an intermediate party for further retail sale).
3. The charge does not exceed the actual cost to the retailer of the transportation.
4. Either:

• The transportation is by a third-party carrier (USPS, common carrier, contract carrier), or
• The transportation is by the retailer's own facilities and the sale occurred before the transportation began (title passed at the shipping point, not on delivery).

1. The charge is designated as "shipping," "freight," "delivery," or "postage." If the charge is labeled "shipping and handling" or "postage and handling," only the portion substantiated as actual carrier cost is excludable; the handling portion is taxable. A charge labeled solely "handling" is fully taxable.

If any element is missing, the charge is fully taxable.

California provides a partial exemption from state sales and use tax for purchases of qualified equipment and property used primarily in manufacturing, research and development (R&D), and electric power generation or distribution. The exemption is codified in Cal. Rev. & Tax. Code § 6377.1 and Cal. Code Regs. tit. 18, § 1525.4 and is operative from July 1, 2014, through June 30, 2030.

## Partial exemption rate — state tax only, not local or district tax

The partial exemption applies only to a portion of the statewide sales and use tax. From July 1, 2014, through December 31, 2016, the exemption rate was 4.1875%. From January 1, 2017, through June 30, 2030, the exemption rate is 3.9375%.

The exemption does not apply to:

• Bradley-Burns Uniform Local Sales and Use Tax
• Any district taxes imposed under the Transactions and Use Tax Law
• Taxes imposed or deposited pursuant to Cal. Rev. & Tax. Code §§ 6051.2, 6051.5, 6051.15, 6201.2, 6201.5, or 6201.15

When the partial exemption applies, the purchaser pays the remaining state tax (currently 3.3125%) plus all applicable local and district taxes. In practice, a qualified purchase in a jurisdiction with a total combined rate of 9.50% would be taxed at approximately 5.56% (9.50% minus the 3.9375% partial exemption).

Source: Cal. Rev. & Tax. Code § 6377.1(d)

Source: Cal. Code Regs. tit. 18, § 1525.4(a)

## Who qualifies — "qualified person" definition

A "qualified person" eligible for the exemption is a person primarily engaged in one of the following lines of business, as defined by the 2012 edition of the North American Industry Classification System (NAICS):

• Manufacturing, processing, refining, fabricating, or recycling — NAICS codes 3111 to 3399, inclusive
• Research and development in biotechnology, physical engineering, and life sciences — NAICS codes 541711 and 541712 (2012 edition only; the 2017 edition revised these codes, but California statute uses the 2012 NAICS codes)
• Electric power generation — NAICS codes 221111 to 221118, inclusive
• Electric power distribution — NAICS code 221122

"Primarily engaged" is determined by a person's primary revenues or primary operating expenses in the qualifying line of business.

Establishment-level qualification: If a legal entity as a whole is primarily engaged in a qualifying line of business, the entire entity qualifies for all purchases that meet the other requirements. If the legal entity as a whole is not primarily engaged in a qualifying line, but the entity operates separate establishments that constitute distinct cost centers or economic units, a separate establishment may qualify for the partial exemption if that establishment is primarily engaged in a qualifying line of business. In that case, only purchases intended for use and actually used in the qualifying establishment are eligible.

Source: Cal. Code Regs. tit. 18, § 1525.4(b)(10)

Source: CDTFA Tax Guide for Manufacturing, and Research & Development, and Electric Power Equipment & Buildings Exemption — Industry Topics

## What qualifies — "qualified tangible personal property"

Qualified tangible personal property eligible for the partial exemption includes:

(1) Manufacturing equipment and machinery. Tangible personal property purchased for use by a qualified person to be used primarily (more than 50% of the time) in any stage of the manufacturing, processing, refining, fabricating, or recycling of tangible personal property. The exemption covers the full production process from the point raw materials are received and introduced into the process to the point at which the product reaches its completed form, including packaging if required.

(2) Research and development equipment. Tangible personal property purchased for use by a qualified person to be used primarily in research and development. "Research and development" means those activities described in Internal Revenue Code § 174 (deduction for research or experimental expenditures) or regulations thereunder.

(3) Maintenance, repair, measurement, and testing equipment. Tangible personal property purchased for use by a qualified person to be used primarily to maintain, repair, measure, or test any qualified tangible personal property described in (1) or (2).

(4) Construction contractor materials. Qualified tangible personal property purchased by a contractor for use in the performance of a construction contract for a qualified person, provided the property becomes an ingredient or component part of a qualified person's project and will be used primarily in a qualifying manner.

(5) Electric power generation and distribution property. Tangible personal property purchased for use by a qualified person to be used primarily in the generation or production, storage, or distribution of electric power, including special purpose buildings and foundations used as an integral part of such activities (effective January 1, 2018).

The property must have a useful life of one year or more for state income or franchise tax purposes to qualify. Property with a useful life of less than one year — such as consumables, supplies, and regularly replaced items — is excluded.

Exclusions: The exemption does not apply to:

• Consumables with a useful life of less than one year
• Furniture, inventory, and equipment used in the extraction process
• Equipment used to store finished products that have completed the manufacturing, processing, refining, fabricating, or recycling process
• Tangible personal property used primarily (more than 50% of the time) in administration, general management, or marketing

Source: Cal. Rev. & Tax. Code § 6377.1(a), (b)

Source: Cal. Code Regs. tit. 18, § 1525.4(b)(11), (12)

## Annual per-person cap — $200 million limitation

The partial exemption is subject to a $200 million per calendar year limit on purchases of qualified tangible personal property by a qualified person (or combined reporting group). Any purchases by a qualified person (or all persons in a combined report under Cal. Rev. & Tax. Code §§ 25101 or 25101.15) during a calendar year that exceed $200 million in the aggregate are not eligible for the partial exemption and are subject to the full sales and use tax rate.

For purposes of this limitation, in the case of a qualified person that is required to be included in a combined report under Cal. Rev. & Tax. Code § 25101 or authorized to be included in a combined report under § 25101.15, the aggregate of all purchases of qualified personal property for which an exemption is claimed by all persons in the combined report group shall not exceed $200 million in any calendar year.

If a purchaser provides a partial exemption certificate for a purchase that exceeds the $200 million limitation, the purchaser is liable for payment of the sales tax as if the purchaser were a retailer making a retail sale at the time the property is purchased, and the cost to the purchaser is deemed the gross receipts from that retail sale.

Source: Cal. Rev. & Tax. Code § 6377.1(e)(1)(A), (e)(2)

## How to claim — partial exemption certificate

To claim the partial exemption, the purchaser must provide the seller with a partial exemption certificate at the time of purchase. The CDTFA publishes two standard forms:

• CDTFA-230-M — Partial Exemption Certificate for Manufacturing and Research & Development Equipment (for direct purchases)
• CDTFA-230-MC — Construction Contracts—Partial Exemption Certificate for Manufacturing, and Research & Development Equipment (for contractors performing construction contracts)

Any document qualifies as a partial exemption certificate if it contains:

• The signature of the purchaser, the purchaser's authorized representative, or the purchaser's employee
• The name, address, and telephone number of the purchaser
• The purchaser's seller's permit number (or, if not required to hold a seller's permit, a notation to that effect and the reason)
• A statement that the purchaser is primarily engaged in a qualifying line of business and identification of the applicable NAICS code
• A description of the property being purchased
• A statement that the property will be used in a qualifying manner

Purchasers may issue blanket certificates covering recurring purchases from the same seller until rescinded, provided the purchaser advises the seller on each physical purchase order or sales agreement which purchases do not qualify.

When a valid partial exemption certificate is provided, the seller collects tax only at the reduced rate (state and local tax minus the 3.9375% exemption). The purchaser pays the reduced tax to the seller or self-assesses the reduced use tax if the seller did not collect it.

Source: Cal. Code Regs. tit. 18, § 1525.4(c)

Source: CDTFA Tax Guide for Manufacturing, and Research & Development, and Electric Power Equipment & Buildings Exemption — Purchasers

## Recapture events — when the exemption is lost

The partial exemption is subject to recapture if, within one year from the date of purchase, the purchaser:

• Removes the property from California
• Converts the property from an exempt use to a use not qualifying for the exemption
• Uses the property in a manner not qualifying for the exemption

If any of these events occur, the purchaser is liable for payment of the full sales tax (the state tax that was exempted), with applicable interest, as if the purchaser were a retailer making a retail sale at the time the property is removed, converted, or misused. The purchaser's cost of the property is deemed the gross receipts from that retail sale.

Source: Cal. Rev. & Tax. Code § 6377.1(e)(1)(B), (e)(2)

## Interaction with other exemptions

The manufacturing and R&D partial exemption under Cal. Rev. & Tax. Code § 6377.1 may be claimed in conjunction with certain other partial exemptions (for example, the partial exemption for farm equipment under § 6356.5 or timber harvesting equipment under § 6356.6) if the property qualifies under multiple statutes, but the total exemption claimed may not exceed the applicable tax.

When a purchaser is accepted into the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) sales and use tax exclusion program, the CAEATFA exclusion generally takes precedence over the manufacturing partial exemption for property that is part of a CAEATFA "project," because the CAEATFA exclusion applies to the full sales and use tax rate. A purchaser may not provide an exemption certificate for both the CAEATFA exclusion and the manufacturing partial exemption for the same property. However, if a purchase qualifies for the manufacturing partial exemption but is not part of a CAEATFA project, the partial exemption certificate may still be used for that purchase.

Source: CDTFA Tax Guide for Manufacturing, and Research & Development, and Electric Power Equipment & Buildings Exemption — Purchasers

## Sunset date

The partial exemption is scheduled to sunset on July 1, 2030. Unless extended by the California Legislature, no purchases or leases occurring on or after that date will be eligible for the exemption. The sunset date has been extended twice since enactment (originally set to expire June 30, 2022, extended to July 1, 2030, by Assembly Bill 398 in 2017).

Source: Cal. Rev. & Tax. Code § 6377.1(a)

California imposes two layers of local taxes on top of the statewide base rate: the Bradley-Burns Uniform Local Sales and Use Tax (a mandatory 1.25% levy in every jurisdiction) and voter-approved district Transactions and Use Taxes (optional rates that vary by district). Both are collected and administered by the CDTFA, but they rest on different statutory frameworks and impose distinct nexus rules.

## Bradley-Burns Uniform Local Sales and Use Tax — 1.25% mandatory local component

The Bradley-Burns Uniform Local Sales and Use Tax Law, codified at Cal. Rev. & Tax. Code §§ 7200–7213, authorizes every California city, county, and city-and-county to impose a local sales and use tax at a uniform combined rate of 1.25%. This tax is imposed in every jurisdiction statewide and is a component of the 7.25% statewide base rate.

Source: Cal. Rev. & Tax. Code § 7200 et seq.

Source: CDTFA Regulation 1808

The Bradley-Burns tax has the same tax base as the state sales and use tax. When state sales tax applies to a transaction, the 1.25% local sales tax also applies. The same rule applies to use tax.

Source: CDTFA Regulation 1808

The Bradley-Burns nexus rule mirrors the state nexus standard: any retailer engaged in business in California under Cal. Rev. & Tax. Code § 6203 (including the $500,000 economic-nexus threshold for remote sellers, effective April 1, 2019) must collect the 1.25% local tax on all taxable sales into the state. There is no separate district-by-district nexus threshold for Bradley-Burns — it is a statewide collection obligation that applies uniformly to every California sale.

Source: Cal. Rev. & Tax. Code § 6203

## Transactions and Use Tax (district taxes) — voter-approved optional rates

The Transactions and Use Tax Law, codified at Cal. Rev. & Tax. Code §§ 7251–7273, authorizes cities, counties, and special districts (such as transportation authorities) to impose additional local taxes, commonly called "district taxes," at rates of 0.125% or multiples thereof, subject to voter approval. Not all jurisdictions impose district taxes; some areas have none, while others have multiple overlapping district taxes.

Source: Cal. Rev. & Tax. Code § 7251 et seq.

Source: CDTFA Regulation 1821

District taxes generally incorporate the same tax base as the state Sales and Use Tax Law and the Bradley-Burns tax. However, there are four primary differences between district taxes and state/Bradley-Burns taxes:

(1) Pre-operative-date contract exemption. The district transactions (sales) tax does not apply to gross receipts from the sale or lease of tangible personal property that the seller or lessor is obligated to furnish for a fixed price pursuant to a contract entered into before the operative date of the district ordinance.

(2) Out-of-district delivery exemption. The district transactions (sales) tax does not apply to gross receipts from the sale of property to be used outside the district when the property is shipped to a point outside the district, pursuant to the contract of sale, by delivery to such point by the retailer or the retailer's agent, or by delivery by the retailer to a carrier for shipment to a consignee at such point. If the purchaser later brings the property into the district and uses it there, the district use tax may apply and the purchaser may owe that tax.

(3) Vehicle/aircraft/vessel registration-based collection. Beginning January 1, 1988, retailers of vehicles, aircraft, or undocumented vessels are engaged in business in a district imposing a transactions and use tax and are required to collect the use tax from the purchaser when such vehicles, aircraft, or undocumented vessels are registered or licensed in that district.

(4) District-level engaged-in-business standard. District use tax must be collected by retailers engaged in business in the district and paid to the CDTFA when the retailer ships or delivers the property into the district or participates within the district in making the sale. By contrast, state and Bradley-Burns use tax must be collected by retailers engaged in business in California (a statewide, not district-specific, test).

Source: CDTFA Regulation 1821

## Engaged-in-business-in-a-district nexus rule — the April 25, 2019 change

The critical compliance question for district taxes is whether a retailer is "engaged in business in the district." Cal. Rev. & Tax. Code § 7262 requires each district ordinance to substitute the name of the district for the word "state" in the phrase "retailer engaged in business in this state" as defined in § 6203.

