The California Sales Tax in 2021 What’s New?
Your business must first register with the state Tax Commission to ensure proper management of the state sales tax. 4 min read
With millions of cases confirmed to date, California is one of the states most seriously impacted by the pandemic. Although vaccines are being distributed, economic recovery has been slow because of the tiered reopening plan.
According to a Small Business Majority survey conducted in August 2020, 44% of small businesses are in danger of closing down due to the threat of COVID-19. Governor Gavin Newsom’s office noted that small businesses create “two-thirds of new jobs and employ nearly half of all private sector employees,” and “99.8 percent of all businesses in the state and employing 7.2 million workers in California, or 48.5 percent of the state’s total workforce.”
To help these businesses keep the lights on and avoid layoffs, the state has been offering COVID-19 economic initiatives and relief. Small business owners need to know how to navigate the California sales tax landscape in 2021 to see if any of these initiatives can help.
The California Sales Tax
California businesses are required to report and file sales tax returns once they have calculated the sales tax to charge their customers.
The tax rate for California is 7.25%. This includes the 6.00% state sales tax rate and an extra 1.25% local rate. There are also various district sales tax rates in California. You can find the latest sales tax rates for your district here.
The modified-origin law makes California a tricky state in which to figure out just how much sales tax you will have to collect. In short, you are required to collect 7.25% sales tax and a district rate from customers. In other words, the sales and use tax rates will be different depending on the location of your business.You can find your rate here.
Changes to the California Sales Tax in 2021
The Franchise Tax Board (FTB) has made several changes to give businesses relief during the pandemic following Governor Newsom’s executive order which proclaimed a state of emergency in California as a result of COVID-19.
These are some of the most important differences you need to know.
Small businesses have a longer time to file their returns
California has approximately 4.1 million small businesses, which employ roughly 7.2 million people.
Recognizing that small businesses are drivers of economic growth, Governor Newsom’s office proposed several measures. Among these measures is a three-month extension on filing and payment of taxes and fees for small businesses reporting sales taxes and fees below $1 million.
The California Department of Tax and Fee Administration has extended the deadline to file sales tax returns originally due between December 15, 2020, and April 30, 2021. This means businesses have a longer time to file their returns and pay their taxes without paying interest or penalties.
California taxpayers may also deduct any disaster-related loss starting after January 1, 2014, and before January 1, 2024 in an area declared to be in a state of emergency by the President or the Governor.
Larger businesses can apply for a 12-month, interest-free payment plan
A business is eligible for a twelve-month, interest-free payment plan to defer payments for up to $50,000 if its annual sales are less than $5 million. A business could instead pay sales taxes in twelve installments rather than paying all of them at once.
Eligible businesses are those that have sales tax returns originally due between December 15, 2020, and April 30, 2021. If the business pays in full by April 30, 2022, they are eligible for a no-interest payment plan.
This is the second program the state has offered, and those who took part in the previous program are eligible to apply for the new program as well. If a business wants to apply for this program, they must submit a request through the CDTFA online services system.
Online sellers are being pursued in California for back sales and income tax
The California Department of Tax and Fee Administration (CDTFA) is responsible for collecting sales and use tax. They began pursuing out-of-state online sellers for taxes in 2019. These efforts will continue in 2021.
No longer operating on a “physical presence” nexus, California will find a remote or online seller to have an “economic nexus” when a retailer generates $500,000 in sales in a twelve-month period or makes over 200 transactions during the same period. If either of those thresholds is met, the retailer must collect and remit sales tax regardless of whether they have a physical presence in the state.
It was reported in October 2020 that many Amazon sellers in California received letters from the California Department of Tax and Fee Administration demanding payment of past-due income tax because they had inventory stored in the state.
The burden of proof is on the seller to show the state they are exempt from paying California sales taxes. If your business sells online, then you can find more information on how to calculate your taxes here.
What California's Sales Tax Could Mean and Beyond
Small businesses may benefit in the short term from interest-free payment plans and a longer filing period. By helping businesses remain afloat during this time, the California government hopes that local economies will recover from the pandemic faster.
However, California's legislature may continue to address the pandemic with more tax changes in 2021 and beyond that could change how businesses can tax customers and file their returns. As tax legislation evolves, it’s important to monitor how future changes could affect California small businesses.