Managing Your Sales for Home-Based Businesses

Recordkeeping

If you hold a California seller's permit or any other California Department of Tax and Fee Administration (CDTFA) license or permit, you are required to maintain your business records to verify that you have properly paid the tax or fee.

You must keep your business records for at least four years. If you are being audited, retain all records that cover the audit period until the audit is complete, even if that period is longer than four years.

Your records should be adequate so CDTFA representatives may:

  • Verify the accuracy of your tax returns; and
  • Determine if you have correctly paid the tax due on your sales and purchases.

Records you should keep include, but are not limited to:

  • Cash register tapes
  • Purchase invoices
  • Sales invoices
  • Shipping documents
  • Resale certificates
  • Tax returns and supporting worksheets

Computing the Correct Tax

As a home-based business selling goods in California, you have a duty; whether or not you collect tax reimbursement from your customers, to report and pay the correct amount of state sales and use tax, which applies to all retail sales of goods, except those sales that qualify for an exemption or exclusion (refer to the Exemptions section below).

The sales and use tax rate that you are required to report and pay will vary depending on where you do business (For online sales, please refer to the Industry Topics tab, under the heading Internet Sales). You are responsible for the statewide tax rate and any applicable district taxes in cities and counties where you are engaged in business.

Generally, you are engaged in business in a district when you:

  • Own or lease real or tangible personal property, including, but not limited to, a computer server, in the district;
  • Maintain, occupy, or use, directly or indirectly, or through a subsidiary or agent, a permanent or temporary office, place of distribution, sales or sample room, warehouse or storage place, or other physical place of business in the district (whether or not it is related to your sales activities);
  • Have a representative, agent, or independent contractor operating in the district on your behalf or under your authority, or under the authority of your subsidiary, for purpose of making sales, taking orders, assembling or installing merchandise, training customers, making deliveries, or otherwise establishing or maintaining a market for your products;
  • Use your own delivery vehicles to regularly deliver merchandise into or within the district;
  • Receive rental payments from the leases of tangible personal property located in the district, such as leases of machinery, equipment, and furniture;
  • Sell or lease vehicles or undocumented vessels which will be registered in the district; or
  • Have total combined sales of tangible personal property in California, or for delivery in California, by you and all persons related to you exceeding $500,000 in the preceding or current calendar year.

Beginning April 25, 2019, if you are required to be registered with CDTFA, whether located inside or outside California, and you meet the $500,000 threshold, you are engaged in business in every district in California, whether or not you have a physical presence in those districts. As such, you are required to collect the district use tax on taxable sales made for delivery in those districts that impose a district tax. If you do not meet the $500,000 threshold, you are still engaged in business in any districts(s) in which you have a physical presence. For more information, see the online guide Use Tax Collection Requirements Based on Sales into California Due to the Wayfair Decision.

Example 1:
If you sell crafts from your home and ship your crafts by common carrier into a county where you are not engaged in business, you owe tax at the statewide rate (currently 7.25 percent).

Example 2:
If you sell goods at craft fairs, the applicable sales tax rate is the rate where the craft fair is located.

For more information on being engaged in business and the correct district tax rates, please see publication 44, District Taxes (Sales and Use Taxes).

You can look up tax rates by city and county or find the full tax rate in your city or county by going to the Find a Sales and Use Tax Rate webpage and entering the address as prompted.

Use Tax

Generally, you owe California use tax when you purchase physical merchandise (for example, supplies, furniture, fixtures, and equipment) for use, storage, or consumption in California without paying tax from a seller located outside the state.

In addition, use tax applies to the use, storage, or other consumption of goods, including vehicles, within the state. Therefore, you must report and pay the use tax due on any home-based business related purchases on your sales and use tax return in the period in which your business first used, stored, or consumed the goods in California.

For more information, please see California Use Tax Information.

Inventory Withdrawals

As a registered seller's permit holder, you are entitled to purchase goods without payment of tax that you plan to resell (see Purchases for Resale below). However, if you remove goods from resale inventory and make use of the goods rather than reselling them, you owe use tax on the purchase price of the goods. For example, if you give away goods as a gift instead of reselling them, you must report and pay the use tax due on your sales and use tax return, on those goods withdrawn from resale inventory.

Example:
You sell home-made holiday ornaments from your home and at special events. You may generally purchase the items you use to make ornaments tax free, by giving your supplier a timely resale certificate. At the special event, as a promotion for your business, you give away small ornaments. You will be considered the consumer of any ornaments you give away and you will owe use tax on the purchase price of the material you used to make the ornaments.

Purchases for Resale

If you purchase goods for your home-based business that you plan to resell, you can purchase the goods without paying tax to your vendors by providing them with a resale certificate.

When your vendor accepts a valid resale certificate in good faith and in a timely manner, the vendor does not owe tax on that sale. You can provide CDTFA-230, General Resale Certificate, to your vendor when purchasing goods you will resell in the regular course of your business operations.

Generally, resale certificates are used:

  • When purchasing finished items for resale.
  • When buying materials that will become a physical part of an item that will be held for resale.
  • When purchasing items solely for demonstration or display while holding them for sale in the regular course of business operations.

As the purchaser, you should not use a resale certificate when buying a product that you will:

  • Use rather than sell,
  • Use in your business before you sell it,
  • Use for a personal purpose, or
  • Hold as an investment for appreciation in value and for sale in the future.

For more information on using a resale certificate, see publication 103, Sales for Resale.

Notes

  1. Section 6015 retailers cannot accept resale certificates from their agents, unless the agent holds a California Sales or Use Tax Permit and sells the goods through a storefront. For more information on Section 6015 retailers, please see the Industry Topics tab, under the heading 6015 Retailers.
  2. The purchaser must report use tax on their sales and use tax return on the purchase price of materials they purchased without tax, when the material is incorporated into an item that is later given away for free.

Exemptions

Depending upon your type of home-based business, some of your sales transactions may qualify for a full or partial sales tax exemption.

Exempt and excluded sales are transactions not subject to tax and a deduction for those transactions can be taken on your sales and use tax return. You must retain all documentation to support the deduction. Some common exempt sales transactions include:

For a list of all exemptions, please see publication 61, Sales and Use Taxes: Tax Expenditures.

Other Non-CDTFA Licenses

In addition to obtaining a California seller's permit from CDTFA, you may need other permits and licenses for your business.

We encourage you to visit the Governor's Office of Business and Economic Development webpage (GO-Biz) to help you determine if other state, federal, and local agencies have any licensing or registration requirements that may affect you.

GO-Biz offers extensive information, including:

  • CalGold — Provides information about other federal, state, or local government permits that may be required for your business.
  • California Business Portal — Provides personalized business assistance, including quick start guides for starting and growing your business, and the California Business Navigator which provides custom information for your business regarding permits, licenses, and incentives.

CDTFA also partnered with the Employment Development Department, the Franchise Tax Board and Internal Revenue Service to establish the California Tax Service Center. The website acts as a one-stop source for the latest tax information.