Publication 109, Internet Sales
- Basic Internet Sales and Leases
- Nontaxable Sales
- Online Marketplaces and Fulfillment Centers
- Additional Information
Yours may be among the many businesses taking advantage of changing technology to market products over the Internet. Despite all of the publicity surrounding Internet commerce, one essential fact is often overlooked—there is no general tax exemption for sales made over the Internet (Internet sales). This publication is intended to help you determine if you must pay California’s sales and use taxes on your Internet sales.
Businesses physically located in California
Internet sales are treated just like sales made at retail stores, by sales representatives, over the telephone, or by mail order. If your business is located in California, retail sales of tangible personal property that you make over the Internet to California customers are generally taxable unless the sales qualify for a specific tax exemption or exclusion (see Nontaxable Sales), and you are required to register for a permit and report and pay tax to the same extent as any other retailer in California.
You can register on our website at www.boe.ca.gov by selecting New Registration, and then select Register a business activity with BOE. You can also register in person at any of our field offices. Please contact our Customer Service Center for assistance at 1-800-400-7115 (TTY:711).
Businesses located outside of California
Internet sales made by out-of-state retailers to California customers are also treated no differently than other remote sales made to California customers. Generally, remote sales by out-of-state retailers to California customers, whether made over the Internet, by telephone, or mail order, take place outside of California because the property is delivered to a common carrier outside the state for shipment into California, and are, therefore, not subject to sales tax. However, California customers do owe the use tax on those sales, unless a specific tax exemption or exclusion applies. Out-of-state retailers that are engaged in business in California are required to register with the California State Board of Equalization (BOE), collect the use tax from California customers, and pay the tax to the BOE.
Out-of-state retailers are considered to be engaged in business in California if they have a substantial nexus with California. This includes, but is not limited to, an out-of-state retailer which:
- Has an affiliate operating in California that has entered into an agreement to refer potential customers to the retailer, for a consideration based upon completed sales, by an Internet-based link, Internet website, or otherwise, under specified circumstances, or
- Owns or leases real or tangible personal property, including a computer server, in California, or
- Maintains, occupies, or uses a place of business in California, or
- Has persons operating in California under its authority for the purpose of selling, delivering, installing, assembling, or the taking of orders for tangible personal property, or derives rentals from a lease of tangible personal property (including vehicles, vessels and aircraft) situated in California, or
- Is a member of a commonly-controlled group and combined reporting group and a member of the retailer’s commonly-controlled group and combined reporting group perform services under an agreement with the retailer or in cooperation with the retailer in California that help the retailer establish or maintain a California market for sales of tangible personal property.
For further details regarding these examples and California’s use tax registration and collection requirements generally, please see Regulation 1684, Collection of Use Tax by Retailers, publication 77, Out-of-State Sellers: Do You Need to Register in California?, or our frequently asked questions (FAQs) on Use Tax Collection Requirements for Out-of-State Retailers.
If you are a retailer that has a substantial nexus with California and you are not already registered with the BOE, you should register for a California Certificate of Registration—Use Tax. You can register on the BOE website at www.boe.ca.gov, by selecting New Registration, and then select Register a business activity with BOE. Once you have registered, you may pay any use tax due by filing your return. You can also register to report use tax in person at any of our field offices.
The use tax rate is the same as the sales tax rate for any given California location; please see California City and County Sales and Use Tax Rates. Transactions that are exempt from sales tax are usually exempt from use tax.
Voluntary collection of use tax
As noted above, your customers must pay the use tax to the BOE if you do not collect it from them. You may wish to voluntarily register and collect the use tax as a customer service even if you are not required to do so.
Prepaid Mobile Telephony Services Surcharge
If you are an out-of-state business that sells or ships prepaid wireless phone cards and services to California customers, you must register with the BOE as a prepaid MTS seller, collect the surcharge from customers, and pay the amounts collected to the BOE.
Beginning January 1, 2016, sellers of prepaid wireless phone cards and services are required to collect a Prepaid Mobile Telephony Services (MTS) Surcharge from customers and pay it to the BOE for all retail transactions occurring in this state. The surcharge is imposed as a percentage of the sales price of prepaid wireless cards/services sold in retail transactions occurring in this state. If you are an out-of-state retailer, your sales of prepaid wireless services and products to consumers are considered to occur in California when one of the following applies:
- The item is shipped to, or picked up by, a customer at a California location.
- Your records show that the customer’s address is in California.
- Your customer provided you with an address in California during the sales transaction.
- The mobile phone number is associated with a California location.
If your sales of prepaid wireless products and services occur in California (as stated above), you must register with the BOE as a prepaid MTS seller. The prepaid MTS account is a separate account from a seller’s permit for the sales of tangible personal property.
For more information about this program, please read our guide Prepaid Mobile Telephony Services (MTS) Surcharge.
Note: This publication summarizes the law and applicable regulations in effect when the publication was written, as noted above. However, changes in the law or in regulations may have occurred since that time. If there is a conflict between the text in this publication and the law, decisions will be based on the law and not on this publication.
Some Internet sales are not taxable
Common exempt transactions
Some of your Internet sales—including sales for resale, sales of cold food products, and sales delivered outside of California—may not be subject to California sales or use tax. Common exemptions are described in publication 73, Your California Seller’s Permit. More detailed information is found in publication 61, Sales and Use Taxes: Exemptions and Exclusions.
Products electronically transmitted to customers
Your sale of electronic data products such as software, data, digital books (eBooks), mobile applications, and digital images is generally not taxable when you transmit the data to your customer over the Internet or by modem. However, if as part of the sale you provide your customer with a printed copy of the electronically transferred information or a backup data copy on a physical storage medium such as a CD-ROM, your entire sale is usually taxable.
