California Sales Tax Guide for SaaS and E‑Commerce Businesses

2025-07-04

California hosts many software and e-commerce companies but has one of the most complex sales tax systems in the US. Here's what you need to know about California sales tax obligations, registration requirements, and compliance.

Quick Reference

Item	Details
State Tax Rate	7.25% (6% state + 1.25% mandatory local)
District Tax Range	0% - 3.5%
Combined Rate Range	7.25% - 10.75%
Economic Nexus	$500,000 in current or previous calendar year
Physical Nexus	Any presence in California
SaaS Taxable	No (exempt as service)
Registration Portal	CDTFA Seller's Permit Portal

California Sales Tax Fundamentals

California imposes two complementary taxes administered by the California Department of Tax and Fee Administration (CDTFA):

Sales tax applies to retail sales of tangible personal property within California
Use tax applies to the use, consumption, or storage in California of tangible goods purchased out of state when sales tax was not charged

From a remote seller's standpoint, you collect "use tax," but the rate, reporting, and payment process mirror sales tax, so this guide refers to both as sales tax.

The statewide base rate is 7.25% (6% state + 1.25% mandatory local). Voter-approved district taxes can raise the combined rate to 10.75% in certain cities. Always charge the rate that applies at the customer's location. Use the CDTFA's District Tax Rate Lookup to verify current total rates by address.

Tax you collect belongs to the state. Track it separately and remit it on time - penalties start at 10% of the unpaid amount.

Nexus: When Are You Required to Collect?

You must register, collect, and remit California sales tax once you establish nexus - a significant connection to the state.

Physical nexus

Triggered by any physical presence, including:

Office, store, warehouse, or fulfillment center in California
Employees, contractors, or sales reps working in the state
Inventory stored in a California facility (e.g., Amazon FBA)
Company-owned equipment or servers located in California
Trade-show activity exceeding 15 days or $100,000 in sales per year

Economic nexus

Under Assembly Bill 147 (2019), a remote seller has nexus if sales of tangible personal property delivered into California exceed $500,000 in the current or previous calendar year. Cross the threshold and you must register immediately.

Small-seller relief: If you have no physical presence and under $500,000 in California sales, you are not required to collect. Monitor your sales so you can register promptly once you approach the limit.

What Is Taxable?

Category	Taxable in CA?	Notes
Tangible personal property (clothing, electronics, home goods)	Yes	Default rule; exemptions are limited (most groceries, prescription drugs)
SaaS (pure cloud access, no physical media)	No	Covered by Regulation 1502 - software accessed via the cloud is a service, not a sale of tangible goods
Digital downloads (e-books, music, software)	No	Non-taxable when delivered electronically without a physical copy
Services (consulting, custom software development)	No	Installation labor may be taxable if part of a product sale
Bundled tangible + digital or SaaS	Yes (entire bundle)	Shipping any physical item can make the whole transaction taxable

Rate Sourcing: Hybrid Origin/Destination Rules

California uses modified-origin sourcing:

State, county, and city portions follow the origin - your California place of business
District taxes follow the destination - the customer's delivery address

Remote sellers (economic-nexus only) apply the full destination rate, including all district taxes. Use the CDTFA's rate-lookup tool to ensure accuracy.

Registering for a Seller's Permit

Apply online via CDTFA's seller-permit portal
Provide business details (entity type, EIN, addresses, projected sales)
Registration is free, though CDTFA may request a security deposit for high-risk accounts
Post the permit at any California business location
Use your permit number to issue resale certificates on wholesale purchases

Collecting, Filing, and Remitting

Step	Action
Configure platforms	Enable CA tax in your e-commerce or billing software. For CA-based sellers, combine origin base rate with destination district rate. Remote sellers charge full destination rate
Filing frequency	CDTFA assigns monthly, quarterly, or annual cadence based on tax volume
File returns	Report total and taxable sales, tax collected, and allocate by jurisdiction. File online through your CDTFA account
Pay tax	Remit electronically by the due date to avoid 10% late penalties plus interest
Zero returns	File even if no CA sales occurred during the period
Record-keeping	Retain records for at least 4 years

Marketplace Facilitators

Since October 1, 2019, large marketplaces (Amazon, eBay, Etsy, etc.) must collect and remit CA tax on your behalf. Their sales still count toward your $500,000 threshold. If you sell both on marketplaces and direct, register once you exceed the threshold and collect on direct sales only.

Best Practices for Smooth Compliance

Monitor sales against the $500,000 threshold
Automate calculations - turn on the tax engine in Stripe, Shopify or any other billing platform for California if you established nexus
Subscribe to CDTFA updates - local district rates change frequently
Consider signing up for Afternoon.co - we can put your sales tax on autopilot