California Sales Tax Guide for SaaS and E‑Commerce Businesses

California is a home to many software and e-commerce companies, but it also has one of the more complex sales‑tax systems in the United States. This guide explains when you must collect California sales tax (nexus), which products and services are taxable, and how to comply with registration and filing rules without drowning in jargon.

1. California Sales‑Tax Fundamentals

Sales tax vs. use tax. 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 simply refers to both as sales tax.

Base and local rates. The statewide base rate is 7.25 % (6 % state + 1.25 % mandatory local). Voter‑approved district taxes can raise the combined rate as high as 10.75 % in certain cities. Always charge the rate that applies at the customer’s location (see Section 4 on sourcing). The CDTFA maintains the authoritative District Tax Rate Lookup so you can verify the current total rate by address.

Key point: Tax you collect belongs to the state. Track it separately and remit it on time,penalties start at 10 % of the unpaid amount (Publication 101).

2. 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.

2.1 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.

2.2 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 < $500 000 in California sales, you are not required to collect,monitor your sales so you can register promptly once you approach the limit.

For additional guidance, review CDTFA’s Wayfair & Remote Seller FAQ.

3. What Is Taxable?

Category	Taxable in CA?	Notes
Tangible personal property (clothing, electronics, home goods)	Yes	Default rule; exemptions are limited (e.g., 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.

4. 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.

5. 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.

For out‑of‑state sellers, CDTFA’s Publication 107 offers additional registration guidance.

6. 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 (see Publication 101).
Zero returns	File even if no CA sales occurred during the period.
Record‑keeping	Retain records for ≥ 4 years.

7. Marketplace Facilitators

Since 1 October 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. See CDTFA’s remote‑seller FAQ for details.

8. Best Practices for Smooth Compliance

Monitor sales against the $500 000 threshold.
Automate calculations turn on the tax engine in Stripe, Shipify 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.

California Sales Tax Guide for SaaS and E‑Commerce Businesses