California Sales Tax Nexus: $500,000 Threshold for Sellers

When does an out-of-state seller have to collect California sales tax?

An out-of-state seller must register with the California Department of Tax and Fee Administration (CDTFA) and collect California use tax when its total sales of goods for delivery in California, added to those of every related person, exceed $500,000 in the current or the preceding calendar year (CDTFA overview). CDTFA's test is a dollar total; it names no minimum number of orders.

California calls this economic nexus. It is one of several ways to be "engaged in business" in the state. Inventory, an office, a representative or leased equipment in California each create the duty on their own, with no sales minimum (Publication 77).

What makes a case not simple: related companies whose sales add together, marketplace sales that count even when the marketplace collects the tax, drop shipments, inventory in a California fulfillment center, and several states at once. Gather sales by delivery address and month, every related company's California sales, and each marketplace's sales report. For other states and other nexus types, see when you must collect sales tax.

Which sales count toward California's economic nexus threshold?

Every sale of goods delivered in California counts, taxable or not, including sales for resale, marketplace sales and sales by related persons. CDTFA says the total may include nontaxable sales such as sales for resale (CDTFA FAQ).

A person is related to you if the relationship in section 267(b) of the Internal Revenue Code applies (Publication 77). List every company, owner and family member who sells into California, and have each pair tested.

A seller whose California sales are all documented sales for resale, with no sale to a California consumer, does not have to register under this test. Once it makes any retail sale to a California consumer and is over the threshold, it must register and report all its California sales (CDTFA FAQ). Keep a valid California resale certificate for each resale sale.

Which period is measured, and on what date must I register?

California's statute covers a seller whose total was over the line in the preceding calendar year or the current calendar year (RTC 6203). A seller under the line last year must register on the day its running total for the current year passes $500,000 (CDTFA FAQ). A seller already over the line last year is covered from the start of the current year under the statute's wording; CDTFA's worked example does not spell out that case.

There is no seasonal exception. A seller with only holiday sales is covered, and CDTFA says seasonal sellers may apply for a temporary permit.

Keep records by delivery date, since the date the total passes the line is the date you register. A seller that stays under the line should keep its California sales records to show it, because passing the line in a later year starts the duty then.

Is the sale that crosses the line taxable, and what about sales before that date?

A seller does not have to collect tax on the sale that pushes the total over the line, or on the sales before it. CDTFA's own example has a seller register on the day its total passes the line and says the seller is not liable to collect use tax on earlier sales, including the sale that crossed it. The customers stay liable for use tax on those purchases (CDTFA FAQ). Collection starts with the next taxable retail sale.

CDTFA's example describes a seller with no other connection to California. If you had inventory, an office or a representative in California earlier, you may have been required to register earlier. For tax never collected, see catching up on uncollected sales tax.

What do I collect: state, local and district tax at the delivery address?

Collect California use tax at the rate for the address where the goods are delivered. That is the statewide base rate of 7.25%, which includes local tax, plus any district tax that applies at that address (CDTFA general information).

A seller over the threshold is treated as engaged in business in every California taxing district, so district use tax applies to every taxable delivery in a district that has one, wherever the seller is located (CDTFA district tax guide). Rates differ by address; look up each one with CDTFA's rate by address tool, or connect its rate service to your checkout.

California taxes goods, not services. Food for human consumption and some prescription medicines are exempt (CDTFA FAQ). Some goods also carry separate fees, such as new tires, covered electronic devices, lead-acid batteries and lumber products, each needing its own fee account (CDTFA getting started).

How do I register with CDTFA, and which account is it?

Register online with CDTFA. An out-of-state seller with no place of business or dedicated stock in California generally gets a Certificate of Registration – Use Tax; a seller with a California place of business or its own dedicated stock gets a seller's permit (marketplace guide; fulfillment centers).

In CDTFA's online services, choose registration for a new business activity and follow the prompts (Publication 77); the system's questions decide the account (fulfillment centers). Once registered you file returns and pay on the schedule CDTFA assigns; see filing sales tax returns.

A seller under the threshold may register for a Certificate of Registration – Use Tax anyway, to collect as a courtesy to customers. It then has the same duties as any retailer until it closes the account (Publication 77).

Does California tax services, and what about digital products?

California sales and use tax applies to goods, not to services unless the services are part of selling goods (CDTFA FAQ). The goods threshold does not make a services-only seller a collector.

Digital items change on January 1, 2027. From that date, CDTFA says tax generally applies to digital products, defined as prewritten software delivered on media, delivered electronically or accessed remotely, including software as a service. Before that date, software delivered electronically with no physical media is not taxed (CDTFA digital products guide; general information).

