Sales Tax in California: Essential Guide for Businesses

If your business sells goods or services in California or to its residents, understanding the state's sales tax and your ongoing compliance responsibilities related to it is imperative. This tax funds essential public services throughout California, including critical infrastructure and education, and failure to comply can invite penalties and interest that would make operating in a high-tax state much more onerous. 

The California sales tax system has city, county, and state components that make it incredibly complex, which further emphasizes the need for businesses to grasp applicable sales tax responsibilities. Businesses that operate throughout the state will encounter varying rates, which range from 7.25% to 11.25%, due to the addition of local district taxes.

Treat this article as your essential guide to sales tax in California. It explores sales tax basics, a breakdown of California's sales tax components, compliance requirements, and implications for businesses like yours. It's also important to keep up with tax rate changes, such as those implemented in April 2025 in Santa Barbara and Los Angeles counties and elsewhere. 

What’s the Deal with California's Sales Tax System?

When disclosing the use of revenues in fiscal year 2023/24, California shared that it had collected over $96 billion in total revenue statewide, with nearly half of that distributed to local governments and local jurisdictions. 

Sales Tax Basics

Retailers in California must register with the California Department of Tax and Fee Administration (CDTFA) and collect and pay tax on sales, which covers virtually all retail sales of goods and merchandise, barring certain exemptions memorialized in California law.

A sales tax is triggered on the sale of many goods and services, which can increase depending on the locality within the state. Businesses that sell qualifying goods or services collect sales tax from customers and transmit it to the appropriate government authorities. For example, if you operate a retail business, you would collect this tax at the point of sale.

Some businesses view sales tax and use tax interchangeably, which may be because the CDTFA administers both. However, there are fundamental differences. 

If the storage, use, or other consumption in California of items purchased in transactions is exempt from sales tax, they typically fall under the use tax. The use tax also applies to goods purchased via e-commerce platforms shipped from outside the state to California. While businesses are exclusively responsible for collecting sales tax in California, businesses, residents who purchased an exempt item, or even non-profit organizations, will typically be responsible for use tax. The current use tax rate is 7.25%.

State Base Rates and Local Add-Ons

California's base state sales tax rate is 7.25%, with 6% representing the state rate and 1.25% representing the default local rate, but local add-ons will drive that rate to over 11% in specific locations in 2025. Only a handful of other states feature a sales tax of 11% or more, making California one of the most expensive states in the country for sales tax. This is consistent with other taxes and operational expenses in California. While the state offers numerous advantages for small business owners, it comes with a high burden that can be mitigated, in part, with a year-round tax planning strategy.

Add-ons to the base California sales tax rate can vary substantially. For example, Livingston has a sales tax rate of 8.75%, while Lancaster features a sales tax rate of 11.25%. According to the CDTFA, Livingston approved a new 1% tax, and a new code is required, while Lancaster approved a tax increase of .75% in addition to a new countywide tax. Measure A, approved by voters in the 2024 election, repealed the 0.250 percent countywide tax that was previously added by Measure H and added a new 0.500 percent countywide tax. Like Livingston, a new code is required for Lancaster.

Breaking Down California Sales Tax Components

State and Local Sales Tax Basics

The base California sales tax rate is 7.25%, with some county and city rates pushing the overall sales tax rate above 11%. The revenue generated by these taxes in the 2023/24 fiscal year went to: 

• Local ($44.9 billion) 

• Education ($17.1 billion) 

• Health and Human Services ($13.8 billion)

• Other ($11.2 billion)

• Transportation ($9.2 billion)

The CDTFA administers California's sales tax. They also administer use, fuel, tobacco, alcohol, and cannabis taxes, and other taxes and fees that fund various programs in the state. CDTFA-administered programs collect over $90 billion annually, which supports essential services such as: 

• Transportation

• Public safety and health

• Libraries

• Schools

• Social services

• Natural resource management programs 

These services are funded through the distribution of income tax dollars going directly to local communities, with the programs concentrated in two main areas: 

• Sales and use

• Special taxes and fees

While the CDTFA attempts to help businesses that struggle to fulfill their sales tax obligations, businesses that fail to do so are subject to penalties and interest. 

Special District Taxes and Those Temporary Extras

California's special district taxes fund particular projects or services. They are approved by voters and tend to focus on transportation, such as the Bay Area Rapid Transit (BART) system and initiatives helping the homeless, among other public goods. When voters approve of such measures, taxes will moderately increase.

A recent example is the passing of Measure A, which was approved to help homeless people in Los Angeles, increasing the sales tax rate. Measure H, approved by voters in 2017, is set to expire in 2027, when Measure A will go into effect. While Measure H has a ¼ cent tax, Measure A doubles that to half a cent. The shift is expected to produce nearly $1 billion annually to fund a variety of programs aimed at helping homeless people in need. Since 2017, revenue from Measure H has been used to house over 20,000 people. 

Navigating California Sales Tax Compliance and Filing

How to Handle Registration, Filing, and Recordkeeping

You must obtain a seller's permit in California if: 

• You are engaged in business there. 

• You intend to sell or lease tangible personal property that would ordinarily be subject to sales tax (furniture, toys, clothing, etc.) if sold at retail.

