Main Takeaways
- California sales tax nexus determines when a business must collect and remit sales tax.
- Nexus can be triggered by physical presence, economic thresholds, employees, inventory, or referrals.
- California requires tax collection once sales exceed $500,000 annually in the state.
- Marketplace facilitators like Amazon collect tax for sellers, but direct sales still require compliance.
- Remote employees in California can establish nexus for out-of-state companies.
- Correct tax rates depend on customer location due to local district taxes.
- Businesses must register with CDTFA, collect tax, file returns, and keep accurate records.
- Common mistakes include ignoring inventory, affiliates, or district tax rules.
- Technology like Avalara or TaxJar can help automate compliance.
- Lucia & Co. CPAs assist with nexus reviews, CDTFA registration, filing, automation, and audits.
If you operate a business that sells products or services in California, you’ve probably heard the term “California sales tax nexus.” This concept determines when a company must collect and remit sales tax to the state. With online sales, remote work, and expanding e-commerce, understanding how nexus works has become more important than ever.
This article explains what California sales tax nexus means, how it’s established, and what types of businesses need to pay attention to it. We’ll also cover economic thresholds, marketplace rules, and practical tips for staying compliant with state tax laws.
What Is a Sales Tax Nexus?
A sales tax nexus is the legal connection between a business and a state that requires the company to collect and pay sales tax on transactions made there. Every state in the U.S. has its own laws defining what creates that connection.
In simple terms, if your business has a significant presence—either physically or economically—in California, you’re likely required to collect sales tax from customers in the state.
California’s nexus laws are particularly detailed and can apply even if your company isn’t physically located there. This makes it critical for both in-state and out-of-state businesses to understand the different types of nexus California recognizes.
Physical Nexus in California
Physical nexus is the most traditional and straightforward type. It occurs when your business has a physical presence in California, such as:
- A store, office, or warehouse located in the state
- An employee or contractor working within California
- Inventory stored in a California facility (including a third-party fulfillment center like Amazon FBA)
- Participation in trade shows or temporary business events
Even short-term physical activities can create nexus. For example, if your business sends sales representatives to visit clients or conduct training sessions in California, you may be required to collect sales tax for transactions made there.
Economic Nexus: The Post-Wayfair Era
In 2018, the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. changed how states can collect sales tax. The ruling allowed states to impose tax obligations on businesses with economic presence, even if they have no physical location within the state.
Following this decision, California established its own economic nexus rules.
As of 2019, out-of-state sellers must collect California sales tax if they exceed:
- $500,000 in total sales of tangible goods delivered into California within the current or previous calendar year
This means that if your company sells more than $500,000 worth of products to California customers—even online—you are considered to have a California sales tax nexus and must register with the California Department of Tax and Fee Administration (CDTFA).
Marketplace Facilitator Laws
California also enforces marketplace facilitator rules. These laws apply to large online platforms that connect third-party sellers with buyers, such as Amazon, eBay, or Etsy.
Under California law, these marketplaces are considered the “retailer” and are responsible for collecting and remitting sales tax on behalf of sellers.
However, if your business sells both through a marketplace and directly through your own website, you may still have independent sales tax obligations for those direct transactions.
It’s essential to distinguish between marketplace sales (handled by the facilitator) and direct sales (handled by your business).
Affiliate Nexus: Partners and Referrals
Affiliate nexus applies when your company has a relationship with individuals or businesses in California who promote your products for a commission or referral fee.
If those affiliates help generate a significant amount of revenue—typically through advertising, referrals, or online links—you may be seen as having a taxable presence in California.
Affiliate relationships can be tricky, especially in the digital space where referrals and partnerships happen across states. Keeping clear documentation and monitoring affiliate revenue can help you determine whether you’ve triggered nexus.
Click-Through Nexus and Online Advertising
California’s click-through nexus applies to online sellers who partner with California-based websites or influencers that refer customers through links.
If total sales from these referral links exceed $10,000 annually, and your total California sales surpass $1 million, you may need to collect sales tax.
This rule primarily affects e-commerce businesses that rely heavily on affiliate marketing or influencer-driven sales. While not all states enforce click-through nexus, California does, and noncompliance can result in penalties.
Common Products and Services Subject to California Sales Tax
California taxes most sales of tangible personal property, but not all goods and services. Some examples include:
- Retail products such as clothing, furniture, and electronics
- Construction materials and home improvement products
- Equipment and tools used in business operations
- Some digital goods, depending on how they’re delivered
- Certain repair and installation services
However, many services—such as consulting, accounting, and digital marketing—are not taxable in California. The line between taxable and non-taxable items can be confusing, so businesses should confirm their tax obligations with a CPA who understands California tax law.
The Role of the CDTFA
The California Department of Tax and Fee Administration (CDTFA) oversees all sales and use tax collection within the state. Businesses that establish nexus must register with the CDTFA and file regular tax returns.
