Online Retailers, like all businesses engaged in sales, must adhere to specific registration and reporting requirements, especially concerning sales and use tax. Understanding these obligations is crucial for compliance and smooth operations. This guide provides essential information to ensure your online retail business is correctly registered, accurately reports sales, and properly allocates local taxes. The way your business is registered significantly impacts the schedules you’ll use for local tax reporting and sales allocation.
Essential Rules for Online Retailers: Registration and Tax
General Registration Requirements for Online Sales
Regulation 1699, governing permits, stipulates that any individual or entity actively selling tangible personal property in California – where retail sales are subject to sales tax – must register for a seller’s permit. This permit is required for each physical location within California where sales transactions are customarily negotiated with customers.
Generally, warehouses or storage facilities are exempt from permit requirements if they solely serve as storage locations for a permitted place of business and are not locations where customers regularly visit to make purchases. However, there are key exceptions:
- Inventory Storage: A seller’s permit is mandatory for any entity maintaining inventory for sale at a storage location within California.
- Out-of-State Sales Fulfillment: Seller’s permits are also necessary for storage locations from which retail sales negotiated outside of California are delivered or fulfilled.
Retailers who sell tangible personal property for storage, use, or consumption within California, but are not required to hold a seller’s permit, may still be obligated to register for a Certificate of Registration – Use Tax. This applies if they are classified as a “retailer engaged in business in this state” as defined by Revenue and Taxation Code (R&TC) section 6203, subdivision (c). Regulation 1684, subdivision (a), further clarifies the requirements for Payment and Collection of Use Tax.
A retailer is considered “engaged in business” in California if they have a sufficient physical presence, which includes, but is not limited to:
- Maintaining a place of business within California.
- Having an agent, representative, or salesperson operating under the retailer’s authority for selling, delivering, or installing tangible personal property in California.
- Owning or leasing real or personal property situated in California.
Furthermore, effective April 1, 2019, a retailer is also considered engaged in business in California if their total combined sales of tangible personal property for delivery within California, along with sales from related entities, exceed $500,000 in the preceding or current calendar year.
Specific Registration for Marketplace Facilitators and Sellers
The general registration rules outlined above apply universally to all retailers, including those operating within online marketplaces. However, marketplace facilitators and marketplace sellers, as defined in R&TC section 6041, have additional specific regulations.
Starting October 1, 2019, a marketplace facilitator who is registered or required to be registered for a seller’s permit or Certificate of Registration – Use Tax becomes the designated retailer for sales and use tax purposes for all retail sales facilitated through their marketplace on behalf of marketplace sellers (referred to as “marketplace sales”), as per R&TC section 6043, unless specific exceptions under R&TC section 6047, subdivision (a), apply.
Important Note: “Marketplace sale” in this context strictly refers to retail sales facilitated by a registered marketplace facilitator. Such facilitators are legally considered the seller and retailer for these transactions under R&TC section 6043.
Sales facilitated by unregistered marketplace facilitators are not classified as “marketplace sales.” These are considered “direct sales,” where the marketplace facilitator is not the seller or retailer.
Marketplace facilitators must include both their own direct sales and the sales they facilitate for marketplace sellers when determining their registration requirements for a seller’s permit or Certificate of Registration – Use Tax (R&TC section 6042). When assessing whether they meet the $500,000 sales threshold to be considered “engaged in business in this state,” marketplace facilitators must incorporate sales facilitated on behalf of marketplace sellers in addition to their own sales (R&TC section 6044, subdivision (a)).
Conversely, a marketplace seller, regardless of location (inside or outside California), is not required to register for a seller’s permit or Certificate of Registration – Use Tax if all of their sales in California or for use in California are marketplace sales. However, registration becomes necessary if the marketplace seller also engages in direct sales, such as through their own website or via unregistered marketplace facilitators (R&TC section 6045). Even though a marketplace seller isn’t the retailer for marketplace sales, they must still include these sales, alongside their direct sales, when calculating if they meet the $500,000 threshold for being “engaged in business in this state” (R&TC section 6044, subdivision (b)).