CDTFA does not state whether digital sales count toward the sales threshold. Its digital guide widens the definition of tangible personal property to include them, but its threshold pages still speak only of tangible personal property. That is unsettled; ask CDTFA in writing before relying on either answer. Taxability is covered in sales tax on SaaS and software.

What if I drop ship for another seller or use a California fulfillment center?

A seller over the threshold that ships goods to a California consumer for a retailer not registered in California is treated as the retailer for that sale and must collect the tax (CDTFA FAQ). This applies even if the sale to the other seller was a resale. Tax is measured on the price that seller charged the consumer, or on your price to that seller plus a markup of 10%; a lower markup needs documents showing the real selling price.

If the other seller is itself registered or required to be registered in California, it collects, and you should keep its resale certificate. A resale certificate that lacks the buyer's California seller's permit number generally does not overcome the presumption that you are the drop shipper (marketplace guide).

CDTFA says an out-of-state seller that stores its inventory in a California fulfillment center must register and file returns on its retail sales to California consumers (fulfillment centers); inventory is a physical presence with no sales minimum. CDTFA's marketplace guide treats a seller whose California sales all go through registered marketplaces differently (see the next section) and does not say how the two rules fit when the marketplace also stores the goods, so ask CDTFA in that case. Stock kept apart from others' goods generally needs a seller's permit for that location; mixed stock generally needs a Certificate of Registration – Use Tax (online retailers guide).

Do marketplace sales count, and do I still register if the marketplace collects?

Marketplace sales count toward the threshold, but a seller whose California sales are all made through registered marketplaces that act as the retailer is not required to register. The marketplace collects and pays the tax on those sales (CDTFA marketplace guide).

Direct sales change that. Sales through your own website, or through a marketplace that is not registered, are yours. If your direct and marketplace sales together are over the threshold, you must register and collect on your direct sales. You then report all your California sales and may claim a deduction for the marketplace-collected ones as "other" (marketplace guide).

Keep the marketplace's agreement or proof that it is registered, and its permit or account number. CDTFA will not hold you liable for a marketplace sale if it can verify the marketplace collected and paid the correct tax.

Can I stop collecting if my sales fall below the line?

Not right away. Because the statute counts the preceding calendar year, a seller over the line in one year stays covered through the end of the next year (RTC 6203); CDTFA says the same of district use tax (district tax guide). When neither the preceding year nor the current year to date is over the line, and nothing else connects you to California, the sales test no longer applies.

Registration does not end by itself, and CDTFA does not say when a seller below the line may close its account, so ask it in writing first. Publication 74 asks you to close an account when you are no longer actively engaged in business or no longer engage in taxable activities, among other events. Closing means notifying CDTFA, filing a final return, paying what is owed and keeping records for four years (Publication 74). A seller that registered voluntarily collects until it closes the account (Publication 77). A seller with inventory or another connection to California stays covered by that connection.

If a corporation, partnership or LLC ends its business owing tax it collected, a person responsible for paying it who willfully failed to pay can be personally liable (RTC 6829); see filing sales tax returns.

Example

These examples are illustrative. Amounts are in US dollars.

An Oregon shop crosses in October

An Oregon online shop delivers goods in California. By September 30 the year's total is $490,000. An $8,000 order on October 10 brings it to $498,000. A $5,000 order on October 20 brings it to $503,000, including $40,000 of resale sales that count. The shop registers on October 20 and collects use tax from the next retail sale. It does not have to collect tax on the October 20 order or earlier ones, though those customers owe use tax themselves.

The next year the shop's California sales are $300,000. The preceding year was over the line, so under the statute the shop stays covered and collects all year. In the third year the preceding year was under the line, so the sales test no longer applies unless the third year's own total passes $500,000. Whether and when it can close its account is a question to put to CDTFA in writing.

An Arizona consultant sells services

A software consultant in Arizona bills $900,000 a year to California clients, all for services. The goods threshold does not apply to services. If it also sells digital items after the start date above, those need a separate check.

A Nevada drop shipper

A Nevada wholesaler delivers $600,000 of goods to California buyers, mostly to retailers with resale certificates. It also ships $20,000 of goods straight to California consumers for a retailer not registered in California. Over the line, the wholesaler is the California retailer for those $20,000 of sales and must register and collect.

Different for you?

• You are over the line in several states: compare thresholds in when you must collect sales tax.
• You should have registered earlier: read catching up on uncollected sales tax, and get bookkeeping help rebuilding sales by delivery address.
• You are a Canadian or other foreign seller: see foreign sellers and sales tax.
• You sell software or subscriptions: see sales tax on SaaS and software.
• Your business also operates in California: income and franchise tax are in California minimum tax and LLC fee.
• You are registered and unsure how to file: see filing sales tax returns.