Activities that show you're engaged in business in California include: 

• Having a place of business within the state

• Having a sales rep, agent, or canvasser operating in the state

• Renting tangible personal property in the state and receiving payments

Register online with the CDTFA to obtain your seller's permit for sales tax registration if you qualify. Once approved, the CDTFA will assign a filing frequency for your business based on your reported sales tax or anticipated taxable sales when you registered. Refer to the CDTFA's website to find your filing frequency. Filing frequencies include: 

• Quarterly prepay

• Quarterly

• Monthly

• Fiscal year

• Yearly

Your reporting responsibilities, in addition to the possibility of a CDTFA audit, emphasize the importance of accurate and timely recordkeeping. Sales receipts, purchase invoices, and exemption certificates are some of the records you should be maintaining in your bookkeeping system.

If you're struggling with your California sales tax responsibilities, 1-800Accountant can help with expert guidance on sales tax return filing and compliance, ensuring accuracy and efficiency.

What You Need to Ensure Sales Tax Compliance

Digital Tools and Getting Automated

Digital tools, including sales tax calculators and do-it-yourself bookkeeping platforms, such as QuickBooks and Xero, benefit small business owners by helping to reduce errors while improving compliance through automation. These tools are aided, in part, by real-time updates and data integration.

While many small business owners handle these tasks early on in an effort to save money, embracing digital tools for your business is usually preferred over handling your financial work manually. With digital tools, sales tax recordkeeping and reporting processes are automated, which reduces administrative burdens and mistakes. 

Why You Might Want Professional Help

Many small businesses will operate initially without professional accounting support as a means to save budget. However, as businesses grow and are responsible for managing complex California sales tax regulations, many will seek the guidance of professionals.

When evaluating financial firms, ensure the firm is experienced in collaborating with small businesses to optimize sales tax strategies and ensure proactive management and compliance. They should also communicate regularly with your business and embrace strategic planning to maintain compliance and minimize liabilities, leveraging partnerships for integrated solutions.

Business tax preparation and filing from 1-800Accountant is an affordable, full-service tax solution that helps you manage complex sales tax calculations and filings, prevent errors, and maximize savings.

Sales Tax Exemptions and Industry Rules

Exemptions and Online Sales Explained

Typically, retail sales of tangible goods are subject to sales tax in California, but there are exemptions that require proper documentation and adherence to CDTFA guidelines to qualify.

Common exemptions from California sales tax include: 

• Sales of certain food products

• Sales to the U.S. Government

• Sales of prescription medicine and certain medical devices

• Sales of items paid for with EBT cards

But what about online sales from out-of-state? The Wayfair Supreme Court decision, named after online retailer Wayfair and officially known as South Dakota v. Wayfair, Inc., has impacted sales tax collection for online retailers by allowing states to require sellers from outside their borders to collect and remit sales tax based on sales from inside a state, such as California. In response to this ruling, the CDTFA created an essential tax guide for retailers without a physical presence in the state. 

The intricacies of retail tax rules can be confusing without year-round tax advisory support from the experts at 1-800Accountant. 

How Sales Tax Laws Have Evolved in California

A Look at the History and What’s New

The state of California rolled out sales tax on August 1, 1933. The initial sales tax rate was 2.5%. When sales tax was first introduced, it lacked a local sales tax rate component that would not be added until the 1960s. Since then, economic shifts, budget deficits, and technological breakthroughs such as e-commerce have influenced changes in sales tax laws, driving it to its current 7.25% base rate.

Voters can also impact the local component of California sales tax. Measure A's approval in November 2024 added a new 0.500 percent countywide tax that will benefit the homeless. Overall, the evolution of California sales tax reflects broader trends in tax policy and economic strategy, such as increased focus on local funding and compliance enforcement.

Tackling Sales Tax Challenges in Business Strategy

Pricing, Supply Chains, and Compliance Challenges

Sales tax influences pricing strategies and competitive positioning for businesses operating in California or selling to its residents. Some businesses strategically manage sales tax to optimize pricing and enhance competitiveness by absorbing tax increases or adjusting pricing models, among other tactics.

Sales tax can also impact supply chain management and vendor relationships, making strategic sourcing paramount. When negotiating with suppliers, ensure the best terms for managing sales tax implications in procurement, including clear contractual terms that account for sales tax rate activity in California.

Changes to California sales tax and complexities associated with operating in multiple jurisdictions with varying rates jeopardize sales tax compliance for many small business taxpayers. Frequent rate changes and other updates emphasize the need for regular monitoring. Following the CDTFA and other governmental agencies in the state can help your business stay on top of changes that may impact your tax situation.

Keeping your records accurate and up to date while accounting for the numerous sales tax changes throughout the year can be difficult without affordable, full-service bookkeeping from 1-800Accountant. Our proprietary bookkeeping platform, ClientBooks, is compatible with leading bookkeeping software, including QuickBooks Online, FreshBooks, and Wave. Our bookkeepers are fluent in these platforms, ensuring seamless integration and financial data and sales tax management.

Unlocking Simplicity and Efficiency in Sales Tax Management with 1-800Accountant

California has a complex sales tax system that owners and entrepreneurs must comply with if they wish to do business in the state. When managing California sales tax responsibilities distracts from your core business operations, it's time to talk to the sales tax professionals at 1-800Accountant, America's leading virtual accounting firm, for help managing small business sales taxes efficiently.Save time and achieve your annual financial goals with our suite of affordable, tax-deductible financial services. Schedule a quick consultation–usually 30 minutes or less—to learn how bookkeeping, tax advisory, and business tax preparation and filing will help you maintain full IRS compliance with maximum tax savings in California.