Before April 25, 2019, a retailer with only physical presence in one district was generally required to collect district use tax only for that district (and districts where it had separate physical presence or participated in sales). Remote sellers with no California physical presence had no district-tax collection obligation even if they had statewide economic nexus under § 6203.

Effective April 25, 2019, Assembly Bill 147 (AB 147) and Senate Bill 92 (SB 92) amended § 7262 to add a statewide economic-nexus rule for district taxes. Under § 7262(a)(1), "a retailer engaged in business in the district" now includes any retailer that, in the preceding calendar year or the current calendar year, has total combined sales of tangible personal property in this state or for delivery in the state by the retailer and all persons related to the retailer that exceeds $500,000.

Source: Cal. Rev. & Tax. Code § 7262(a)(1)

Accordingly, beginning April 25, 2019, any retailer required to be registered with CDTFA (whether located inside or outside California) that meets the $500,000 statewide threshold is engaged in business in every district in the state, whether or not the retailer has physical presence in any district.

Source: CDTFA Local and District Tax Guide for Retailers

The $500,000 threshold under § 7262(a)(1) is a statewide measure, not a per-district measure. Once a retailer's total combined sales into California exceed $500,000, the retailer must collect district use tax on all taxable sales delivered into every district that imposes a district tax, beginning with the sale immediately after the threshold is exceeded.

District tax collection obligation — delivery or participation requirement

Even after April 25, 2019, a retailer engaged in business in a district under § 7262(a)(1) is not required to collect district use tax unless the retailer ships or delivers the property into that district or participates within the district in making the sale, including soliciting or receiving the order, either directly or indirectly, at a place of business of the retailer in the district or through any representative, agent, canvasser, solicitor, subsidiary, or person in the district under the authority of the retailer.

Source: Cal. Rev. & Tax. Code § 7262(a)(2)

Source: CDTFA Regulation 1827

In practice, this means that a remote seller who exceeds the $500,000 statewide threshold and ships goods into a district is required to collect that district's use tax on the delivered sale. The participation test ensures that a retailer with statewide nexus still collects district tax only on sales that have a connection to the district (delivery or in-district sales activity).

## How district taxes stack

District taxes add to the 7.25% statewide base rate (which already includes the 1.25% Bradley-Burns component). A location with one 0.5% district tax will have a total rate of 7.75%; a location with two overlapping district taxes (e.g., a county transportation tax and a city tax) will have a higher combined rate. As of 2026, total rates in some California locations exceed 10%.

The CDTFA publishes a comprehensive rate table (updated quarterly) showing the current combined state, Bradley-Burns, and district rates for every California location. Rates may change when new district taxes are adopted or existing taxes expire.

Source: CDTFA — California City & County Sales & Use Tax Rates

## Pyramiding and credit provisions

Cal. Rev. & Tax. Code § 7262(c) provides that the amount subject to district tax does not include the amount of any sales tax or use tax imposed by the state or by any jurisdiction under the Bradley-Burns law, or the amount of any other state-administered transactions or use tax. This anti-pyramiding rule ensures that district taxes are imposed on the sales price of the property, not on the embedded state or Bradley-Burns tax.

Additionally, § 7262(d) provides that any person subject to district use tax is entitled to a credit against that tax (or to reimbursement for a transactions tax) paid to a district or retailer in a district imposing a transactions and use tax. This prevents double taxation when a purchaser pays district tax to one district and later brings the property into another district.

Source: Cal. Rev. & Tax. Code § 7262(c), (d)

## Registration and reporting

Retailers who hold a California seller's permit under § 6067 and who are engaged in business in a district are automatically registered to collect district use tax. The CDTFA administers district tax collection and distribution on behalf of local jurisdictions under contract.

Source: CDTFA Regulation 1827

Retailers report district taxes on the same sales and use tax return used for state and Bradley-Burns taxes, using location codes and detailed schedules to allocate district tax to the correct jurisdiction. The CDTFA then distributes the collected district tax revenue to the imposing district. CDTFA Publication 44 provides detailed guidance on district tax application, but the controlling legal authority is the Transactions and Use Tax Law (§§ 7251–7273) and the CDTFA's implementing regulations.

Source: CDTFA Publication 44 — District Taxes

California exempts from sales and use tax retail sales of food products for human consumption and prescription medicines dispensed under specified conditions. These exemptions narrow the taxable base substantially for grocery retailers, pharmacies, and health facilities, but both exemptions contain detailed exclusions and conditions that practitioners must navigate carefully.

## Food products exemption — general rule

Statutory foundation. Cal. Rev. & Tax. Code § 6359(a) exempts from tax "the gross receipts from the sale of, and the storage, use, or other consumption in this state of, food products for human consumption." The statute defines "food products" broadly in subdivision (b) to include cereals and cereal products, oleomargarine, meat and meat products, fish and fish products, eggs and egg products, vegetables and vegetable products, fruit and fruit products, spices and salt, sugar and sugar products, candy, gum, confectionery, coffee and coffee substitutes, tea, cocoa and cocoa products, milk and milk products (including ice cream, milkshakes, and malted milks), fruit juices, vegetable juices, other beverages whether liquid or frozen (including bottled water), but excluding spirituous, malt, or vinous liquors and carbonated beverages.

Source: Cal. Rev. & Tax. Code § 6359

Regulatory interpretation. Regulation 1602 implements § 6359 and states that "tax does not apply to sales of food products for human consumption except as provided in Regulations 1503, 1574, and 1603." Those cross-referenced regulations address taxable prepared-food scenarios (meals furnished at tables, hot prepared food products, vending machine sales, and sales at locations with admission charges or parking facilities for immediate consumption).

Source: Cal. Code Regs. tit. 18, § 1602(a)

## Exclusions from "food products" — dietary supplements and medicines

Cal. Rev. & Tax. Code § 6359(c)(1) expressly excludes from the definition of "food products" two categories: (1) medicines, including medicinal cannabis or medicinal cannabis products, and preparations in liquid, powdered, granular, tablet, capsule, lozenge, and pill form sold as dietary supplements or adjuncts; and (2) cannabis and cannabis products as defined in the Health and Safety Code. This exclusion means that dietary supplements — even if consumed as food — are taxable unless they qualify independently as exempt prescription medicines under § 6369.

Source: Cal. Rev. & Tax. Code § 6359(c)

Regulation 1602(a)(4) clarifies that tax does apply to "medicines and preparations in liquid, powdered, granular, tablet, capsule, lozenge, and pill form sold as dietary supplements or adjuncts," but carves out an exception: complete dietary foods that provide the user in the recommended daily dosage with substantial amounts of vitamins, proteins, minerals, and adequate caloric intake (meeting FDA minimum daily requirements for vitamins A, B1, C, D, riboflavin, niacin, and the minerals calcium, phosphorus, iron, and iodine) qualify as exempt food products. Products falling short of this threshold are taxable.

Source: Cal. Code Regs. tit. 18, § 1602(a)(4)

The classification is mutually exclusive: a product is either food, medicine, or a supplement/adjunct, and CDTFA guidance instructs that medicinal claims on a label alone do not make a product a medicine for purposes of the exemption.

Source: CDTFA Annotation 425.0053.100

## Circumstances that nullify the food-products exemption

Cal. Rev. & Tax. Code § 6359(d) lists seven circumstances in which the food-products exemption does not apply, rendering the sale taxable:

(1) Meals served on or off premises. When the food products are served as meals on or off the premises of the retailer.

(2) Food furnished for consumption at tables, chairs, or counters. When the food products are furnished, prepared, or served for consumption at tables, chairs, or counters or from trays, glasses, dishes, or other tableware provided by the retailer or a person with whom the retailer contracts.

(3) Drive-in and immediate-consumption sales. When the food products are ordinarily sold for immediate consumption on or near a location at which parking facilities are provided primarily for the use of patrons in consuming the products purchased at the location, even though sold on a "take out" or "to go" order and actually packaged or wrapped and taken from the premises.

(4) Sales within admission-charge venues. When the food products are sold for consumption within a place the entrance to which is subject to an admission charge, except for national and state parks and monuments, marinas, campgrounds, and recreational vehicle parks.

(5) Vending machine sales. When the food products are sold through a vending machine.

(6) The "80-80" rule. When the food products sold are furnished in a form suitable for consumption on the seller's premises, and both of the following apply: (A) over 80 percent of the seller's gross receipts are from the sale of food products, and (B) over 80 percent of the seller's retail sales of food products are sales subject to tax pursuant to paragraphs (1), (2), (3), or (7). This provision targets establishments that predominantly sell for on-premises consumption.

(7) Hot prepared food products. When the food products are sold as hot prepared food products. Subdivision (e) defines "hot prepared food products" to include products, items, or components that have been prepared for sale in a heated condition and that are sold at any temperature higher than the air temperature of the room or place where they are sold. The definition includes combinations of hot and cold items sold for a single price. Paragraph (7) does not apply to a sale for a separate price of bakery goods or beverages (other than bouillon, consommé, or soup), or where the food product is purchased cold or frozen.

Source: Cal. Rev. & Tax. Code § 6359(d), (e)

Regulation 1603 implements these prepared-food taxability rules and provides additional detail on the application of tax to restaurants, hotels, boarding houses, soda fountains, and similar establishments.

Source: Cal. Code Regs. tit. 18, § 1603

## Prescription medicines exemption — general rule

Statutory foundation. Cal. Rev. & Tax. Code § 6369(a) exempts from tax gross receipts from the sale in California of, and the storage, use, or consumption in California of, medicines when sold or furnished under one of six specified conditions:

(1) Prescription by authorized prescriber, dispensed by pharmacist. Prescribed for the treatment of a human being by a person authorized to prescribe the medicines, and dispensed on prescription filled by a registered pharmacist in accordance with law.

(2) Furnished by physician/surgeon, dentist, or podiatrist to own patient. Furnished by a licensed physician and surgeon, dentist, or podiatrist to his or her own patient for treatment of the patient.

(3) Furnished by health facility pursuant to physician's order. Furnished by a health facility for treatment of any person pursuant to the order of a licensed physician and surgeon, dentist, or podiatrist.

(4) Sold to physician, dentist, podiatrist, or health facility. Sold to a licensed physician and surgeon, podiatrist, dentist, or health facility for the treatment of a human being.

(5) Sold to government entities. Sold to the state or any political subdivision or municipal corporation thereof, for use in the treatment of a human being; or furnished for the treatment of a human being by a medical facility or clinic maintained by the state or a political subdivision.

(6) Furnished without charge by pharmaceutical manufacturer or distributor. Furnished without charge by a pharmaceutical manufacturer or distributor to a licensed physician, surgeon, dentist, podiatrist, or health facility for the treatment of a human being, or furnished without charge to an institution of higher education for instruction or research, provided the exemption is limited to medicines of a type that can be dispensed only (A) for the treatment of a human being and (B) pursuant to prescriptions issued by persons authorized to prescribe medicines.

Source: Cal. Rev. & Tax. Code § 6369(a)

## Expanded definition of "medicines" — implanted and orthotic devices

Notwithstanding subdivision (b)'s general definition (which the statute does not reproduce in full text but references elsewhere), § 6369(c) specifies that "medicines" includes:

(1) Sutures, whether or not permanently implanted.

(2) Bone screws, bone pins, pacemakers, and other articles (other than dentures) permanently implanted in the human body to assist the functioning of any natural organ, artery, vein, or limb and which remain or dissolve in the body.

(3) Orthotic devices (other than orthodontic devices) designed to be worn on the person of the user as a brace, support, or correction for the body structure, and replacement parts for these devices. However, orthopedic shoes and supportive devices for the foot are not exempt unless they are custom-made biomechanical foot orthoses or are an integral part of a leg brace or artificial leg.

Source: Cal. Rev. & Tax. Code § 6369(c)

Subdivision (e) provides that insulin and insulin syringes furnished by a registered pharmacist to a person for treatment of diabetes as directed by a physician are deemed to be dispensed on prescription within the meaning of § 6369.

Subdivision (f) provides that orthotic and prosthetic devices, and replacement parts for these devices, furnished pursuant to the written order of a physician or podiatrist, are deemed to be dispensed on prescription within the meaning of paragraph (a)(1), whether or not the devices are furnished by a registered pharmacist.

Subdivision (g) provides that mammary prostheses, and any appliances and related supplies necessary as the result of any surgical procedure by which an artificial opening is created in the human body for the elimination of natural waste, are deemed to be dispensed on prescription.

Source: Cal. Rev. & Tax. Code § 6369(e), (f), (g)

## Regulatory definition of "medicines" and "persons authorized to prescribe"

Regulation 1591 implements § 6369. Subdivision (a)(1) defines "Physicians, Dentists, Optometrists, and Podiatrists" as persons authorized by a currently valid and unrevoked license to practice their respective professions in California. "Physician" includes any person holding a valid physician's and surgeon's certificate or certificate to practice medicine and surgery issued by the Medical Board of California or the Osteopathic Medical Board of California.

Subdivision (a)(2) defines "Prescription" to mean an oral, written, or electronic transmission order issued by a physician, dentist, optometrist, or podiatrist licensed in California and given individually for the person or persons for whom ordered.

Source: Cal. Code Regs. tit. 18, § 1591(a)(1), (a)(2)

Acupuncturists, even if licensed, are not "persons authorized to prescribe" medicines under Regulation 1591, and prescriptions written by acupuncturists do not support the medicines exemption.

Source: CDTFA Annotation 425.0410

## Items excluded from the definition of "medicines"

Regulation 1591(c) lists items that do not qualify as medicines and are therefore subject to tax even when prescribed:

(1) Auditory, ophthalmic, and ocular devices and appliances (except when permanently implanted in the body).

(2) Orthodontic and dental devices, orthopedic devices for the foot (unless custom-made biomechanical foot orthoses or integral part of a leg brace or artificial leg), repair of dentures, and certain prosthetic and orthotic devices not designed to be worn fully on or in the body. The regulation also excludes devices, instruments, apparatus, contrivances, and other similar items that apply treatment to patients but are not implanted in or worn on the body (e.g., colon irrigation devices, cervical diaphragms).

