What is sales and use tax, and how is it applied California?
- California's sales tax generally applies to the sale of merchandise, including vehicles, in the state. California's use tax applies to the use, storage, or other consumption of those same kinds of items in the state. Generally, if sales tax would apply when you buy physical merchandise in California, use tax applies when you make a similar purchase without tax from a business located outside the state.
- Typically, sales tax applies to the stated sales price. Deductions allowed for discounts, returns, shipping if separately stated. Exemptions may apply based on the transaction or use, for example
- A transaction exemption is sales of intangibles
- A use exemption is a “reseller” or wholesale exemption
- Services are generally exempt from sales tax, though some types of services are taxed including, telephone, cable television, utilities, and dry cleaning.
- California does not generally tax services unless they are an integral part of the transfer of the property.
How does this apply to Nonprofit taxpayers?
Nonprofit taxpayers must pay sales or use tax on purchases and collect and remit sales tax on taxable sales to customers. Examples from Publication 18 include:
- Sales of food, meals, beverages, and similar items under a number of different circumstances.
- Sales of tickets that buyers will exchange for food, beverages, or other physical products.
- Sales of booklets, books, pamphlets, and so forth.
- Sales of tickets for fundraising events when the ticket price includes amounts for food or beverages.
- Sales of items at rummage sales, bazaars, carnival booths, community events, and other fundraisers.
- Sales of merchandise in Internet, live, and silent auctions.
- Sales of tickets for game booths where prizes are guaranteed to each ticket purchaser, even when the prizes have little value. Examples include white elephant, fish pond, grab bag, and “pitch-’til-you-win” games.
Nonprofits also carry out certain activities that are not considered sales for sales or use tax purposes. Examples from Publication 18 include:
- The gifting of merchandise for a true donation: an amount someone gives your organization without expecting to receive merchandise of equal value in return.
- Sales of tickets for concerts, movies, plays, shows, and similar events when food and meals are not included in the ticket price.
- Sales of tickets for game booths and raffles when prizes are not guaranteed to every ticket purchaser.
- The sale of travel, home rentals, guide services, personal services, tutoring, and other things of value that are not physical products.
- Sales of gift cards, gift certificates, and coupon books.
- Membership drives and other fundraising activities that do not involve the exchange of merchandise or that include merchandise premiums of a much lower value than the donation or membership amount.
- Sales of advertising that does not involve exchanges of merchandise or goods.
If food is taxable, when does the sale of food create a sales or use tax liability?
The sale of food can be tax-exempt or taxable, depending on: (1) the type of food, (2) the circumstances under which the food is sold, and (3) who makes the sale. Notably, the same rules apply whether the food is purchased or donated to the organization.
Special sales or use tax exemptions may be available for meals and/or food that are:
- Sold to students at schools by a qualifying vendor.
- Delivered to elderly people and people with disabilities.
- Furnished by social clubs, fraternal organizations or religious organizations.
- Sold by nonprofit veterans’ or youth organizations.
Food and beverage vendors should consider the following transaction examples if the above exemptions do not apply:
For sales of food “to go,” is the sale usually taxable?
- Cold food, No.
- Cold beverages, No.
- Hot prepared food, Yes.
- Combination packages, Yes. Notably, cold food and cold beverages maybe taxable if sold as part of a hot food combination package.
For sales of food for consumption on-site, is the sale usually taxable?
- Food sold where admission is charged, Yes.
- Food sold where dining facilities are provided, Yes.
- Meals served at fundraising events, Yes.
For more information about California sales and use tax or applicability for certain transactions, contact Frances Ellington.