The CDTFA provides online tools, filing systems, and guidance for businesses to stay compliant. Still, tax rules change often, and failing to register or file correctly can lead to audits, fines, and back taxes.
Local District Taxes: Why the Rate Varies
Unlike many states, California has a base statewide sales tax rate of 7.25%, but local jurisdictions can add district taxes. Depending on where your customer is located, the total rate can exceed 10% in some areas.
This means your business must calculate the correct destination-based rate for each sale. For example, a purchase shipped to Los Angeles might have a different tax rate than one sent to San Diego or Sacramento.
Online sellers must use customer addresses to determine the proper tax rate, which can make compliance more complex.
Use Tax Obligations
Even if you don’t collect sales tax on a transaction, your customer may owe use tax—a complementary tax applied to items used, stored, or consumed in California.
Businesses are required to report use tax if they buy equipment or supplies from out-of-state vendors that don’t charge California sales tax.
Failing to pay use tax is one of the most common mistakes companies make when expanding into California. Tracking out-of-state purchases and reporting them properly helps prevent problems during audits.
Economic Nexus and Remote Work
The rise of remote work has added new layers to nexus determination. If your business employs remote workers who live in California, you may unintentionally create a physical nexus.
Even if your main office is outside the state, having a single employee who works from home in California can trigger sales tax responsibilities. This rule applies regardless of whether that employee is involved in sales, operations, or customer service.
If your business recently transitioned to a remote model, reviewing employee locations is essential for staying compliant.
Filing and Registration Requirements
Once your business establishes a California sales tax nexus, you must:
- Register with the CDTFA before making taxable sales.
- Collect sales tax at the appropriate local rate for each transaction.
- File sales tax returns regularly (monthly, quarterly, or annually).
- Remit collected taxes to the state on time.
Late filings or payments can lead to significant penalties, so it’s best to automate filings or work with a CPA who handles California tax compliance.
Common Mistakes Businesses Make
Many businesses overlook nexus obligations because they underestimate how easily it can be triggered. Common mistakes include:
- Assuming no physical presence means no tax responsibility
- Forgetting about inventory stored in California warehouses
- Ignoring affiliate or online referral sales
- Misapplying district tax rates for deliveries
- Failing to track total sales to California customers
Even a small oversight can result in unpaid tax liabilities. Regularly reviewing your nexus status ensures you’re collecting and remitting correctly.
How Technology Can Help with Sales Tax Compliance
Sales tax compliance can feel overwhelming, especially when dealing with multiple states. Fortunately, technology can simplify the process.
Many businesses use sales tax automation software such as Avalara, TaxJar, or Vertex. These tools integrate with e-commerce platforms to automatically calculate and apply the correct California tax rate.
They can also file returns, store tax records, and alert you when you approach nexus thresholds. However, automation doesn’t replace professional oversight—working with a CPA ensures accuracy and compliance with the latest regulations.
Sales Tax Audits in California
The CDTFA conducts regular sales tax audits to ensure businesses are following state laws. Audits typically review sales records, tax filings, and invoices to confirm that taxes were collected and reported accurately.
Common triggers for an audit include:
- Late or inconsistent filings
- Sudden changes in reported sales volume
- Customer complaints or tips
- Data discrepancies with other tax filings
Preparing accurate records and maintaining consistent filing habits can help your business avoid problems during an audit.
Staying Compliant in a Changing Tax Environment
California sales tax laws evolve regularly, especially with the growth of digital commerce. Businesses should stay informed about changes to nexus thresholds, tax exemptions, and filing requirements.
Periodic reviews with a CPA can help you adjust quickly and avoid penalties. Keeping documentation of all sales, shipments, and returns is equally important.
How Lucia & Co. CPAs, Inc. Helps Businesses Manage California Sales Tax Nexus
If your company sells to customers in California, understanding and managing your California sales tax nexus is essential to avoid costly mistakes. At Lucia & Co. CPAs, Inc., our team of tax experts helps businesses of all sizes navigate these complex rules with clarity and precision.
We provide:
- Sales tax nexus reviews to determine your filing obligations
- CDTFA registration assistance for new or expanding businesses
- Automated sales tax solutions integrated with your accounting system
- Audit support to prepare records and minimize risk
- Ongoing compliance monitoring so you never miss a filing deadline
Lucia & Co. CPAs, Inc. works with both California-based and out-of-state companies to ensure they meet all sales and use tax requirements. Our firm combines technical expertise with real-world experience to protect your business from unexpected liabilities.
If you’re unsure whether your business has triggered a California sales tax nexus—or need help managing compliance—contact Lucia & Co. CPAs, Inc. today. Our team is ready to help you understand your obligations, streamline your tax processes, and keep your company in good standing with California’s tax authorities.