Sales Tax vs. Use Tax: When Each Applies to Online Retail
Sales tax generally applies if a retailer’s in-state place of business, such as an office, branch, outlet, or other business location, actively participates in a sale and the sale occurs within California (refer to Regulation 1620, subdivision (a)). This hinges on in-state participation and the location of the sale. If either condition isn’t met, sales tax is not applicable. In such cases, use tax becomes relevant. Use tax applies to the use of property purchased from a retailer when that property is intended for use within California.
Defining “Place of Business” for Online Retailers
The “place of business” requiring participation under Regulation 1620 must be a location of the retailer. This definition aligns with R&TC section 6203, subdivision (c)(1), which includes “an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business” within California.
Typically, a third-party location is not considered the retailer’s place of business, even if the third party is related. The mere presence of retailer’s employees or property at a third-party location, in itself, does not establish it as the retailer’s place of business. However, a third-party storage location can be considered a place of business if it houses dedicated, non-commingled storage of the retailer’s inventory (see Reynolds Memo Opinion [May 31, 2007]). A single storage location could potentially house places of business for multiple retailers if it maintains dedicated storage for each.
Crucially, in marketplace sales, the retailer is the registered marketplace facilitator, not the marketplace seller. Therefore, a marketplace seller’s location is not considered a place of business for the marketplace facilitator.
What Constitutes “Participation” in Online Sales?
Regulation 1620, subdivision (a)(2)(A), clarifies that any level of participation by an in-state place of business in a transaction is sufficient to subject the transaction to sales tax. However, for an activity to be deemed “participation,” it must serve a real purpose, have a meaningful effect on the sales process, and involve genuine physical human interaction related to the sale from that in-state location.
Activities occurring after the sale is completed do not constitute participation. Similarly, certain support operations conducted from a California location, such as price setting, inventory purchasing, website design, and general marketing, are also excluded from the definition of participation under Regulation 1620, subdivision (a)(2)(A).
Internet transactions are typically designed for online processing, minimizing direct human intervention until the order is fulfilled at the storage location. Often, the storage location is the primary place of business involved in an online transaction. Activities related to the automated online processes are generally considered support operations and not direct participation in individual transactions. The server location hosting the website is also irrelevant in determining participation (see Annotation 710.0013.600).
Examples of Participation in Online Retail Transactions
Example 1: Corporate Headquarters Activities
An online retailer’s corporate headquarters in City A handles advertising, accounting, website design, software programming, and order processing servers.
While these activities support sales, they do not constitute direct participation in specific sales. Thus, the corporate headquarters is not considered participating in transactions for sales tax purposes.
Example 2: Third-Party Warehouse with Dedicated Stock
A retailer uses a supplier’s in-state warehouse, maintaining a separate, dedicated stock of their goods. No retailer employees are present at this warehouse. 15% of the retailer’s California sales are fulfilled from this dedicated stock, and 85% from the supplier’s general warehouse stock.
The dedicated stock area is considered the retailer’s place of business and participates in the 15% of sales fulfilled from it. However, it does not participate in the 85% fulfilled from the supplier’s general stock.
Example 3: Sales Team and Warehouse Fulfillment
A retailer selling medical supplies has master contracts with hospitals. Sales are fulfilled from a City A warehouse, while master contracts are negotiated by salespeople in a City B office.
Both the City A warehouse and City B office participate in the sales. However, City B, where contract negotiations occur, is considered the place of sale.
Example 4: Fraud Review by Office Staff
A department store in City C has office employees who review daily spreadsheets of California orders to identify and review potentially fraudulent sales. Goods are often shipped before the review is complete.
Fraud review, in this case, is not considered participation in sales, as it is not essential to complete the transaction. Sales not subject to review also have no participation from this office.
Example 5: Order Approval and Filing
A retailer in City H sells fixtures and supplies to a customer under a master contract. Orders are placed online or by phone with the retailer’s out-of-state office and fulfilled from both in-state and out-of-state warehouses. City H office employees receive and file approval lists from the out-of-state office but have no customer contact and take no further action on these lists.
