Guide to Paying Sales Tax, and Business Taxes in California for Online Retailers and Etsy Shops
Updated on July 23, 2023 by Tim Donahue
How to collect and pay sales tax in California – for online retailers and Etsy shops
Welcome to our comprehensive guide on paying Etsy and online store sales tax in California. Navigating the world of sales tax can seem daunting, but with some guidance, it’s not as complicated as it might seem. Let’s break it down together.
Here’s the overview if you just want the general idea:
- Find out what your State base rate is and also your local sales tax rate. Add these two together to determine how much sales tax to charge. See this page for current sales tax rates in your city and county, in California. For other states, check with your State website.
- Find out if your state is “origin-based” or “destination based” – more on that below
- Enter the total sales tax you need to charge in your payment processor (Stripe, Square, Shopify, Paypal etc) settings
- Your customers will now be paying that tax amount and you will send all that collected sales tax to the California Department of Tax and Fee Administration annually.
>> See this page for current sales tax rates in your city and county, in California.
For other states, check with your State website.
Table of Contents
- Understanding Sales Tax Basics
- Sales Tax in California: The Basics
- Registering for a Seller’s Permit
- Origin-based vs. Destination-based sales tax States
- How to Collect Sales Tax for California Customers
- Submitting Sales Tax in California
- Paying Etsy and Online Store Sales Tax in California
- Navigating Business Taxes in California
- Record Keeping for Taxes
- The Impact of Tax on Your Ecommerce Store’s Profits
- Resources to Help with Sales Tax and Business Taxes
- Next Steps You Can Take To Get Started
Understanding Sales Tax Basics
If you’re new to the world of online retail or running an Etsy shop, you might be wondering, “how do I pay sales tax in California?” Let’s start with the basics. Sales tax is a consumption tax levied on the sale of goods and services. In most states, including California, consumers pay sales tax at the point of purchase.
Sales Tax in California: The Basics
Sales tax in California varies by locality, but as of this writing, the base state rate is 7.25%. Local tax rates can add between 0.10% to 1.00%, making the total sales tax rate anywhere from 7.25% to 8.25%. This means when you sell a product, you must add this percentage to the sale price, and this additional amount is what you’ll remit to the state.
Registering for a Seller’s Permit
Before you start collecting sales tax, you must register for a seller’s permit through the California Department of Tax and Fee Administration. This is a straightforward process that can be completed online and is an essential first step for any new online retailer or Etsy shop owner.
Determine if your state is an Origin-based or Destination-based sales tax state:
California is an origin-based sales tax states – but what does that mean?
There are two methods to determine sales tax rates: origin-based and destination-based.
Origin-based sales tax: In this system, the sales tax rate is based on the location of the seller.
For example, if your business is based in California and you sell a product to a customer in New York, you would charge the California sales tax rate, regardless of the customer’s location.
Destination-based sales tax: In this system, the sales tax rate is based on the location of the buyer. If you are a California-based business selling to a customer in New York, you would charge the New York sales tax rate, even though your business is located in California.
Most states use a destination-based sales tax system.
However, there are a few exceptions such as Alaska, Delaware, Montana, New Hampshire, and Oregon, which use an origin-based sales tax system.
Below is a list of all the origin-based states and all the destination based states.
It’s important to understand the specific sales tax regulations in each state and jurisdiction to ensure compliance and accurate tax collection. Consulting with a tax professional or accountant knowledgeable in sales tax can provide valuable guidance tailored to your business’s circumstances.
Origin-based States:
(you collect the sales tax rate from your city and county within the state):
- Arizona
- California
- Illinois
- Mississippi
- Missouri
- Ohio
- Pennsylvania
- Tennessee
- Texas
- Utah
- Virginia
Destination-based States:
(you collect the sales tax rate from your city and county within the state):
- Alabama
- Arkansas
- Colorado
- Connecticut
- Florida
- Georgia
- Hawaii
- Idaho
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Nebraska
- Nevada
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Oklahoma
- Rhode Island
- South Carolina
- South Dakota
- Vermont
- Washington state
- West Virginia
- Wisconsin
- Wyoming
How to Collect Sales Tax for California Customers
Collecting sales tax from your customers isn’t too complex. If you’re using a platform like Etsy or Shopify, they have built-in features that calculate the sales tax for each transaction based on the customer’s location.