(3) Test kits and equipment used to analyze, monitor, or test samples of cells, tissues, organs, blood, saliva, or other bodily fluids do not qualify as medicines regardless of whether they are prescribed (except as provided in Regulation 1591.1(b)(4) for glucose test strips and skin puncture lancets used by diabetic patients in conjunction with insulin).

Source: Cal. Code Regs. tit. 18, § 1591(c)

Over-the-counter sales of items that would otherwise qualify as medicines are taxable when sold without a prescription. For example, aspirin, liniment, and milk of magnesia sold over the counter are taxable; the same items become exempt when sold to a health facility and later furnished to patients pursuant to a physician's order.

Source: CDTFA Annotation 425.0143

## Interaction between food and medicine exemptions

When a product could arguably fall under either exemption, CDTFA guidance clarifies that the classifications are mutually exclusive. A product cannot be both a food product and a medicine, and the characterization depends on whether it meets the statutory and regulatory definitions. Products in liquid, powdered, granular, tablet, capsule, lozenge, and pill form labeled as dietary supplements are excluded from the food-products exemption under § 6359(c)(1) and are taxable unless they qualify as complete dietary foods under Regulation 1602(a)(4) or as exempt prescription medicines under § 6369 and Regulation 1591.

Source: Cal. Rev. & Tax. Code § 6359(c)

Source: Cal. Code Regs. tit. 18, § 1602(a)(4)

California Regulation 1706 governs drop shipment transactions in which a remote "true retailer" — a retailer not engaged in business in California — sells tangible personal property to a California consumer but instructs a California-based supplier to deliver the property directly to the consumer. The regulation reclassifies the California supplier as the retailer for sales and use tax purposes and imposes liability on that supplier, even though the supplier's own sale (to the true retailer) may have been at wholesale. This reclassification ensures that California collects tax on the retail transaction when the true retailer itself lacks nexus.

## Drop shipment structure and terminology

A drop shipment generally involves two separate sales. The true retailer (a retailer not engaged in business in California) contracts to sell tangible personal property to a California consumer. The true retailer then contracts to purchase that property from a supplier and instructs the supplier to ship the property directly to the consumer. The supplier is a drop shipper.

Definitions:

• "True retailer" means any retailer who is not a retailer engaged in business in California and who makes a sale of tangible personal property to a consumer in California.

• "Drop shipment" means any delivery of tangible personal property by an owner or former owner thereof, or factor or agent of that owner or former owner, to a California consumer pursuant to the instructions of a true retailer.

• "Drop shipper" means any owner or former owner of tangible personal property, or factor or agent of that owner or former owner, who makes a drop shipment.

• "Retailer engaged in business in this state" means any person who would be so defined by Cal. Rev. & Tax. Code § 6203 if the person were a retailer (including the $500,000 economic-nexus threshold applicable to remote sellers as of April 1, 2019).

Source: Cal. Code Regs. tit. 18, § 1706(a)

## Drop shipper liability — reclassification as the retailer

A drop shipper that is a retailer engaged in business in California is reclassified as the retailer and is liable for tax as provided in the regulation. The drop shipper must report and pay tax measured by the retail selling price of the property paid by the California consumer to the true retailer, unless the sale to the California consumer and the use by the consumer are exempt from sales and use tax.

When more than two separate sales are involved in a chain (for example, the true retailer purchases from Supplier A, who purchases from Supplier B, who ships directly to the consumer), the person liable for the applicable tax as the drop shipper is the first person who is a retailer engaged in business in California in the series of transactions beginning with the purchase by the true retailer.

Source: Cal. Code Regs. tit. 18, § 1706(b), (d)(1)

## The 10% markup rule — calculating the retail selling price

Effective for reporting periods commencing on or after January 1, 2001, the drop shipper may calculate the retail selling price of its drop shipments based on its selling price of the property to the true retailer plus a markup of 10 percent (10%). This safe-harbor calculation is permitted when the drop shipper does not know the actual retail price charged by the true retailer to the California consumer.

A drop shipper may use a markup percentage lower than 10 percent if the drop shipper can document that the lower markup percentage accurately reflects the retail selling price charged by the true retailer to the California consumer. If a markup percentage lower than 10 percent is developed in an audit of the drop shipper, the drop shipper may use that percentage for subsequent reporting periods provided the drop shipper has not had a significant change in business operations. If a later audit develops a higher percentage, the CDTFA will not assess additional tax based on the newly computed markup percentage, provided there has been no significant change in business operations.

Exception for vehicles, vessels, and aircraft: The 10% markup procedure set forth in subdivision (d)(2) does not apply to drop shipments of vehicles, vessels, and aircraft (also known as "courtesy deliveries"). For purposes of this regulation, "vehicle," "vessel," and "aircraft" are defined in Cal. Rev. & Tax. Code §§ 6272, 6273, and 6274, respectively.

Source: Cal. Code Regs. tit. 18, § 1706(d)(2), (d)(3)

## Overcoming the drop shipper presumption — resale certificates

Regulation 1706 creates a presumption that an owner or former owner of tangible personal property (or a factor or agent of that owner) who, upon the instructions of that person's customer, delivers property to a person in California is a drop shipper liable for the applicable tax as the retailer.

A person may overcome this presumption in three ways:

(1) Valid resale certificate from the true retailer. By accepting a timely resale certificate in good faith from that person's customer (the true retailer) that contains all the essential elements as provided by Regulation 1668, Sales for Resale, including:

• (A) The customer's valid California seller's permit number; or
• (B) An explanation as to the reason why the customer is not required to hold a California seller's permit, and either (1) a statement that the customer is registered with the CDTFA for a Certificate of Registration—Use Tax and the customer's valid account number, or (2) documentation establishing that the customer is a marketplace seller and purchased the property pursuant to its sale facilitated by a marketplace facilitator that was the retailer for purposes of the sale under Cal. Rev. & Tax. Code § 6043.

(2) Customer was a retailer engaged in business in California. By establishing that the person's customer was a retailer engaged in business in California at the time of the sale (or that the customer was a marketplace seller who purchased the property pursuant to a sale facilitated by a marketplace facilitator that was the retailer for purposes of the sale).

(3) Valid resale certificate from the ultimate recipient in California. By accepting a timely and valid resale certificate in good faith that contains all the essential elements as provided by Regulation 1668 from the person in California to whom the property is delivered.

Source: Cal. Code Regs. tit. 18, § 1706(f)

## Marketplace sales are not drop shipments (effective October 1, 2019)

Subdivision (c) of Regulation 1706, added by amendment effective November 30, 2021, clarifies that when a marketplace facilitator is the retailer for a retail sale of tangible personal property to a California consumer by a marketplace seller under Cal. Rev. & Tax. Code § 6043 (the Marketplace Facilitator Act, effective October 1, 2019), the marketplace facilitator is not a true retailer.

As a result, if the marketplace seller contracts to purchase the property from a supplier and instructs the supplier to deliver the property directly to the consumer, the supplier is not a drop shipper under Regulation 1706, because the supplier is not delivering the property pursuant to a retail sale by a true retailer. The marketplace facilitator remains the retailer liable for the tax on the sale to the consumer.

Source: Cal. Code Regs. tit. 18, § 1706(c)

## Interaction with Cal. Rev. & Tax. Code § 6007 and § 6203

Regulation 1706 references Cal. Rev. & Tax. Code § 6007 (definition of "retail sale") and § 6203 (engaged in business in this state) as the statutory foundation for reclassifying a drop shipper as the retailer. The regulation's definition of "retailer engaged in business in this state" expressly incorporates the § 6203 standard, including economic nexus. This means that beginning April 1, 2019, a remote supplier with total combined sales into California exceeding $500,000 is a retailer engaged in business in California and will be reclassified as the retailer on its drop shipments unless it obtains a valid resale certificate from its customer.

Source: Cal. Code Regs. tit. 18, § 1706, Reference

---

Effective dates:

• Regulation 1706 was adopted September 13, 2000, effective December 28, 2000.
• The 10% markup rule in subdivision (d)(2) applies to reporting periods commencing on or after January 1, 2001.
• The marketplace-sales exclusion in subdivision (c) reflects the effective date of the Marketplace Facilitator Act, October 1, 2019, and was codified by amendment effective November 30, 2021.

Source: Cal. Code Regs. tit. 18, § 1706, History

California allows retailers to deduct previously paid sales or use tax when customer accounts become worthless and are charged off, relieving the retailer from liability for tax on amounts that will never be collected. The deduction is subject to strict requirements on charge-off method, accrual-basis reporting, allocation of partial payments, and—until January 1, 2028—a special election regime for lenders holding retail accounts.

## Who may claim the deduction

A retailer is relieved from liability for sales tax that became due and payable, insofar as the measure of the tax is represented by accounts that have been found to be worthless and charged off for income tax purposes by the retailer or, if the retailer is not required to file income tax returns, charged off in accordance with generally accepted accounting principles (GAAP). The retailer that has previously paid the tax may take as a deduction the amount found worthless and charged off.

For purposes of this relief, "retailer" includes any entity affiliated with the retailer under Internal Revenue Code section 1504 (the 80-percent-ownership test for affiliated groups). This means that a parent corporation or affiliated entity may claim a bad debt deduction for worthless accounts of a subsidiary retailer if the bad debt is charged off on the parent's or affiliate's income tax return.

Source: Cal. Rev. & Tax. Code § 6055(a)(1)

Source: Cal. Code Regs. tit. 18, § 1642(a)

## Accrual-basis reporting requirement

All retailers must report sales tax liability on an accrual basis, regardless of the method they use for federal income tax purposes. Bad debt deductions will not be disallowed solely for the reason that a retailer is on a cash reporting basis for income tax purposes. The retailer must, however, have actually paid the sales or use tax to the state in order to claim a bad debt deduction.

Source: Cal. Code Regs. tit. 18, § 1642(c)

## When to take the deduction

The bad debt deduction should be taken on the return filed for the period in which the amount was found worthless and charged off for income tax purposes (or, if the retailer is not required to file income tax returns, charged off in accordance with GAAP). Failure to take the deduction on the proper return will not prevent the allowance of a refund, provided a claim for refund is filed with the CDTFA within the limitation periods specified in Cal. Rev. & Tax. Code § 6902 (generally three years from the date of overpayment).

Source: Cal. Code Regs. tit. 18, § 1642(a)

## Allocation of partial payments — three permitted methods

If an account is comprised in part of nontaxable receipts (such as interest, insurance, repair charges, or installation labor) and in part of taxable receipts upon which tax has been paid, a bad debt deduction may be claimed only with respect to the unpaid amount upon which tax has been paid. In determining that amount, all payments and credits to the account may be applied using any of three methods:

(1) Pro rata method. Payments and credits are applied ratably against the various elements comprising the amount the purchaser contracted to pay (taxable merchandise, nontaxable services, interest, etc.).

(2) Contract method. Payments and credits are applied as provided in the contract of sale.

(3) Alternative method. Any other method that reasonably determines the amount of the taxable receipts. When claiming a bad debt deduction or refund using an alternative method, the retailer must include a clear explanation of that method along with the deduction or refund claim.

Once a retailer has applied payments and credits using one method and has claimed a deduction or refund based on that method, the retailer shall not thereafter reapply the payments or credits using another method with respect to such losses previously claimed.

Source: Cal. Code Regs. tit. 18, § 1642(b)(1)

## What may not be deducted

No deduction is allowable for expenses incurred by the retailer in attempting to enforce collection of any account receivable, or for that portion of a debt recovered that is retained by or paid to a third party as compensation for services rendered in collecting the account.

No deduction is allowable in the event that property sold on credit is repossessed, except where the entire consideration paid by the purchaser is refunded to the purchaser or where a credit for a worthless account is allowable. When there is a repossession, a bad debt deduction is allowable only to the extent that the retailer sustains a net loss of gross receipts upon which tax has been paid—that is, when the amount of all payments and credits allocated to the purchase price of the merchandise, including the wholesale value of the repossessed article, is less than that price.

Source: Cal. Code Regs. tit. 18, § 1642(b)(2), (d)

## Recovery of accounts previously charged off

If any account found worthless and charged off is thereafter collected by the retailer, in whole or in part, the taxable percentage of the amount so collected shall be included in the first return filed after the collection and the tax shall be paid with the return. The same rule applies to amounts received from a third party for the sale of an account after the retailer has found it to be worthless and claimed a bad debt deduction or refund.

Source: Cal. Rev. & Tax. Code § 6055(a)(1)

Source: Cal. Code Regs. tit. 18, § 1642(d)

## Lender election — special rules operative until January 1, 2028

In the case of accounts held by a lender, a retailer or lender that makes a proper election may claim a deduction or refund of the tax that the retailer has previously reported and paid, provided all of the following conditions are met:

(A) A deduction was not previously claimed or allowed on any portion of the accounts.

(B) The accounts have been found worthless and written off by the lender in accordance with the requirements of subdivision (a) (income tax charge-off or GAAP charge-off) before January 1, 2025.

(C) The contract between the retailer and the lender contains an irrevocable relinquishment of all rights to the account from the retailer to the lender.

(D) The retailer remitted the tax on or after January 1, 2000.

(E) The party electing to claim the deduction or refund files a claim in a manner prescribed by the CDTFA.

For purposes of this subdivision, the term "lender" means any of the following: (1) any person that holds a retail account which that person purchased directly from a retailer who reported the tax; (2) any person that holds a retail account pursuant to that person's contract directly with the retailer that reported the tax; or (3) any person that is either an affiliated entity, under IRC § 1504, of a person described in (1) or (2), or an assignee of a person described in (1) or (2).

A "proper election" shall be established when the retailer that reported the tax and the lender prepare and retain an election form, signed by both parties, designating which party is entitled to claim the deduction or refund. This election may not be amended or revoked unless a new election, signed by both parties, is prepared and retained by the retailer and the lender.