These activities do not constitute participation in sales transactions, as the employees have no meaningful interaction in the sales process.
Local Tax Allocation for Online Retailers
When state sales tax applies to a transaction, the Bradley-Burns Uniform Local Tax (local sales tax) also applies. Similarly, local use tax applies if state use tax is applicable (Regulation 1803).
Local sales tax is allocated to the jurisdiction where the sale occurs. If only one in-state place of business of the retailer participates in a sale, the sale is deemed to occur at that place of business. If multiple places of business participate, the sale location is where the principal negotiations take place (Regulation 1802, subdivisions (a)(2)(B) and (d)). Local sales tax is typically allocated directly to the jurisdiction of the sale’s location using Schedule C. However, if the retailer is not required to have a seller’s permit for the place of sale, local sales tax is allocated to the countywide pool of that jurisdiction’s county using Schedule B.
Local use tax is allocated to the jurisdiction where the property is first functionally used (Regulation 1802, subdivision (d)). The shipping destination is generally presumed to be the place of first functional use. Local use tax is usually allocated on Schedule B to the countywide pool of the county where first functional use occurs.
Local Tax Allocation for Marketplace Sales
The rules for sales and use tax application and local tax allocation apply to marketplace facilitators, as they are considered the retailer for marketplace sales. For sales tax to apply to a marketplace sale, a place of business of the marketplace facilitator (not the marketplace seller) must participate in the sale. Local sales tax allocation is also based on participation by the marketplace facilitator’s place of business. “Participation” holds the same definition as for all other retailers.
Tax Application to Common Internet Transaction Scenarios
The following scenarios clarify tax application and local tax allocation for common internet transactions. Assume all sales are processed online without in-state negotiation and that in-state fulfillment implies the sale occurs in California at shipment. Also, assume any participating in-state storage location holds the necessary seller’s permit.
Direct Sales Fulfilled from Third-Party California Storage
Retailers without a California place of business who use a third-party California fulfillment center with commingled inventory are generally considered “engaged in business in this state” and must register for a Certificate of Registration – Use Tax due to their inventory presence. However, the third-party storage location is not their place of business.
- Use Tax Scenario: When a direct sale to a California customer is fulfilled from the third-party in-state storage, the sale occurs in California but is subject to use tax, not sales tax, as the retailer has no participating in-state place of business. The retailer must collect use tax, allocating local use tax to the countywide pool of the shipping jurisdiction using Schedule B.
Retailers with both a California place of business and commingled inventory at a third-party California fulfillment center are engaged in business due to both factors. They might need a seller’s permit for their place of business, or at least a Certificate of Registration – Use Tax. Again, the third-party storage is not their place of business.
- Use Tax Scenario (No In-State Participation): If the retailer’s in-state place of business does not participate in a direct sale fulfilled from the third-party storage (e.g., fully automated internet transaction), the sale is subject to use tax because no in-state place of the retailer participated. The retailer must collect use tax, allocating local use tax to the countywide pool of the shipping jurisdiction via Schedule B.
- Sales Tax Scenario (With In-State Participation): If the retailer’s in-state place of business does participate in the sale, sales tax applies. Local sales tax allocation (Schedule B or C) depends on whether the participating location requires a seller’s permit.
When a retailer has dedicated, non-commingled stock at a third-party California storage location, this is considered an in-state place of business. The retailer must have a seller’s permit for this location.
- Sales Tax Scenario (Fulfillment from Dedicated Stock, No Other Participation): If a direct sale is fulfilled from this dedicated stock and no other in-state place of business participates, sales tax applies. Local sales tax is allocated directly to the jurisdiction of the stock location using Schedule C.
- Sales Tax Scenario (Fulfillment from Dedicated Stock, With Other Participation): If another in-state place of business also participates, sales tax still applies. Local sales tax allocation depends on where the “significant” participation occurs. If it’s the stock location, Schedule C applies. For other locations, Schedule B or C depends on seller’s permit requirements at that location.
Marketplace Sales Fulfilled from Marketplace Seller’s Place of Business
A marketplace seller fulfills marketplace sales to California customers from their own in-state stock.