However, if you’re running your own ecommerce store, you may need to set up sales tax collection manually or use a third-party app or plugin.
Collecting Sales Tax – Follow These Steps:
- Figure out what your state sales tax is
- Enter that amount into your online payment software (such as Stripe, Paypal, Square, etc.)
- When customers purchase something using your checkout/cart system, the proper sales tax should be added to their payment.
- You will send that collected sales tax to theCalifornia Department of Tax and Fee Administration – eventually, but the collecting part is now done. 🙂
Submitting Sales Tax in California
Once you’ve collected sales tax, it’s time to remit it to the California Department of Tax and Fee Administration (CDTFA). You can remit sales tax online, by mail, or in person. The frequency of your payments will depend on the volume of your sales – it could be monthly, quarterly, or annually. In most cases, the CDTFA will assign you a filing frequency when you register for your seller’s permit.
As for the amount to remit, it will be the total of all sales tax you’ve collected during the reporting period. The CDTFA will provide you with the necessary forms (either online or by mail), and these forms will guide you through how to calculate the amount of sales tax you need to remit.
Remember, your obligation to collect and remit sales tax isn’t determined by your residency status. Even if you’re not a California resident, if you have a physical presence in the state, or if you sell to California residents through your website, you’re required to collect and remit sales tax.
Paying Etsy and Online Store Sales Tax in California
When it comes to Etsy, the sales tax scenario is a little different. As part of their service, Etsy automatically calculates, collects, and remits sales tax on orders shipped to some states, including California. This means that for sales made through Etsy, the platform handles the sales tax for you. You can find more information in the Etsy Help Center.
However, for non-Etsy online sales, you’ll be responsible for calculating, collecting, and remitting sales tax following the process described in the “Submitting Sales Tax in California” section. In either case, paying your sales tax in California is a critical aspect of running your online business. Remember, failure to remit sales tax can lead to penalties and interest. There are some exemptions to sales tax in California, including groceries and prescription drugs, but these are unlikely to apply to most Etsy sellers and other online retailers.
Navigating Business Taxes in California
Apart from sales tax, as a business owner, you’ll also be responsible for other types of taxes. Check out our comprehensive guide on business basics for new entrepreneurs to learn more about the types of business taxes in California.
Record Keeping for Taxes
Keeping accurate records of your sales, expenses, and tax payments is crucial. It not only helps during tax time but also allows you to track your business’s financial health. If you’re unsure about how to maintain financial records, check out our blog on how to start a small business.
The Impact of Tax on Your Ecommerce Store’s Profits
It’s essential to understand how taxes, including sales tax, impact your ecommerce store’s profitability. Ensure you factor in tax expenses when pricing your products and forecasting profits.
Resources to Help with Sales Tax and Business Taxes
Here are a few resources to help you navigate sales and business taxes in California:
- California Department of Tax and Fee Administration
- IRS Small Business and Self-Employed Tax Center
- Our blog on common mistakes new business owners make
Next Steps You Can Take To Get Started
- Register for a seller’s permit in California if you haven’t already.
- Set up sales tax collection on your online store or Etsy shop.
- Start collecting sales tax on your sales to California residents.
- Regularly remit collected sales tax to the California Department of Tax and Fee Administration.
- Keep accurate records of all your sales and tax payments.
- Always factor in sales tax when calculating your profitability.
Following these steps will ensure you’re well on your way to managing your online store or Etsy shop’s sales tax like a pro. Remember, the key is to stay organized and keep accurate records.