If the retailer or the lender thereafter collects in whole or in part any accounts, the party that claimed the deduction or refund under the election must remit the tax: if the retailer claimed it, the retailer includes the amount collected in its first return filed after collection and pays tax on that amount; if the lender claimed it, the lender pays the tax to the CDTFA in accordance with Cal. Rev. & Tax. Code § 6451.

Important limitation: An entity that is a retailer under this lender-election provision is not entitled to a deduction under subdivision (a)(1) on or after January 1, 2025. Stated differently, affiliated lenders that previously qualified as "retailers" lost the ability to claim bad debt deductions for new charge-offs beginning January 1, 2025. Only retailers in the traditional sense—those making retail sales—may claim bad debt deductions for charge-offs occurring on or after January 1, 2025.

Source: Cal. Rev. & Tax. Code § 6055(a)(2), (a)(3), (b)(1)–(4)

## Sunset and repeal

Cal. Rev. & Tax. Code § 6055 (the statute authorizing bad debt deductions) shall remain operative until January 1, 2028, and as of that date is repealed. The Legislature enacted this sunset as part of Assembly Bill 167 in 2023. Unless the Legislature extends or re-enacts the provision before that date, retailers will lose the ability to claim bad debt deductions for sales and use tax purposes for charge-offs occurring on or after January 1, 2028.

Source: Cal. Rev. & Tax. Code § 6055(c)

California imposes penalties and interest on unpaid, late-paid, and underpaid sales and use tax, as well as on failures to file required returns. The penalty rate depends on whether the failure is simple delinquency, negligence, or fraud. Interest accrues separately and is not waivable, though certain penalties may be waived for reasonable cause.

## Late-payment and late-filing penalty — 10 percent under § 6591

Cal. Rev. & Tax. Code § 6591(a) imposes a 10 percent penalty on any person who fails to pay any tax to the state or any amount of tax required to be collected and paid to the state within the time required, plus interest at the modified adjusted rate per month from the date the tax became due until the date of payment. This penalty applies to self-declared tax on a return, not to amounts assessed by the CDTFA under a deficiency determination (which are governed by §§ 6511 and 6565).

Source: Cal. Rev. & Tax. Code § 6591(a)

Section 6591(b) imposes a 10 percent penalty on any person who fails to file a return in accordance with the due date set forth in § 6451 (quarterly return due date) or the due date established by the CDTFA under § 6455 (monthly or other assigned due date). The penalty is calculated on the amount of taxes, exclusive of prepayments, with respect to the period for which the return is required.

Subdivision (c) limits the penalties imposed by § 6591 to a maximum of 10 percent of the taxes for which the return is required, exclusive of any prepayments, for any one return.

Source: Cal. Rev. & Tax. Code § 6591(b), (c)

## Penalty for failure to pay a determination — 10 percent under § 6565

When the CDTFA issues a deficiency determination under Article 2 (commencing with § 6481) or a determination for failure to file a return under Article 3 (commencing with § 6511), and the taxpayer fails to pay the amount shown on the determination on or before the penalty date specified in the notice, a 10 percent penalty applies to the unpaid amount, unless the taxpayer has filed a timely petition for redetermination.

Source: Cal. Code Regs. tit. 18, § 1703 (referencing Cal. Rev. & Tax. Code § 6565)

Section 6565 penalties are in addition to any penalties imposed at the time the determination was issued (for example, negligence or fraud penalties assessed as part of the audit). Filing a timely petition for redetermination within 30 days under § 6561 stays the accrual of the § 6565 penalty.

## Failure to file a return (CDTFA-issued determination) — 10 percent under § 6511

If any person fails to make a return, the CDTFA may issue a determination under § 6511 estimating the amount of gross receipts and the tax due. The determination includes a 10 percent penalty on the tax amount determined.

Source: Cal. Code Regs. tit. 18, § 1703 (referencing Cal. Rev. & Tax. Code § 6511)

The § 6511 penalty is imposed at the time the determination is issued and is separate from the § 6565 penalty (which accrues only if the taxpayer fails to pay the determination or file a timely petition).

## Fraud or intent to evade — 25 percent penalty under § 6485

If any part of a deficiency for which a deficiency determination is made is due to fraud or an intent to evade the Sales and Use Tax Law or authorized rules and regulations, a 25 percent penalty is added to the amount of the determination.

Source: Cal. Rev. & Tax. Code § 6485

The § 6485 fraud penalty is imposed in addition to the underlying tax and interest, and is not subject to relief for reasonable cause under § 6592. "Fraud" for purposes of California sales and use tax is defined as acts with intent to deprive the state of taxes due under the law. "Intent to evade" is intent to escape paying tax through misrepresentation or deception.

Source: CDTFA Regulation 1703 (annotation)

The fraud penalty applies when the CDTFA can demonstrate that the taxpayer knowingly understated tax liability or failed to report taxable transactions with the specific intent to avoid the tax. The burden of proof for fraud is on the CDTFA and requires clear and convincing evidence.

## Negligence or intentional disregard — 10 percent penalty under § 6484

Cal. Rev. & Tax. Code § 6484 imposes a 10 percent negligence penalty if any part of a deficiency is due to negligence or intentional disregard of the Sales and Use Tax Law or authorized rules and regulations, but without intent to defraud. This penalty does not apply to amounts already subject to penalties under §§ 6485, 6511, 6514, or 6591.

Source: Cal. Code Regs. tit. 18, § 1703 (referencing Cal. Rev. & Tax. Code § 6484)

The negligence penalty is less severe than the fraud penalty and may be relieved for reasonable cause under § 6592, unlike the fraud penalty. Negligence includes careless mistakes, failure to maintain adequate records, and repeated underreporting errors.

## Interest rate — IRC § 6621 rate plus 3 percent

Interest on unpaid tax accrues at the modified adjusted rate per month, or fraction thereof. For underpayments of tax, the "modified adjusted rate per annum" is the rate for underpayments determined in accordance with Internal Revenue Code § 6621 plus three percentage points. The annual rate is divided by 12 to determine the monthly rate.

Source: Cal. Code Regs. tit. 18, § 1703(a)(1)(A), (B)

IRC § 6621 sets the federal underpayment rate quarterly based on the federal short-term rate plus 3 percentage points. California then adds an additional 3 percentage points to that federal underpayment rate. For example, if the IRC § 6621 underpayment rate is 8 percent per annum, California's modified adjusted rate would be 11 percent per annum, or approximately 0.917 percent per month.

The CDTFA publishes the current interest rate on its website. The rate is adjusted quarterly to track changes in the federal rate.

Source: Cal. Rev. & Tax. Code § 6591.5 (as referenced in Regulation 1703)

Interest is computed from the date the tax became due and payable until the date of payment. Interest is not waivable and accrues regardless of whether the failure to pay was due to reasonable cause. Interest continues to accrue during administrative appeals and litigation unless the taxpayer posts a bond or makes a protective payment.

## Relief from penalties for reasonable cause — § 6592

If the CDTFA finds that a person's failure to make a timely return or payment is due to reasonable cause and circumstances beyond the person's control, and occurred notwithstanding the exercise of ordinary care and the absence of willful neglect, the person shall be relieved of the penalties provided by §§ 6452.05, 6476, 6477, 6479.3, 6480.4, 6511, 6565, 6591, 7051.2, 7073, and 7074.

Source: Cal. Rev. & Tax. Code § 6592(a)(1)

The statutory standard has four elements, all of which must be present:

1. Reasonable cause for the failure;
2. Circumstances beyond the person's control;
3. The person exercised ordinary care; and
4. The failure was not due to willful neglect.

Procedure for requesting relief. A person seeking to be relieved of a penalty must file with the CDTFA a statement under penalty of perjury setting forth the facts upon which the claim for relief is based. The request may be submitted with the return, in response to a notice of determination, or as part of a petition for redetermination.

Source: Cal. Rev. & Tax. Code § 6592(b)

Source: Cal. Code Regs. tit. 18, § 1703(c)(8)

Penalties not subject to reasonable-cause relief. Section 6592 does not provide relief for the 25 percent fraud penalty under § 6485 or § 6514, the 10 percent negligence penalty under § 6478 (late prepayment due to negligence), or the 40 percent penalty under § 6597 (failure to remit collected tax reimbursement). Additionally, § 6592 relief does not eliminate interest; it relieves only the penalties listed in § 6592(a).

Source: Cal. Code Regs. tit. 18, § 1703(c)(8)

Common reasonable-cause scenarios. The CDTFA has recognized reasonable cause in cases involving natural disasters, serious illness or death of the person responsible for filing, reliance on erroneous written advice from the CDTFA, and unforeseeable computer system failures beyond the taxpayer's control. Ignorance of the law, financial hardship, and reliance on a tax professional's error generally do not constitute reasonable cause.

## Interaction of penalties and interest

Penalties and interest are cumulative. A taxpayer who fails to file a return and pay tax on time may be subject to:

• The 10 percent late-filing penalty under § 6591(b), plus
• The 10 percent late-payment penalty under § 6591(a) (though § 6591(c) caps the total penalty at 10 percent for any one return), plus
• Interest from the due date until payment, plus
• If the CDTFA issues a determination and the taxpayer fails to pay or file a timely petition, an additional 10 percent penalty under § 6565.

If the deficiency is attributable to negligence or fraud, the CDTFA may also impose the 10 percent negligence penalty under § 6484 or the 25 percent fraud penalty under § 6485, but not both. Section 6484 expressly excludes amounts already subject to § 6485, § 6511, § 6514, or § 6591.

Interest accrues on the underlying tax, but not on penalties. Interest and penalties are computed separately.

---

Practitioner note: Because § 6592 relief is mandatory ("shall be relieved") when the statutory standard is met, the CDTFA's determination is subject to administrative and judicial review. A taxpayer whose penalty-relief request is denied may challenge the denial in a petition for redetermination, an appeal to the Office of Tax Appeals, and ultimately by writ of mandate to superior court. However, the burden of proving reasonable cause rests on the taxpayer, and the CDTFA's factual findings are generally entitled to deference on review.

California treats most leases of tangible personal property as both a "sale" and a "purchase" under the Sales and Use Tax Law, imposing tax on a continuing basis measured by rental receipts rather than as a single up-front transaction. This lease-as-continuing-sale framework is codified in Cal. Rev. & Tax. Code §§ 6006(g) and 6010(e) and implemented by Regulation 1660. Lessors must understand three interlocking rules: the general tax-on-rentals structure, the alternative acquisition-tax election available in specific circumstances, and the irrevocable nature of the lessor's chosen method.

## Lease as continuing sale and purchase — foundational rule

Cal. Rev. & Tax. Code § 6006(g)(1) provides that "sale" means and includes "[a]ny lease of tangible personal property in any manner or by any means whatsoever, for consideration," subject to enumerated exceptions. Correspondingly, § 6010(e) provides that "purchase" includes "[a]ny lease of tangible personal property in any manner or by any means whatsoever, for consideration," subject to the same exceptions. Regulation 1660(b)(1) restates this principle: "[a]ny lease of tangible personal property in any manner whatsoever for a consideration is a 'sale' as defined in Section 6006 of the Revenue and Taxation Code, and a 'purchase' as defined in section 6010 of the Revenue and Taxation Code."

The statute defines "lease" broadly to include "rental, hire and license." Cal. Rev. & Tax. Code § 6006.3.

Cal. Rev. & Tax. Code § 6006.1 further specifies that "[t]he granting of possession of tangible personal property by a lessor to a lessee, or to another person at the direction of the lessee, is a continuing sale in this state by the lessor for the duration of the lease as respects any period of time the leased property is situated in this state." The parallel provision for purchases, § 6010.1, states that "[t]he possession of tangible personal property by a lessee, or by another person at the direction of the lessee, is a continuing purchase for use in this state by the lessee for the duration of the lease as respects any period of time the leased property is situated in this state."

This continuing-sale characterization means that each rental payment represents a new taxable event. The general rule is that the lessee is liable for use tax measured by the rentals payable, and the lessor must collect the use tax from the lessee at the time each rental payment is made.

Source: Cal. Rev. & Tax. Code § 6006(g)(1) Source: Cal. Rev. & Tax. Code § 6010(e) Source: Cal. Code Regs. tit. 18, § 1660(b)(1) Source: Cal. Rev. & Tax. Code § 6006.1

## Exceptions — leases that are not sales

Sections 6006(g) and 6010(e) exclude from the definition of "sale" and "purchase" the following leases:

(1) Motion picture films and video tapes, including television films and video tapes.

(2) Linen supplies and similar articles when an essential part of the lease agreement is the furnishing of the recurring service of laundering or cleaning the articles.

(3) Household furnishings leased together with a lease of the living quarters in which they are to be used.

(4) Mobile transportation equipment as defined in Cal. Rev. & Tax. Code § 6023 (separate lease rules apply under Regulation 1661).

(5) Tangible personal property leased in substantially the same form as acquired by the lessor or by a transferor, as to which the lessor or transferor has paid sales tax reimbursement or has paid use tax measured by the purchase price of the property. This exception is subject to detailed conditions discussed in the next section.

(6) A mobilehome, as defined in Cal. Health & Safety Code §§ 18008 and 18211 (except mobilehomes originally sold new prior to July 1, 1980, and not subject to local property taxation).

Paragraph (7) of both sections provides that paragraphs (1) and (5), as well as Cal. Rev. & Tax. Code § 6094.1, shall not apply to rentals or leases of video cassettes, video tapes, and video discs for private use under which the lessee or renter does not obtain or acquire the right to license, broadcast, exhibit, or reproduce the video cassette, video tape, or video disc.

