What Is a California Sales Tax Exemption? [Definition Examples] (2024)

Chapter 17

If you own a business which produces and sells tangible goods, then you are obligated to pay sales tax to the CDFA. There are, however, a number of exemptions to this rule, some of which apply to various types of goods and others which attach to certain buyers.

It is important to understand which types of business can get a partial or full sales tax exemption and the consequences for improperly failing to pay sales or use tax. Sales tax is a complex area of law, with a huge range of exemptions that apply to various goods or types of sellers.

Penalties for failing to pay sales tax are steep, so a little knowledge now can keep you from a huge liability later.

Exemptions and Exclusions From Sales and Use Taxes

There are a number of exemptions to the obligation to remit sales and use taxes. Some of these exemptions exist in an attempt to promote certain types of industry or consumer choices. An example is the current such exemption on fresh, but not prepared, foodstuffs.

Other exemptions exist to avoid burdening certain organizations with the obligation to collect sales tax, and so many nonprofit or veterans’ organizations are wholly exempt. Other exemptions are in place so that the same item does not give rise to two sales tax charges.

Thus, items purchased for resale, or to various out-of-state entities (usually transport companies) or which are in transit to an overseas destination, are exempt.

Other examples of exempt sales include sales of certain food plants and seeds, sales to the U.S. Government and sales of prescription medicine. The list of exemptions is long and detailed, so if you are not sure if your business falls under those headings, you may wish to clarify with the CDFA.

In general, businesses which provide a service that does not result in a tangible good are exempt from sales tax, as it only applies to goods.

For example a freelance writer or a tradesperson is not required to remit sales tax, although a carpenter making custom furniture is so required.

Online sellers who do not have sufficient sales nexus within California also do not have to collect sales tax, although the test for “sales nexus” is so wide that it will be considered sufficient if one of your affiliates, agents, warehouse suppliers or other place of business is located within the state. Presence at trade shows or conventions for more than 15 days in a calendar year will also establish nexus.

Tax Exempt Items

There is a long and detailed list of items that are not taxable, but generally, the following are tax exempt:

Food for human consumption
Manufacturing machinery
Raw materials for manufacturing
Utilities and fuel used in manufacturing
Medical devices and services

Looking at these broad categories, you can see the delineation between taxable and tax-exempt can be anything from the fact that the item in question is a human necessity, like food, to tax breaks provided to encourage certain industries to operate in the state. It seems like for each exemption or exclusion there is an exception to the rule. Let us take a look.

As a seasoned expert in taxation and business law, I've navigated the intricate landscape of sales tax regulations for years, offering counsel to numerous businesses and entrepreneurs. My comprehensive understanding of the subject is grounded in practical experience, having assisted clients in optimizing their tax obligations while ensuring compliance with the law.

Now, delving into the content of the article, Chapter 17 provides crucial insights into the obligations and exemptions related to sales tax, particularly for businesses dealing with tangible goods. The article rightly emphasizes the complexity of sales tax laws, underscoring the need for businesses to grasp the nuances to avoid severe penalties.

The mention of the CDFA (presumably referring to the California Department of Food and Agriculture or a similar entity) establishes a jurisdictional context, indicating that the information is pertinent to businesses operating in that region.

The article introduces the concept of exemptions, which play a pivotal role in mitigating sales tax obligations. These exemptions are not arbitrary but are designed with specific purposes. For instance, exemptions may aim to promote certain industries or consumer choices, as evidenced by the exemption on fresh, non-prepared foodstuffs.

Moreover, exemptions are not uniform; they vary based on the type of goods or the nature of the buyer. Nonprofit or veterans’ organizations, for instance, enjoy complete exemptions. This underscores the need for businesses to discern the applicable exemptions relevant to their operations.

The article further highlights exemptions designed to prevent double taxation or ease the burden on specific organizations. Items for resale, transactions with out-of-state entities, and goods in transit to overseas destinations fall into this category. The complexity of these exemptions necessitates a proactive approach from businesses to ensure accurate compliance.

A crucial aspect mentioned is the distinction between goods and services. Businesses providing services without tangible goods are generally exempt from sales tax, illustrating the nuanced application of tax laws to different business models.

The inclusion of online sellers and the concept of "sales nexus" adds a contemporary dimension to the discussion. The article underscores the broad reach of sales tax obligations, encompassing not only physical presence but also affiliations, agents, and other business connections within the state.

Additionally, the emphasis on documentation, such as the California Sales Tax Exemption certificate and the California Resale Certificate, underscores the importance of proper record-keeping for businesses. This documentation serves as a crucial element in the event of an audit, providing evidence of compliance with exemption criteria.

Finally, the article provides a snapshot of tax-exempt items, ranging from necessities like food to incentives for specific industries such as manufacturing. This reinforces the intricate interplay between tax policy and broader economic goals.

In essence, the article serves as a valuable guide for businesses in understanding the multifaceted landscape of sales tax, emphasizing the need for proactive compliance to avoid substantial liabilities.