An eBook is an electronic version of a traditional print book that can be read by using a tablet computer or by using an eBook reader. Users can purchase an eBook on diskette or CD, but the most popular method of getting an eBook is to purchase a downloadable file of the eBook without purchasing any physical storage medium. A mobile application, also known as a “mobile app”, is computer software designed for use on a smartphone or tablet computer. The transfer of a downloadable file such as an eBook or an “app” without purchasing any physical storage medium is not a taxable transaction.
If your company sells canned (noncustom) software programs to customers who download them from a server, those sales are generally not subject to tax. However, if you also provide your customers with a backup copy on a CD-ROM, the entire transaction is taxable. Similarly, if you transmit a stock (noncustom) database to your customer over the Internet and also provide a printed copy of the contents, the entire sale is subject to tax. For more information regarding the sale of computer programs and data processing services, you may wish to obtain a copy of Regulation 1502, Computers, Programs, and Data Processing.
Online Marketplaces and Fulfillment Centers
Many retailers are choosing to use online marketplaces (also referred to as eCommerce marketplaces or eMarketplaces) to sell their products instead of, or in addition to, selling through their own websites. An online marketplace is a website where third-party sellers list products for sale, and the sales of such products are processed by the operator of the website (marketplace operator). Some online marketplaces offer products for sale by the marketplace operator as well as third-party sellers. Others exclusively serve as a marketplace for third-party sellers.
A fulfillment center is a location, generally a warehouse facility, where orders for tangible personal property are received, packaged, and picked up by common carrier for shipment to the customer. Some sellers use their own fulfillment centers to fulfill all of their orders, including orders processed by marketplace operators. Other sellers contract with a third-party that operates a fulfillment center (fulfillment center operator) to fulfill their orders. In some instances, the fulfillment center operator is a retailer itself that provides fulfillment services to third-party sellers at the same facilities from which it ships its own products.
Engaged in Business
Offering tangible personal property for sale on an online marketplace will generally not, by itself, cause an out-of-state retailer to be engaged in business in California, even if the marketplace operator is located in California. Generally, the use by an out-of-state retailer of a website hosted on servers located in California will not cause the retailer to be engaged in business in California. However, an out-of-state retailer that stores tangible personal property in California, including at a fulfillment center owned and operated by a third-party is engaged in business in California.
Identifying the Retailer of Property Sold through an Online Marketplace
When a seller utilizes an online marketplace and/or a third-party fulfillment center to make a sale of tangible personal property to a California customer, either the seller or the marketplace operator may be the retailer for sales and use tax purposes.
- Some online marketplace operators display the property of various sellers, process the sellers’ transactions and provide various other services, but the terms of sale dictate and the receipts and other documents related to the sales reflect that the consumers are purchasing the property directly from the sellers. In these instances, the marketplace operators are generally just providing a service, and the seller that lists the property on the marketplace is the retailer making a retail sale to the consumer.
If you are a seller making sales through an online marketplace in this manner, you are generally considered the retailer for purposes of such sales. However, if the marketplace operator is also providing fulfillment services, the marketplace operator will be considered the retailer if it has possession of the property at the time of sale and it can transfer ownership to the purchaser without further action by you. For additional information, please see publication 114, Consignment Sales. (Please note: If the marketplace operator has the authority to transfer ownership, but a different person, such as a fulfillment center operator, has possession of the property at the time of sale, then neither person would be a consignee, even if the two are related entities, and you would still be considered the retailer.)
- Some online marketplace operators display the property of various sellers, manufacturers and suppliers, and when a consumer purchases property through the marketplace the terms of sale dictate and the receipts and other documents related to the sale reflect that the consumer purchases the tangible property directly from the marketplace operator. In these instances, the marketplace operators are generally purchasing the property from the sellers, manufacturers or suppliers for resale, and then making a retail sale of the property to the consumer.
If you are a seller making sales for resale to a marketplace operator in this manner, you should obtain a timely and properly completed resale certificate from your customer to support your claimed sales for resale (see Regulation 1668, Sales for Resale). However, if you are a retailer engaged in business in California and you ship the property directly to the consumer on behalf of a marketplace operator that is not engaged in business in California, you will be responsible for reporting and paying tax as a drop shipper. For additional information, please see publication 121, Drop Shipments.
Obligation to Pay or Collect Tax
As previously explained either sales or use tax applies to the retail sale of tangible personal to a California consumer through an online marketplace, unless the sale is specifically exempt or excluded from tax. If, as described above, you are a California retailer or an out-of-state retailer that is engaged in business in California and you are the retailer for purposes of the sale, then you are liable for any applicable sales tax or you are responsible for collecting applicable use tax from the customer.
For more information
Additional regulations and publications that relate to this topic:
1502 Computers, Programs, and Data Processing
1528 Photographers, Photocopiers, Photo Finishers, and X-Ray Laboratories
1620 Interstate and Foreign Commerce
1660 Leases of Tangible Personal Property-In General
1661 Leases of Mobile Transportation Equipment
1668 Sales for Resale
1684 Collection of Use Tax by Retailers
1685 Payment of Use Tax by Purchasers
1700 Reimbursement for Sales Tax
1827 Collection of Use Tax by Retailers (for special district taxes)
61 Sales and Use Taxs: Exemption and Exclusions
68 Photographers, Photo Finishers, and Film Processing Laboratories
73 Your California Seller's Permit
77 Out-of-State Sellers: Do You Need to Register with California?
100 Shipping and Delivery Charges
101 Sales Delivered Outside California
103 Sales for Resale
107 Do You Need a California Seller’s Permit?
114 Consignment Sales
121 Drop Shipments
177 Internet Auction Sales and Purchases