Source: Cal. Rev. & Tax. Code § 6006(g) Source: Cal. Rev. & Tax. Code § 6010(e)

## Irrevocable election when property is purchased tax-paid

When a lessor acquires property and pays sales tax reimbursement or use tax measured by the purchase price at the time of acquisition, and the lessor subsequently leases the property in substantially the same form as acquired, the payment of acquisition tax is an irrevocable election not to pay tax measured by rental receipts. The lessor may not later change the election by reporting tax on rental receipts and claiming a tax-paid-purchase-resold deduction.

Conversely, if the lessor acquires property under a resale certificate or in a transaction in which no tax applied (for example, an occasional sale) and then leases the property without electing to pay tax on the acquisition, the lessor is subject to use tax measured by the rentals payable on each subsequent rental payment.

Cal. Code Regs. tit. 18, § 1660(c)(3) states: "In the case of property ultimately leased in substantially the same form as acquired, payment of tax or tax reimbursement measured by the purchase price at the time the property is acquired constituted an irrevocable election not to pay tax measured by rental receipts. The lessor may not change his or her election by reporting tax on rental receipts and claiming a tax-paid-purchase-resold deduction."

Source: Cal. Code Regs. tit. 18, § 1660(c)(3)

## Acquisition-tax election available in limited circumstances

In specific circumstances, a lessor who acquires property without paying tax (or where an acquisition-tax election is otherwise permitted) may elect to pay use tax measured by the purchase price of the property in lieu of tax measured by rental receipts. The election is binding and must be exercised by the lessor in a timely return filed for the period in which the property is first leased.

Occasional sale acquisition. Cal. Code Regs. tit. 18, § 1660(c)(4)(A) provides: "A purchaser of tangible personal property acquired in a transaction defined as an occasional sale in section 6006.5(a) of the Revenue and Taxation Code and leased in substantially the same form as acquired by him or her, may elect to pay use tax measured by the purchase price of the property in lieu of tax measured by rental receipts."

An "occasional sale" is a sale of tangible personal property by a person who is not engaged in the business of selling such property, or a sale of all or substantially all the tangible personal property held or used by a person in the course of an activity if the activity is not the principal activity of the person (subject to limitations in § 6006.5).

Timing of the election. The election must be exercised by the lessor in a timely return filed for the period in which the property is first leased by the lessor. A "timely return" is a return filed within the time prescribed by Cal. Rev. & Tax. Code §§ 6452 or 6455, whichever is applicable (generally, the due date for the quarterly or monthly return covering the period in which the first lease commenced). If a lessor fails to make the election in a timely return, the lessor is subject to tax measured by rentals payable on all subsequent rentals of the property.

Cal. Code Regs. tit. 18, § 1660(c)(4)(C) states: "The election provided for in subdivisions (c)(4)(A) and (c)(4)(B) above shall be exercised by the lessor in a timely return filed for the period in which the property is first leased by him or her."

Business transfer acquisition. Subdivision (c)(4)(B) of Regulation 1660 permits a similar acquisition-tax election for a purchaser of tangible personal property acquired in a business transfer meeting the conditions of Cal. Rev. & Tax. Code § 6006.5(b) (generally, a transfer of all or substantially all the tangible personal property held or used by the transferor in the course of activities requiring a seller's permit) and leased in substantially the same form as acquired. The same timely-return requirement applies.

Source: Cal. Code Regs. tit. 18, § 1660(c)(4) Source: Cal. Rev. & Tax. Code § 6006.5

## Measure of tax — rental receipts vs. purchase price

When tax is measured by rental receipts, use tax applies to the total amount paid or payable by the lessee as consideration for the use of the property during each rental period. The measure of tax includes all amounts charged by the lessor to the lessee as part of the rental, such as charges for insurance, delivery, setup, maintenance (if part of the lease), and other lease-related services, except to the extent separately stated charges qualify for specific exclusions (for example, separately stated charges for repair labor may be nontaxable in certain cases). The tax applies separately to each rental payment as it becomes due.

When tax is measured by purchase price (under an acquisition-tax election), use tax applies to the total amount paid or payable by the lessor for the property at the time of acquisition, and no further tax applies to the rental receipts from subsequent leases of that property in substantially the same form. This one-time tax is advantageous when the lessor's rental income over the life of the property will exceed the original purchase price, but once elected, the election is irrevocable even if the lessor later ceases leasing and sells the property.

The definition of "sales price" and "purchase price" under Cal. Rev. & Tax. Code §§ 6011 and 6012 applies to determine the measure in both contexts.

Source: CDTFA Publication 46, Leasing Tangible Personal Property

## Subleases — tax paid at prime lease level

Tax does not apply to receipts from subleases of tangible personal property leased in substantially the same form as acquired by the prime lessor where the prime lessor has paid sales tax reimbursement or use tax measured by the prime lessor's purchase price (or, where applicable, paid tax measured by rental receipts to the lessor from whom the property was acquired). The sublease receipts are not subject to further tax because the prime lessor has already paid tax on the acquisition or on the rentals received from the owner-lessor.

Cal. Code Regs. tit. 18, § 1660(c)(5) states: "Tax does not apply to receipts from subleases of tangible personal property which is leased in substantially the same form as acquired by the prime lessor where the prime lessor has paid sales tax reimbursement or use tax measured by his or her purchase price."

However, if the prime lessor did not pay tax measured by the purchase price and instead was obligated to collect and pay tax measured by rentals payable to the owner-lessor, the sublease arrangement does not relieve the prime lessor of the obligation to collect and remit tax on the subrental receipts received from the sublessee. The tax measure in that case is the rentals received by the prime lessor from the sublessee, not the rentals paid by the prime lessor to the owner-lessor.

Source: Cal. Code Regs. tit. 18, § 1660(c)(5)

## True leases vs. security agreements — title transfer at end of term

A contract designated as a lease may instead be classified as a sale under a security agreement from inception if it binds the lessee for a fixed term and the lessee is to obtain title at the end of the term upon completion of the required payments or has the option at that time to purchase the property for a nominal amount. In that case, the transaction is treated as a sale at inception, and sales tax or use tax applies to the full sales price at the time the contract is executed or the property is delivered, rather than applying tax periodically to rental receipts.

Cal. Rev. & Tax. Code § 6006.3 provides: "Where a contract designated as a lease binds the lessee for a fixed term and the lessee is to obtain title at the end of the term upon the completion of the required payment or has the option at that time to purchase the property for a nominal amount, the contract shall be regarded as a sale under a security agreement from its inception and not as a lease."

Whether an option purchase price is "nominal" is a factual determination. CDTFA considers factors including the relationship between the option price and the property's estimated fair market value at the end of the lease term, the total amount of rental payments compared to the purchase price, and the economic substance of the transaction. An option to purchase at fair market value at the end of the term does not by itself convert a true lease into a sale under a security agreement.

Source: Cal. Rev. & Tax. Code § 6006.3

## Practical compliance — lessor collection duty and timing

Lessors engaged in the business of leasing tangible personal property in California must register with the CDTFA and obtain a seller's permit (or Certificate of Registration—Use Tax if the lessor is located outside California and has no in-state place of business). The lessor must collect use tax from the lessee at the time each rental payment is made, issue invoices showing the tax separately stated or accompanied by a statement that tax reimbursement is included in the amount charged, and report and remit the collected tax on the lessor's sales and use tax return.

The lessor is directly liable for the tax if the lessor fails to collect it from the lessee, subject to interest and penalties. The lessee remains jointly and severally liable for unpaid use tax, but the CDTFA generally looks first to the lessor for collection.

The timing rules for lease transactions follow the general sales and use tax framework: use tax applies to each rental payment at the time the payment is due or paid, whichever is earlier, and the tax must be reported on the return for the reporting period during which the rental accrued or was paid.

Source: Cal. Code Regs. tit. 18, § 1660 Source: CDTFA Publication 46, Leasing Tangible Personal Property

California imposes comprehensive recordkeeping obligations on every seller and purchaser subject to sales and use tax, backed by the CDTFA's statutory authority to examine those records. Failure to maintain adequate records not only exposes a taxpayer to audit liability but may itself be treated as negligence or intent to evade, triggering penalties beyond the underlying tax deficiency.

## Statutory duty to maintain records — RTC § 7053

Cal. Rev. & Tax. Code § 7053 imposes the foundational obligation: "Every seller, every retailer as defined in subdivision (b) of Section 6015, and every person storing, using, or otherwise consuming in this State tangible personal property purchased from a retailer shall keep such records, receipts, invoices, and other pertinent papers in such form as the board may require."

This duty applies to all persons with California sales or use tax exposure—retailers holding seller's permits, remote sellers with economic nexus, purchasers owing use tax, and lessors of tangible personal property.

Source: Cal. Rev. & Tax. Code § 7053

## Required records — Regulation 1698

Cal. Code Regs. tit. 18, § 1698 implements the statutory recordkeeping mandate and specifies in detail what records must be kept, in what form, and for how long.

General requirement. Subdivision (b)(1) of Regulation 1698 provides that a taxpayer must maintain and make available for examination on request by the CDTFA or its authorized representative all records necessary to determine the correct tax liability under the Sales and Use Tax Law and all records necessary for the proper completion of the sales and use tax return.

Such records include but are not limited to:

(A) Normal books of account ordinarily maintained by the average prudent businessperson engaged in the activity in question.

(B) Bills, receipts, invoices, cash register tapes, or other documents of original entry supporting the entries in the books of account.

(C) Schedules or working papers used in connection with the preparation of tax returns.

Electronic records. Subdivision (b)(2) expressly provides that electronic records are considered records under Cal. Rev. & Tax. Code §§ 7053 and 7054. Electronic records used to establish tax compliance must contain sufficient source document (transaction-level) information so that the details underlying the electronic records can be identified and made available to the CDTFA.

Taxpayers using electronic data processing systems must ensure that the electronic records retained meet the same substantiation standards as hardcopy records. For example, if a point-of-sale system overwrites data after a period of time less than four years, the taxpayer must transfer, maintain, and have available all data that would have been overwritten or otherwise removed from the system for the required retention periods. Regulation 1698(i).

Source: Cal. Code Regs. tit. 18, § 1698

## Retention period — four years, or ten years for pre-2003 periods under extended statute

Subdivision (i) of Regulation 1698 provides that all records required to be retained under the regulation must be preserved for a period of not less than four years unless the CDTFA authorizes in writing their destruction within a lesser period.

Exception for extended statute periods. For reporting periods beginning before January 1, 2003 that are subject to the extended ten-year statute of limitations contained in Cal. Rev. & Tax. Code § 7073(d), records required to be retained under Regulation 1698 must be preserved for a period of not less than ten years.

If a taxpayer is under audit, the taxpayer must retain all records that cover the audit period until the audit is complete, even if that means keeping them longer than four years.

Source: Cal. Code Regs. tit. 18, § 1698(i)

Source: CDTFA Publication 116, Sales and Use Tax Records

## CDTFA examination authority — RTC § 7054

Cal. Rev. & Tax. Code § 7054 grants the CDTFA (or any person authorized in writing by it) the authority to examine the books, papers, records, and equipment of any person selling tangible personal property and any person liable for the use tax and to investigate the character of the business of the person in order to verify the accuracy of any return made, or, if no return is made by the person, to ascertain and determine the amount required to be paid.

This examination authority is broad and includes the right to request and review electronic records, transaction-level detail, source documents, contracts, exemption certificates, resale certificates, invoices, bank statements, general ledgers, and any other records bearing on the taxpayer's sales and use tax liability.

The CDTFA may issue formal Information Document Requests (IDRs) during an audit engagement. Taxpayers are generally allowed 30 days to respond to an initial IDR. Failure to provide requested records may result in the CDTFA using estimation methodologies to determine tax liability and may support the imposition of penalties.

Source: Cal. Rev. & Tax. Code § 7054

Source: Cal. Code Regs. tit. 18, § 1700 (Audit Procedures)

## Consequences of inadequate records in an audit

When the CDTFA audits a taxpayer's account and finds that the taxpayer's records are not adequate, the CDTFA will use standard accounting methods—such as markup tests, sampling, or ratio analysis—to determine how much tax the taxpayer should have paid. The taxpayer bears the burden of proving that reported amounts are correct; in the absence of adequate records, the CDTFA's determinations are presumed correct, and the burden shifts to the taxpayer to overcome that presumption.

Negligence and fraud penalties. A lack of complete, accurate records may be considered negligence or intent to evade the tax, and the taxpayer may be subject to penalties as a result. Cal. Rev. & Tax. Code § 6484 authorizes a 10 percent negligence penalty if any part of a deficiency is due to negligence or intentional disregard of the Sales and Use Tax Law or regulations. Section 6485 authorizes a 25 percent fraud penalty if any part of a deficiency is due to fraud or intent to evade.

Interest. In addition to penalties, interest accrues on all unpaid tax from the date the tax became due until the date of payment, at the modified adjusted rate per month (currently the IRC § 6621 underpayment rate plus 3 percent).

CDTFA Publication 116 states: "In addition, a lack of complete, accurate records may be considered negligence or intent to evade the tax on your part, and you may have to pay penalties as a result."

Source: CDTFA Publication 116, Sales and Use Tax Records

Source: Cal. Rev. & Tax. Code § 6484 (negligence penalty)

Source: Cal. Rev. & Tax. Code § 6485 (fraud penalty)

## Imaging and electronic storage permitted under conditions

Subdivision (h) of Regulation 1698 permits taxpayers to convert hardcopy documents received or produced in the normal course of business to storage-only imaging media such as microfilm, microfiche, PDF files, or other media used in electronic imaging, and to discard the original hardcopy documents, provided the conditions in subdivision (h) are met.

Documents that may be stored on imaging media include general books of account, journals, voucher registers, general and subsidiary ledgers, and supporting records of details such as sales invoices, purchase invoices, exemption certificates, and credit memoranda.

The storage-only imaging media must meet specific requirements for legibility, readability, retrieval, and preservation, and the taxpayer must maintain documentation establishing the procedures for converting the hardcopy documents to the storage-only imaging system.