- Use Tax Scenario (No Marketplace Facilitator In-State Participation): If the marketplace facilitator has no in-state place of business participating in the sale, use tax applies because no in-state place of the retailer (facilitator) participated. The facilitator must collect use tax, allocating local use tax to the countywide pool of the shipping jurisdiction via Schedule B.
- Sales Tax Scenario (Marketplace Facilitator In-State Participation): If the facilitator does have an in-state place of business participating, sales tax applies. Local sales tax is allocated to the jurisdiction of the facilitator’s place of business. Schedule B or C depends on the facilitator’s permit requirements.
If a marketplace seller fulfills marketplace sales to California customers from their out-of-state stock:
- Use Tax Scenario (No Marketplace Facilitator In-State Participation): Use tax applies, collected by the facilitator, allocated to the countywide pool of the shipping jurisdiction via Schedule B.
- Sales/Use Tax Scenario (Marketplace Facilitator In-State Participation): If the facilitator has in-state participation, sales tax applies only if the sale occurs in California. If the sale is out-of-state, use tax still applies (Schedule B). If the sale is in California, sales tax applies, allocated to the facilitator’s in-state location (Schedule B or C depending on permit).
Marketplace Sales Fulfilled by Marketplace Facilitator
If a marketplace facilitator uses an in-state fulfillment center for marketplace sellers’ merchandise, they generally need a seller’s permit for this center. Sales tax applies to marketplace sales fulfilled from this center because the sale occurs in California and the fulfillment center (facilitator’s place of business) participates.
- Sales Tax Allocation (Fulfillment Center Only Participation): Local sales tax is allocated to the jurisdiction of the fulfillment center using Schedule C.
- Sales Tax Allocation (Fulfillment Center and Other Participation): Local sales tax is allocated to the jurisdiction with “significant” participation.
If a marketplace facilitator uses an out-of-state fulfillment center, they generally need a Certificate of Registration – Use Tax. If they also have a California place of business, they might need a seller’s permit for that location.
- Use Tax Scenario (No Marketplace Facilitator In-State Participation): Use tax applies, collected by the facilitator, allocated to the countywide pool of the shipping jurisdiction via Schedule B.
- Sales/Use Tax Scenario (Marketplace Facilitator In-State Participation): Sales tax applies only if the sale occurs in California. Out-of-state sales are subject to use tax (Schedule B). California sales are subject to sales tax, allocated to the facilitator’s in-state location (Schedule B or C depending on permit).
Related Person Scenarios in Online Retail
Complexities arise when multiple related entities are involved in internet transactions, such as marketplace facilitators, marketplace operators, sellers, and fulfillment services. Generally, participation by a related entity’s place of business is not attributed to the marketplace facilitator in a marketplace sale.
- Example: If a marketplace facilitator and a fulfillment service are separate subsidiaries of the same parent company, the fulfillment subsidiary’s in-state storage is not automatically the facilitator’s place of business. Marketplace sales fulfilled from this storage are subject to use tax unless the marketplace facilitator itself has in-state participation.
- Exception: If the marketplace facilitator maintains dedicated, non-commingled stock at the fulfillment entity’s storage, this is the facilitator’s place of business, requiring a seller’s permit. However, this dedicated stock area doesn’t make the entire storage location the facilitator’s place of business. Sales fulfilled from other areas of the fulfillment entity’s storage generally do not involve participation from the facilitator’s place of business.
Finally, a marketplace facilitator contracts with marketplace sellers. An entity facilitating sales only for a single related entity is not technically a marketplace facilitator. However, a facilitator can serve both related and unrelated marketplace sellers. Marketplace sales for related sellers are treated the same as those for unrelated sellers.
- Example: A marketplace facilitator subsidiary and a marketplace seller subsidiary are under the same corporate parent. The seller uses the facilitator’s marketplace and has in-state storage. The facilitator is the retailer for all marketplace sales, including the related seller’s. The related seller’s in-state storage is generally not the facilitator’s place of business. Sales to California customers from this storage are subject to use tax unless the marketplace facilitator has separate in-state participation.