Source: Cal. Code Regs. tit. 18, § 1698(h)

## Record retention limitation agreements — CDTFA discretion

Subdivision (j)(1) of Regulation 1698 provides that the CDTFA has the authority to enter into or revoke a record retention limitation agreement with a taxpayer to modify or waive any of the specific requirements in Regulation 1698. A taxpayer's request for such an agreement must specify which records (if any) the taxpayer proposes not to retain and provide the reasons for not retaining such records, as well as proposing any other terms of the requested agreement. The taxpayer remains subject to all requirements of Regulation 1698 that are not modified, waived, or superseded by a duly approved record retention limitation agreement.

Such agreements are discretionary and rare. In practice, the CDTFA grants them only when the taxpayer can demonstrate that the proposed alternative recordkeeping method provides an equivalent level of substantiation.

Source: Cal. Code Regs. tit. 18, § 1698(j)

California distinguishes sharply among fabrication labor (taxable), installation labor (generally exempt), and repair labor (generally exempt when separately stated). These classifications rest on whether the labor results in the creation or production of tangible personal property, or instead merely installs or restores property to its intended use. The distinction is fact-specific and turns on the condition of the property when the labor begins and what the labor accomplishes.

## Fabrication labor — taxable under Regulation 1526

General rule. Cal. Code Regs. tit. 18, § 1526(a) provides that tax applies to charges for producing, fabricating, processing, printing, or imprinting tangible personal property for a consideration for consumers who furnish either directly or indirectly the materials used in the producing, fabricating, processing, printing, or imprinting. The labor charge is includable in the measure of tax regardless of whether the labor is performed on new or used materials.

Source: Cal. Code Regs. tit. 18, § 1526(a)

Definition of fabrication. Regulation 1526(b) defines producing, fabricating, and processing to include "any operation which results in the creation or production of tangible personal property or which is a step in a process or series of operations resulting in the creation or production of tangible personal property." The regulation expressly distinguishes fabrication from repairing and reconditioning, stating that operations which are limited to the reconditioning or repairing of used articles so as to enable them to accomplish their original purpose more efficiently do not constitute producing, fabricating, or processing.

Source: Cal. Code Regs. tit. 18, § 1526(b)

The key test is whether the labor creates or produces new tangible personal property or changes existing property such that it differs substantively from its original form. When a customer furnishes materials and the service provider performs operations that result in a new item or a distinct end product, the entire labor charge is taxable as fabrication.

Examples of taxable fabrication labor:

• Altering new items. Charges for altering new garments, bedding, or other items constitute taxable fabrication labor regardless of whether the charges are separately stated or included in the selling price of the item. The alteration is treated as a step in the production of the finished product, not as a repair.

Source: Cal. Code Regs. tit. 18, § 1524(b)(1)(A)

• Custom fabrication from customer-furnished materials. A person who fabricates a garment from cloth furnished by a customer, or who cuts customer-furnished carpet and attaches binding to create doormats, performs taxable fabrication labor. Tax applies to the total labor charge, whether or not any materials are supplied by the fabricator.

Source: CDTFA Annotation 435.0583 (Charges by a Carpet Retailer)

• Manufacturing and assembly operations. Modifying automobiles to create racing models, altering production dies to produce different products, fabricating amplifiers and installing them into new computers, and converting black-and-white video tapes to color all constitute fabrication labor because the operations result in the creation or production of tangible personal property that is new or different from the starting materials.

Source: CDTFA Annotation 435.0380 (Automobile Racing Models)

• Batching and blending. Batching concrete aggregate into a ready-mix truck and mixing the aggregate in the truck on the way to the jobsite constitutes taxable fabrication of the resultant wet concrete. Similarly, blending petroleum products is fabrication labor, and charges are includable in the measure of tax even if the blending occurred after the sale of the constituent product parts.

Source: CDTFA Annotation 435.0500 (Batching) and 435.0505 (Blending)

Stretch limousine creation. Regulation 1526(c) specifically provides that producing, fabricating, and processing include any operation which results in the creation or production of a stretch limousine. When a consumer provides a conversion company with a vehicle for conversion into a stretch limousine, tax applies to the entire charge made to the consumer by the conversion company, including all labor charges.

Source: Cal. Code Regs. tit. 18, § 1526(c)(2)

## Installation labor — generally exempt under Regulation 1546(a)

General rule. Cal. Code Regs. tit. 18, § 1546(a) provides that charges for labor or services used in installing or applying the property sold are excluded from the measure of the tax. Installation labor is nontaxable when separately stated, provided the property being installed was sold in a separate taxable transaction. The labor charge must be distinguished on the invoice from the sales price of the property itself.

Source: Cal. Code Regs. tit. 18, § 1546(a)

Exception: fabrication of property in place. Regulation 1546(a) expressly provides that installation labor does not include the fabrication of property in place. If the installer fabricates, assembles, or creates the property at the jobsite or during the installation process, the labor charge attributable to the fabrication portion is taxable, even though the labor to install the fabricated item may be exempt.

Source: Cal. Code Regs. tit. 18, § 1546(a)

Separate-statement requirement. To exclude installation labor from the measure of tax, the charge must be separately stated on the invoice to the customer. If the seller charges a single delivered or installed price without breaking out the installation labor, the entire charge is taxable as part of the sales price of the property.

Examples of installation labor:

• Appliance delivery and hookup. A retailer selling a dishwasher who charges separately on the invoice for delivery and hookup collects tax on the dishwasher price but not on the installation fee. If the installation charge is included in the product price without separate identification, the full amount is taxable.

• Machinery and equipment installation. Labor to install machinery and equipment that has already been manufactured and sold is generally exempt installation labor, provided the charge is separately stated and does not include any fabrication or assembly of the machinery itself.

However, labor to fabricate or assemble machinery or equipment even at the jobsite must be included in the taxable measure. Only labor to install a completed fixture or machine is excluded.

Source: CDTFA guidance on construction contractors (Regulation 1521 context)

## Repair labor — generally exempt under Regulation 1546(b) when parts are ≤ 10% or when separately stated

General rule. California does not tax repair labor. Repair is defined as operations limited to the reconditioning or repairing of used articles so as to enable them to accomplish their original purpose more efficiently. Repair labor is distinguished from fabrication because repair does not result in the creation or production of new tangible personal property; it restores used property to its intended use.

Source: Cal. Code Regs. tit. 18, § 1526(b)

The 10% rule for parts and materials. Regulation 1546(b) establishes a two-tier test for determining whether a repairman is a retailer or a consumer of the parts and materials furnished in connection with repair work:

(1) When repairman is a retailer (parts > 10% or separately stated). If the retail value of the parts and materials furnished in connection with the repair work is more than 10 percent of the total charge, or if the repairman makes a separate charge for such property, the repairman is the retailer of the parts and materials, and tax applies to the fair retail selling price of such property. The repairman must segregate on the invoices to customers and in its records the fair retail selling price of the parts and materials from the charges for labor of repair, installation, or other services performed. The labor charge remains exempt.

(2) When repairman is a consumer (parts ≤ 10% and not separately stated). If the retail value of the parts and materials furnished in connection with the repair work is 10 percent or less of the total charge, and the repairman does not make a separate charge for the parts and materials, the repairman is the consumer of the parts and materials. Tax applies to the sale of the parts to the repairman (the repairman pays tax when purchasing the parts from its supplier), and the repairman does not collect tax from the customer. The entire repair charge to the customer is exempt from tax.

Source: Cal. Code Regs. tit. 18, § 1546(b)(1), (b)(2)

Definition of "total charge." For purposes of the 10% test, "total charge" means the aggregate of:

• The retail value of the parts and materials furnished or consumed in making the repairs, plus
• Charges for installation, plus
• Charges for labor of repair or other services performed in making the repairs, including charges for in-plant or on-location handling, disassembly, and reassembly.

"Total charge" does not include pick-up or delivery charges.

Source: Cal. Code Regs. tit. 18, § 1546(b)(1)

Segregation requirement. If the retail value of the property is more than 10 percent of the total charge, the repairman must segregate on the invoices to customers and in its records the fair retail selling price of the parts and materials from the charges for labor of repair, installation, or other services performed. If the retailer does not make a segregation, the retail selling price of the parts and materials will be determined by the CDTFA based on information available to it, and the CDTFA may treat the entire charge as taxable.

Source: Cal. Code Regs. tit. 18, § 1546(b)(1)

When fabricating a part during a repair. When the repairer fabricates a part (for example, custom-makes a replacement bracket or machined component) as part of a repair job, the charge for the fabrication is part of the retail value of the part, not repair labor. Fabrication labor performed in the course of a repair is treated as part of the cost of the part and is taxable when the part is taxable.

Source: CDTFA Annotation 315.0283 (Pick and Place System Repair)

## Alteration of used items — generally repair labor (exempt) under Regulation 1524(b)(1)(B)

Alteration of used items such as garments, bedding, draperies, or other personal and household items, when such alterations merely refit or repair the item for the use for which it was created or produced, is not subject to tax. These alterations constitute repair labor, not fabrication.

Charges for the alteration of used items are not taxable. The person performing the alterations is the retailer of any supplies and materials furnished if the retail value of the supplies and materials is more than 10% of the total charge or if a separate charge is made for such property. When the retail value of the supplies and materials is 10% or less of the total charge, the person performing the alterations is the consumer of the supplies and materials.

Source: Cal. Code Regs. tit. 18, § 1524(b)(1)(B)

Example. A customer brings in a suit that has clearly been worn and asks a tailor to make size adjustments. The alteration service charge is considered repair labor and is not taxable. If the tailor furnishes replacement buttons or thread, the 10% rule under Regulation 1546(b) applies to determine whether the tailor is a retailer or consumer of the materials.

Source: CDTFA Tax Guide for Alteration or Tailoring — Industry Topics

## Practitioner checklist — distinguishing fabrication from installation and repair

The controlling factors are:

1. Condition of the property when the labor begins.

• New item or new materials → likely fabrication (taxable).
• Used item being restored to original use → likely repair (labor exempt, parts may be taxable).

1. Nature of the operation.

• Creates or produces tangible personal property or results in a new or different product → fabrication (taxable).
• Installs or applies already-manufactured property → installation (labor exempt when separately stated).
• Restores used property to its intended function → repair (labor exempt, parts subject to 10% rule).

1. Separate-statement discipline.

• Installation and repair labor are exempt only when separately stated on the invoice from the sales price of the property or the parts.
• Bundled pricing forfeits the labor exemption; the entire charge is taxable.

1. On-site fabrication is not installation.

• Labor to fabricate, assemble, or create property at the jobsite is taxable fabrication labor, not exempt installation labor, even if the fabrication occurs at the location where the property will be used.

1. Fabrication within a repair is part of the part.

• When a repairman fabricates a part during a repair (e.g., machining a custom bushing), the fabrication charge is part of the retail value of the part and is taxable when the part is taxable under the 10% rule.

---

Not yet human confirmed as of 2026-05-29.

California imposes a statutory withholding obligation on purchasers of a business or stock of goods to protect against sellers absconding with the purchase price without paying outstanding sales and use tax liabilities. If the purchaser fails to withhold and obtain a certificate of tax clearance or receipt of payment from the CDTFA, the purchaser becomes personally liable for the seller's unpaid sales and use tax, up to the amount of the purchase price.

## Withholding obligation — Cal. Rev. & Tax. Code § 6811

When any person liable for sales or use tax under the Sales and Use Tax Law sells out that person's business or stock of goods or quits the business, the successors or assigns of that person shall withhold sufficient of the purchase price to cover such amount until the former owner produces either (1) a receipt from the CDTFA showing that the tax has been paid, or (2) a certificate stating that no amount is due.

Source: Cal. Rev. & Tax. Code § 6811

This withholding obligation applies only when there is a contract of sale providing for the payment of a purchase price in money or property, or providing for the assumption of liabilities. The obligation does not arise in connection with transfers that do not involve a purchase price, such as assignments for the benefit of creditors, foreclosures of mortgages, or sales by trustees in bankruptcy.

Source: Cal. Code Regs. tit. 18, § 1702(a)

The withholding obligation extends to all amounts incurred with reference to the operation of the business by the predecessor or any former owner, including amounts not yet determined against the predecessor at the time of sale. These amounts include taxes, interest thereon to the date of payment, and penalties.

Source: Cal. Code Regs. tit. 18, § 1702(b)

## Personal liability for failure to withhold — § 6812

If the purchaser of a business or stock of goods fails to withhold from the purchase price as required, the purchaser becomes personally liable for the payment of the amount required to be withheld to the extent of the purchase price, valued in money.

Source: Cal. Rev. & Tax. Code § 6812(a)

This liability applies even when the purchaser was unaware of the seller's tax liability at the time of the sale. Courts have long held that the purpose of §§ 6811 and 6812 is "to prevent a retailer who has failed to pay the state all of the tax due under the act from selling his business and departing with the purchase price" by requiring the purchaser "to take the precaution of demanding either the receipt of the [CDTFA] that the tax has been paid in full or its certificate that no tax is due."

The California Court of Appeal in Schnyder v. State Board of Equalization, 101 Cal. App. 4th 538 (2002), held that a purchaser who deposited purchase funds into escrow and filed an interpleader action to allow creditors to resolve claims did not satisfy § 6811, because the purchaser failed to withhold the funds and demand a tax clearance or receipt of payment from the CDTFA. The purchaser was therefore personally liable under § 6812.

Source: Schnyder v. State Board of Equalization (2002) 101 Cal. App. 4th 538

The purchaser's personal liability is limited to the purchase price. The CDTFA cannot assess the purchaser for an amount exceeding what the purchaser paid (or agreed to pay or assume) for the business or stock of goods.

## Certificate of tax clearance — how to obtain relief from withholding

A purchaser may satisfy the § 6811 withholding obligation by obtaining a certificate of tax clearance from the CDTFA. The CDTFA will issue a certificate either (1) after payment of all amounts due according to the CDTFA's records as of the date of the certificate, or (2) after the payment of the amounts (including amounts not yet ascertained) is secured to the satisfaction of the CDTFA. Security for unascertained amounts is not subject to the limitations in Cal. Rev. & Tax. Code § 6701.

Source: Cal. Rev. & Tax. Code § 6813

Procedure for requesting a certificate. A purchaser or the purchaser's escrow agent should submit a written request to the CDTFA for a certificate of tax clearance. The request must be clear and unambiguous. CDTFA annotations make clear that a letter that merely notifies the CDTFA of the asset purchase, without an express or implied request for a certificate, does not satisfy the requirements of §§ 6811 and 6812.

Source: CDTFA Annotations 535.0062

The request should include the following information:

• The name, address, telephone number, and email address of the purchaser
• The name, address, telephone number, and email address of the seller
• The business address
• A list of every location being purchased

Purchasers may submit the request online through the CDTFA's Online Services portal ("Request a Tax and Fee Clearance") or by written request to a local CDTFA office.

Source: CDTFA Publication 74, Notifying CDTFA

Timing. Within 60 days after the latest of the following dates, the CDTFA shall either issue the certificate or mail notice to the purchaser of the amount that must be paid as a condition of issuing the certificate:

• (A) The date the CDTFA receives a written request from the purchaser for a certificate
• (B) The date of the sale of the business or stock of goods
• (C) The date the former owner's records are made available for audit

Source: Cal. Rev. & Tax. Code § 6812(b)(1), (2)

It can take 60 days or more to obtain a clearance, especially if an audit is required and the seller's books and records are not immediately available. Purchasers and escrow agents should request the certificate well in advance of the anticipated closing date.

Source: CDTFA Publication 74, Notifying CDTFA

If the CDTFA fails to mail the notice within the 60-day period, the purchaser is released from any further obligation to withhold from the purchase price.

Source: Cal. Rev. & Tax. Code § 6812(c)

## Scope of "business or stock of goods" — what transactions trigger successor liability

Successor liability under §§ 6811 and 6812 is triggered when the purchaser acquires a "business" or "stock of goods." The CDTFA and courts construe these terms broadly to effectuate the statutory purpose of ensuring tax collection.

A purchase of substantially all of the operating assets of a business — including intangible assets such as customer lists, goodwill, trade name, and the right to negotiate leases — qualifies as the purchase of a "business" even if the purchaser does not acquire inventory or accounts receivable.

Source: CDTFA Annotations 535.0002

Similarly, in Knudsen Dairy Products Co. v. State Board of Equalization, 12 Cal. App. 3d 47 (1970), the court held that a wholly owned subsidiary of a creditor corporation that acquired all of a debtor's operating assets and continued to operate the business was a "purchaser" and "successor" subject to liability under §§ 6811 and 6812.

Source: Knudsen Dairy Products Co. v. State Board of Equalization (1970) 12 Cal. App. 3d 47

Conversely, a purchaser of only fixtures and equipment is not liable as a successor if the evidence shows that the purchaser did not purchase the business of the former owner or become the former owner's successor in the business.

Source: People v. Gabriel (1943) 57 Cal. App. 2d 788

Multi-location businesses. Where one person operates several business establishments, each at a separate location, each establishment is a separate "business" for purposes of successor liability. A purchaser of the business or stock of goods of any such establishment is subject to liability as a successor with respect to that establishment even if the purchaser does not purchase the business or stock of goods of all the establishments.

Source: Cal. Code Regs. tit. 18, § 1702(b)

Partial purchases. A person who purchases a portion of a business or stock of goods may become liable as a successor, for example, where the person purchases substantially all of the business or stock of goods or where the business or stock of goods is purchased by two or more persons.

Source: Cal. Code Regs. tit. 18, § 1702(b)

## Enforcement — notice of successor liability and statute of limitations

The CDTFA enforces the purchaser's obligation by serving a notice of successor liability on the purchaser. The notice must be served in the manner prescribed for service of a notice of a deficiency determination, not later than three years after the date the CDTFA is notified of the purchase of the business or stock of goods.

Source: Cal. Rev. & Tax. Code § 6814(a)

Source: Cal. Code Regs. tit. 18, § 1702(d)(1)

The three-year limitation period begins to run on the date the CDTFA receives written notice of the purchase, not the date of the sale itself. Accordingly, if a purchaser does not notify the CDTFA of the purchase, the three-year limitation period may not begin to run.

The successor may petition for reconsideration of the liability within 30 days after service of the notice, in the manner provided in Article 5 (commencing with § 6561) of Chapter 5 of the Sales and Use Tax Law. The notice becomes final and the amount due and payable in the manner provided in that article, except that no additional penalty applies if the amount is not paid when due and payable.

Source: Cal. Rev. & Tax. Code § 6814(a)

## Penalty relief for reasonable cause — § 6814(b)

If the CDTFA finds that a successor's failure to withhold a sufficient amount of the purchase price to cover the amount owed by the former owner is due to reasonable cause and circumstances beyond the successor's control, and occurred notwithstanding the exercise of ordinary care and in the absence of willful neglect, the successor may be relieved of any penalty included in the notice of successor liability. The successor seeking relief must file with the CDTFA a statement under penalty of perjury setting forth the facts upon which the claim for relief is based.

Source: Cal. Rev. & Tax. Code § 6814(b)

Source: Cal. Code Regs. tit. 18, § 1702(d)(2)

This relief applies only to penalties, not to the underlying tax or interest. The CDTFA retains discretion to deny relief if the statutory standard is not met.

## Relationship to the Uniform Commercial Code Bulk Sales Law

California's successor liability statutes (Rev. & Tax. Code §§ 6811–6814) are distinct from and operate independently of the Uniform Commercial Code Bulk Sales Law (former Cal. Com. Code §§ 6101 et seq., repealed effective January 1, 1997, but still referenced in older case law).

In Schnyder, the court held that compliance with the Bulk Sales Law — by depositing the purchase price into escrow to allow creditors to file claims — did not avoid successor liability under §§ 6811 and 6812. The public interest in collection of taxes outweighs a private interest in the transfer of business assets, and successor liability is a remedy distinct from the Bulk Sales Law.

Source: Schnyder v. State Board of Equalization (2002) 101 Cal. App. 4th 538

The Bulk Sales Law was repealed in 1997, but the successor liability statutes remain in full force and effect. Purchasers cannot rely on general bulk-sale procedures or escrow protections to satisfy the specific requirement to obtain a CDTFA certificate or receipt under § 6811.

## Practical guidance — when to request a clearance

Purchasers contemplating the acquisition of a business or stock of goods in California should:

1. Request a certificate of tax clearance early in the transaction, ideally before signing a binding purchase agreement or at least contemporaneously with opening escrow.

1. Submit a clear, written request to the CDTFA that expressly asks for a certificate of tax clearance under §§ 6811 and 6813, and provides all required information about the buyer, seller, and locations.

1. Ensure the seller's books and records are immediately available for CDTFA audit if requested, to avoid delays in the 60-day response period.

1. Withhold the full amount advised by the CDTFA from the purchase price and remit it to the CDTFA before disbursing proceeds to the seller, or obtain the certificate before releasing funds.

1. Do not rely on escrow or bulk-sale procedures alone — compliance with those processes does not satisfy the § 6811 requirement.

1. Budget 60 days or more for the CDTFA to respond, especially if an audit is required or if the seller has a history of noncompliance.

In cases of doubt as to possible successor liability, the purchaser should obtain a certificate even if the transaction might not technically constitute a purchase of a "business" or "stock of goods."

Source: Cal. Code Regs. tit. 18, § 1702(b)

California exempts from sales and use tax certain occasional sales — isolated transactions by sellers who do not hold or use the property in the course of an activity requiring a seller's permit. The exemption is codified in Cal. Rev. & Tax. Code § 6367 and defined by § 6006.5, with detailed implementation in Regulation 1595. The exemption provides critical relief for individuals selling personal assets and for certain business reorganizations, but the statute disqualifies sales that are part of a series of sales sufficient in number, scope, and character to require the holding of a seller's permit, and it categorically excludes most sales of vehicles, vessels, and aircraft even when otherwise qualifying.

## Statutory exemption — § 6367

Cal. Rev. & Tax. Code § 6367 provides: "There are exempted from the taxes imposed by this part the gross receipts from occasional sales of tangible personal property and the storage, use, or other consumption in this state of tangible personal property, the transfer of which to the purchaser is an occasional sale."

The exemption applies symmetrically to sales tax (gross receipts from the sale) and use tax (storage, use, or other consumption by the purchaser). If a sale qualifies as an occasional sale under § 6006.5, both the seller's sales tax liability and the purchaser's use tax liability are extinguished.

Source: Cal. Rev. & Tax. Code § 6367

## Definition of "occasional sale" — § 6006.5(a)

Cal. Rev. & Tax. Code § 6006.5(a) defines "occasional sale" to include "a sale of property not held or used by a seller in the course of activities for which he or she is required to hold a seller's permit or permits or would be required to hold a seller's permit or permits if the activities were conducted in this state, provided that the sale is not one of a series of sales sufficient in number, scope, and character to constitute an activity for which he or she is required to hold a seller's permit or would be required to hold a seller's permit if the activity were conducted in this state."

This two-prong test determines whether a sale qualifies:

(1) Property not held in a selling activity. The property sold must not be held or used by the seller in the course of activities for which the seller is required (or would be required) to hold a seller's permit. A person who operates a retail store and sells display fixtures from that store cannot claim the occasional sale exemption for those fixtures, because the fixtures were held or used in an activity requiring a seller's permit. Conversely, an individual who sells a personal automobile (assuming it is not a vehicle that must be registered, see the vehicle exception below) or household furniture not used in any business is selling property not held in a permit-required activity.

(2) Not part of a series of sales. Even if the property was not held in a selling activity, the sale loses the exemption if it is "one of a series of sales sufficient in number, scope, and character to constitute an activity" requiring a seller's permit. Regulation 1595(a)(1) provides that "generally, a person who makes three or more sales for substantial amounts in a period of 12 months is required to hold a seller's permit regardless of whether the sales are at retail or are for resale."

Source: Cal. Rev. & Tax. Code § 6006.5(a)

Source: Cal. Code Regs. tit. 18, § 1595(a)(1)

## The three-sales / twelve-month rule — Regulation 1595

Regulation 1595(a)(1) clarifies the series-of-sales disqualification: "Generally, a person who makes three or more sales for substantial amounts in a period of 12 months is required to hold a seller's permit regardless of whether the sales are at retail or are for resale. Each sale of the person during the 12 month period is included in determining whether that person is required to hold a permit, or would be required to hold a permit if the activities were conducted entirely in California."

What is a "substantial amount"? The regulation does not define "substantial," but CDTFA administrative practice (reflected in its Audit Manual and Office of Tax Appeals decisions) treats a sale of $400 or more as substantial. This $400 threshold is not a statutory or regulatory bright line; it is CDTFA administrative guidance applied on a case-by-case basis. A person who makes a substantial number of sales for relatively small amounts may also be required to hold a seller's permit.

First two sales may be exempt; third and subsequent sales are taxable. Regulation 1595(a)(1) provides that when a person makes three or more sales for substantial amounts in a 12-month period, the person is required to hold a seller's permit. The regulatory framework is that only the first two sales in a 12-month period can qualify as occasional sales; the third and all subsequent sales during that period are taxable. By the third sale, the person's activity has crossed the threshold into an activity requiring a seller's permit, and all further sales made in the course of that activity are retail sales subject to tax.

All sales count, not just retail sales. The regulation expressly provides that sales occurring outside California, whether at retail or for resale, are included in the count, even though they would not themselves be subject to California sales tax. A person who made two sales outside California and then makes a third sale in California cannot claim the occasional sale exemption for the California sale if all three sales are sufficient in number, scope, and character to require the holding of a seller's permit.

Source: Cal. Code Regs. tit. 18, § 1595(a)(1)

## Exclusion — vehicles, vessels, and aircraft

The second paragraph of Cal. Rev. & Tax. Code § 6367 provides a sweeping exclusion: "This exemption does not apply to the gross receipts from the sale of, or to the storage, use, or other consumption in this state of, a mobilehome or commercial coach required to be annually registered under the Health and Safety Code, a vessel or aircraft, as defined in Article 1 (commencing with Section 6271) of Chapter 3.5 of this part, or a vehicle required to be registered under the Vehicle Code or a vehicle required to be identified under Division 16.5 (commencing with Section 38000) of the Vehicle Code or a vehicle that qualifies under the permanent trailer identification plate program pursuant to subdivision (a) of Section 5014.1 of the Vehicle Code."

In other words, the occasional sale exemption categorically does not apply to:

• Vehicles required to be registered with the Department of Motor Vehicles
• Off-highway vehicles subject to identification under Division 16.5 of the Vehicle Code
• Mobilehomes and commercial coaches required to be registered with the Department of Housing and Community Development
• Vessels (as defined in § 6271)
• Aircraft (as defined in § 6271)

These sales are taxable even if they are isolated sales by a person who does not hold a seller's permit and who makes no other sales. The only exception (discussed below) is for sales of such property included in a transfer of all or substantially all the business assets when the real or ultimate ownership remains substantially similar.

Source: Cal. Rev. & Tax. Code § 6367

Source: Cal. Code Regs. tit. 18, § 1595(c)

## Exception to the vehicle exclusion — sale-of-a-business with substantially similar ownership (§ 6006.5(b))

Cal. Rev. & Tax. Code § 6006.5(b) defines a second category of occasional sale: "Any transfer of all or substantially all the property held or used by a person in the course of those activities when after the transfer the real or ultimate ownership of the property is substantially similar to that which existed before the transfer."

This provision applies primarily to business reorganizations — transfers of all or substantially all business assets when the underlying ownership does not materially change. Examples include contributions of assets to a newly formed corporation or LLC solely in exchange for first-issue stock or membership interests, transfers between commonly controlled entities, and certain partnership formations.

Under Regulation 1595(c), subdivision (b) provides the only occasional sale exemption for sales of vehicles, vessels, and aircraft. Such property is exempt only when it is included in a transfer of all or substantially all the property held or used in the course of business activities and the real or ultimate ownership of the property is substantially similar to that which existed before the transfer.

Real or ultimate ownership test. For purposes of this section, stockholders, bondholders, partners, or other persons holding an ownership interest in a corporation or other entity are regarded as having the "real or ultimate ownership" of the property of the corporation or entity. The test requires that the beneficial ownership before and after the transfer be substantially the same; changes in legal form (such as incorporating a sole proprietorship or converting a partnership to an LLC) do not defeat the exemption if the ultimate owners remain the same and hold substantially the same proportionate interests.

Source: Cal. Rev. & Tax. Code § 6006.5(b)

Source: Cal. Code Regs. tit. 18, § 1595(c)

## "All or substantially all" — the 80% threshold in business-sale transactions

Regulation 1595(b)(2) provides a bright-line test for determining when a transfer qualifies as a transfer of "all or substantially all" the property: "A transfer or sale of tangible personal property held or used by a retailer in the course of activities for which the retailer is required to hold a seller's permit will be deemed to be a sale of 'substantially all' the property held or used in such activities if the tangible personal property which is transferred or sold constitutes at least 80 percent of the value (determined by the sales price of property sold or, in the case of property not sold, by the fair market value) of all tangible personal property held or used by the retailer in those activities immediately before the sale."

The 80% rule applies to sales by retailers (persons required to hold a seller's permit). If a retailer sells at least 80% (by value) of the tangible personal property held or used in the permit-required activity, and if the ownership is substantially similar after the transfer, the sale qualifies as an occasional sale under § 6006.5(b).

Important limitation: The 80% rule does not exempt the sale if the property was held or used in the course of activities requiring a seller's permit and the purchaser will use the property in an activity requiring a seller's permit. In other words, the sale of a retail business from one retailer to another retailer does not qualify as an occasional sale under subdivision (a), because the property was held in a permit-required activity. Subdivision (b) applies only when the ownership is substantially similar (which generally is not the case in an arm's-length sale to an unrelated buyer).

Source: Cal. Code Regs. tit. 18, § 1595(b)(2)

## Lease transactions are not occasional sales

Regulation 1595(a)(2) provides: "If tangible personal property is leased under a lease which is a 'sale' as defined in Revenue and Taxation Code Section 6006 or a 'purchase' as defined in Revenue and Taxation Code Section 6010, tax applies to the lease as provided in Regulation 1660 (18 CCR 1660), and the lessor must hold a seller's permit as provided in Regulation 1699 (18 CCR 1699). The lessor is not making an occasional sale since the lessor is making a 'continuing sale' and is thereby holding the leased property in an activity requiring the holding of a seller's permit."

Because California treats most leases as continuing sales (see the Leases section of this guide), a lessor who leases property is deemed to hold that property in an activity requiring a seller's permit. A subsequent sale of the leased property by the lessor is not an occasional sale; the lessor must collect and remit sales or use tax on the sale.

Source: Cal. Code Regs. tit. 18, § 1595(a)(2)

## Separate activities by the same person — the unitary business rule rejected

Cal. Code Regs. tit. 18, § 1595(a)(1)(C) provides: "A person may own a hardware store at one location and a real estate brokerage business at another location, with no relationship between the two activities except that of common ownership. If the person's brokerage activity does not require a seller's permit and the person sells the desks, chairs, and other equipment from that office, that sale would be exempt from tax as an occasional sale if the sale is not part of a series of sales sufficient in number, scope, and character to constitute an activity requiring the holding of a seller's permit."

This principle reflects the California Supreme Court's holding in Ontario Community Foundation, Inc. v. State Board of Equalization, 35 Cal.3d 811 (1984), which struck down a Board of Equalization regulation applying a "unitary business concept" to collapse separate activities. The test under § 6006.5(a) is whether the property sold was held or used in an activity requiring a permit, not whether the seller conducts other, unrelated permit-required activities.

Source: Cal. Code Regs. tit. 18, § 1595(a)(1)(C)

## Examples and case law

Garage sales. CDTFA Publication 107 states that when a person has a garage sale and sells used items, the person is generally not required to hold a seller's permit unless the person has more than two garage sales in a 12-month period or is required to hold a seller's permit for being engaged in the business of selling merchandise due to the number, scope, and character of selling activities. This "two-garage-sale" safe harbor is CDTFA administrative guidance, not a statutory or regulatory bright line, but it reflects the three-sales rule in Regulation 1595.

Liquidation sales. A series of sales made during the liquidation or wind-down of a business are not occasional sales if the business was required to hold a seller's permit and the sales are part of the same series. In Sutter Packing Co. v. State Board of Equalization, 139 Cal.App.2d 889 (1956), the court held that where there were a number of plant equipment sales prior to the termination of a business, a sale of plant equipment thereafter is one of the same series of sales and not an occasional sale.

Sale of capital assets by a retailer. In U.S. Industries, Inc. v. State Board of Equalization, 198 Cal.App.2d 775 (1962), the court held that a manufacturer who customarily made sales at retail and held a seller's permit is subject to the retail sales tax on the sale of all capital assets used in operating the business. "Sale of the business assets in such a case is not an occasional sale. Each sale in question was one of a series of sales sufficient in number, scope and character to constitute an activity requiring the holding of a seller's permit."

Sale of property not suitable for retail sale. In Glass-Tite Industries, Inc. v. State Board of Equalization, 266 Cal.App.2d 691 (1968) (later overturned by a 1983 amendment to § 6014), the court held that a manufacturer who had made sales for resale but no retail sales and whose product was not suitable for retail sale was not a "seller" and the sale of the manufacturer's business assets was therefore an occasional sale. The 1983 amendment to § 6014 reversed this rule; a manufacturer whose product is suitable for retail sale is now treated as a "seller" regardless of whether it makes retail sales, and the sale of that manufacturer's business assets is not an occasional sale.

Source: CDTFA Publication 107 — Do You Need a California Seller's Permit?

## Recent nonprecedential OTA decision — Coast Dental (2025)

In Matter of the Appeal of Coast Dental Services, Inc., OTA Case No. 231114667 (Jan. 31, 2025) (nonprecedential), the California Office of Tax Appeals upheld a sales tax assessment of nearly $1 million against an owner/operator of dental practices who sold the practices and associated business assets in 25 separate asset purchase agreements with 15 different buyers. The taxpayer held a seller's permit for its regular business activities and reported the sales of fixtures and equipment as exempt occasional sales. The OTA, applying Regulation 1595, determined that only the first two sales were exempt and the remaining sales were subject to tax. The OTA rejected the taxpayer's argument that the sales should be treated as a single integrated transaction, finding that the taxpayer failed to provide evidence (such as contract terms or negotiation history) demonstrating that the sales were interdependent or part of a single sale. This decision illustrates CDTFA's strict application of the three-sales rule and the requirement that each separate sale be evaluated independently unless the contracts and facts demonstrate a single integrated transaction. The decision is nonprecedential and does not bind CDTFA or the OTA in other cases.

Unable to confirm as of 2026-05-29.

California's statewide sales and use tax rate is 7.25 percent, composed of a 6.00 percent state portion and a mandatory 1.25 percent uniform local tax imposed under the Bradley-Burns Uniform Local Sales and Use Tax Law (Revenue and Taxation Code sections 7200–7226). The Bradley-Burns local tax applies statewide in every city and county; the 1.00 percent "Local Jurisdiction" portion goes to the city or county where the sale or use occurs, and the 0.25 percent "Local Transportation Fund" portion always goes to the county where the sale or use occurs.

The 7.25 percent statewide base rate is a floor — no jurisdiction may impose a combined rate below it. Rates in most areas exceed 7.25 percent due to voter-approved district taxes imposed under the Transactions and Use Tax Law (Revenue and Taxation Code sections 7251–7273). District taxes are local sales and use taxes adopted by ordinance following voter approval in cities, counties, and special districts to fund transportation, public safety, infrastructure, and other local purposes. District tax rates currently range from 0.10 percent to 2.00 percent, and some areas have multiple overlapping district taxes in effect. As a result, combined sales and use tax rates in California range from the statewide base of 7.25 percent to over 10.00 percent in some jurisdictions.

Determining the combined rate at a given address

The applicable combined rate for a transaction depends on the location of the sale or use and whether district taxes apply at that location. Because district tax boundaries do not always align with city limits or ZIP codes, the correct rate cannot reliably be determined from a mailing address or ZIP code alone. Sellers must identify the precise jurisdiction and any applicable district taxes for each transaction location.

CDTFA provides an address-based rate lookup tool on its website to help sellers determine the correct combined rate for a specific address. The tool identifies the city or county jurisdiction and all district taxes (if any) in effect at that location, and returns the current combined rate. Sellers may also contact CDTFA's Customer Service Center at 1-800-400-7115 (TTY: 711), available Monday through Friday from 7:30 a.m. to 5:00 p.m. Pacific time (except state holidays), or contact a local CDTFA office for rate assistance. Some cities maintain online databases of addresses within their jurisdiction; links to these databases are available on CDTFA's rate information page.

CDTFA publishes current combined rates by city and county in its California City & County Sales & Use Tax Rates guide, updated quarterly as district taxes are adopted, amended, or sunset. When a tax rate changes in a city or county, CDTFA issues a special notice to registered sellers, and businesses must collect, report, and pay the new rate beginning on the effective date of the change. Sellers may sign up to receive email notifications of rate changes through CDTFA's website.

Source: Cal. Rev. & Tax. Code §§ 7200–7226 (Bradley-Burns Uniform Local Sales and Use Tax Law) Source: Cal. Rev. & Tax. Code §§ 7251–7273 (Transactions and Use Tax Law) Source: CDTFA, Tax Guide for Local Jurisdictions and Districts—Getting Started Source: CDTFA, California City & County Sales & Use Tax Rate Information Source: CDTFA, Know Your Sales and Use Tax Rate Source: CDTFA Regulation 1821 (Transactions and Use Tax) Source: CDTFA, Local and District Tax Guide for Retailers – Local Tax

California's statewide sales and use tax rate has changed multiple times over the past several decades, most recently through the temporary increase enacted under Proposition 30 and its subsequent expiration. Understanding the applicable rate in effect at the time of a transaction is critical for practitioners handling audits, amended returns, and refund claims, because the rate that applies is the rate in effect when the sale occurred—not the current rate.

Proposition 30 temporary increase (2013–2016)

Voter-approved Proposition 30 (The Schools and Local Public Safety Protection Act of 2012) imposed a temporary 0.25 percent increase to California's statewide sales and use tax rate, raising it from 7.25 percent to 7.50 percent effective January 1, 2013. The increase applied to all retail sales of tangible personal property and to use tax on property purchased for storage, use, or other consumption in California. The Proposition 30 sales tax increase was scheduled to expire on December 31, 2016, and became inoperative on January 1, 2017.

On January 1, 2017, the statewide rate decreased by 0.25 percent, returning from 7.50 percent to 7.25 percent—the rate that remains in effect as of 2026. Retailers who continued to charge the higher 7.50 percent rate after January 1, 2017, were required to refund the excess tax collected to customers or remit it to the California Department of Tax and Fee Administration (CDTFA).

Prior temporary increases

California also enacted a temporary 1.00 percent statewide sales and use tax increase during the 2008–2009 budget crisis, raising the rate from 7.25 percent to 8.25 percent from April 1, 2009, through June 30, 2011. The rate then reverted to 7.25 percent on July 1, 2011, and remained at that level until the Proposition 30 increase took effect on January 1, 2013.

Local and district tax rates

While the statewide base rate is uniform across California, local jurisdictions impose additional district taxes that vary by city, county, and special district. These district taxes are voter-approved and change continually. District tax rates range from 0.10 percent to 2.00 percent, and some areas have multiple overlapping district taxes in effect. The combined state, local, and district rate in any given location can therefore differ significantly from the statewide base rate and can change multiple times in a single year as local measures take effect or expire.

Why historic rates matter to practitioners

The applicable sales and use tax rate is the rate in effect at the time the sale occurs; generally, this is when merchandise is delivered to the customer unless the contract specifies otherwise. When conducting an audit, filing an amended return, or preparing a refund claim, practitioners must apply the rate that was in effect on the transaction date—not the rate currently in force. Misapplying the current rate to a historical transaction period can result in under-reporting or over-reporting of tax liability.

For example, a taxpayer filing an amended return for transactions occurring in 2015 must apply the 7.50 percent statewide rate (plus applicable district taxes) in effect during that period, not the 7.25 percent rate that took effect in 2017. Similarly, an audit covering multiple years may involve applying different statewide rates to different transaction periods, depending on when sales occurred.

CDTFA historical rate resources

The CDTFA maintains comprehensive historical tax rate information for both statewide rates and local jurisdiction rates. Practitioners can access a timeline of statewide sales and use tax rates on the CDTFA's "History of Statewide Sales & Use Tax Rates" page, which documents rate changes from the enactment of the Bradley-Burns Uniform Local Sales and Use Tax Law in 1955 through the present. The CDTFA also publishes archived rate tables showing the combined state, local, and district rates in effect for every California city and county during specific time periods, accessible through the "Historical Tax Rates in California Cities & Counties" page. These archived rate files are organized by effective-date ranges (e.g., rates effective January 1, 2013, through March 31, 2013) and are the authoritative source for determining the total tax rate applicable to a specific address on a specific transaction date.

Source: CDTFA – Sales and Use Tax Rate Decreases January 1, 2017 (Proposition 30 Expiration) Source: CDTFA – History of Statewide Sales and Use Tax Rates Source: CDTFA – Historical Tax Rates in California Cities & Counties