California Internet Sales Tax

Learn about California’s Internet sales tax rules before selling online to California customers.

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If you are selling goods or products online and some of your customers are located in California, you need to be aware of California’s Internet sales tax rules. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both in California and nationwide. 

The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law (called the Marketplace Fairness Act of 2013) would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.

Below is an article on the current rules on Internet sales tax in California. A new federal law under consideration would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)

The General Rule: Physical Presence in the State

The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means such things as

  • having a warehouse in the state
  • having a store in the state
  • having an office in the state, or
  • having a sales representative in the state.

For a more specific statement of what counts as physical presence under California law, consult Section 6203 of California’s Revenue and Taxation Code.

Not unexpectedly, the corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an internet-based sale to someone in that state.


The following examples generally would be valid in situations where special rules did not apply. However, keep in mind that California does have new, special rules, discussed below, that apply to large online retailers.

Example 1: You are operating solely out of a warehouse in Memphis, Tennessee and make a sale to a customer in Santa Monica, California—a state where your business has no physical presence: You are not required to collect sales tax from the Santa Monica customer.

Example 2: You are operating solely out of a warehouse in San Francisco, California and make a sale to a customer in Santa Monica, California: You are required to collect sales tax from the Santa Monica customer.

Example 3: After several years of operating solely out of a warehouse in Memphis, Tennessee, you open a one-room satellite office just outside Los Angeles, California—a state where previously you had no physical presence. A day later, you make a sale to a customer in San Diego: You are required to collect sales tax from the San Diego customer.

Non-Taxable Items

Certain items sold via the Internet to California customers may be exempt from sales tax under California law. Possible non-taxable items include:

  • sales of items for resale
  • sales of cold food products
  • products electronically transmitted to customers, such as software, eBooks, mobile applications, and digital images

For additional information, see this online publication from the California Board of Equalization.

The Customer’s Responsibility

In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a “use tax.” Under California law, if an item would otherwise be subject to sales tax, it is generally subject to use tax. For more information, see this online publication from the Board of Equalization.

California’s Recent Internet Sales Tax Legislation (AB 28 and AB 155)

In the Quill decision mentioned above, the United States Supreme Court considered, but rejected, a more ambiguous sales tax rule that, instead of physical presence, would require only a so-called “nexus” between a business and a state in order for the state to require the business to collect sales tax. A nexus may include things that go beyond an obvious physical presence. California has recently attempted to use the nexus concept to impose a sales tax collection requirement on larger Internet retailers.

More specifically, during a three-month period between late June 2011 and late September 2011, California enacted two pieces of legislation, known technically as AB 28 and AB 155, that created new standards for determining a “nexus” between a business and the state for sales tax purposes. These pieces of legislation appear to be focused on large Internet-based retailers like

The two bills concern Internet retailers that may not have a physical presence in California, but do have so-called “click-through” arrangements with “persons” in California. Under such arrangements, the persons in California solicit California customers and direct them to the non-California business’s website. This is often accomplished by the persons in California having websites with links that connect to the out-of-state retailer’s website. If the non-California business is making enough money from these directed sales, as well as enough money from California sales more generally, it will be required to collect California sales tax.

More specifically, under AB 28 and AB 155, the non-California Internet retailer must meet all of the following conditions before being required to collect California sales tax:

  • have an agreement with a person or persons in California to direct potential buyers to the retailer’s website or link
  • compensate the person or persons in California for directing potential buyers to the online retailer
  • the retailer’s “total cumulative sales price” from directed sales to California customers must exceed $10,000 within the preceding 12 months, and
  • the retailer’s overall total cumulative sales in California (both directed and otherwise) must exceed $1,000,000* within the preceding 12 months

In addition, AB 28 and AB 155 also state that a “retailer that is a member of a commonly controlled group” of businesses must collect California sales tax. The more complete definition, from Section 25105 of California’s Revenue and Taxation Code, indicates that a “commonly controlled group” covers such situations as businesses owned by parent corporations or two corporations with substantial overlap in stock ownership.

*AB 155 largely reiterates the key provisions of AB 28. However, where AB 28 required total cumulative sales in California (directed and undirected) to exceed $500,000, AB 155 revised that figure so that such sales must exceed $1,000,000. However, while this minimum dollar amount may exclude many small and micro Internet-based businesses, it is possible that it will be revised back down in the future as California seeks more tax revenue.

Final Thoughts

The California Internet sales tax law became effective September 15, 2012. This is mainly important for larger online retailers, like and For most small online businesses, it is the long-established “physical presence” rule that provides primary guidance on collecting tax on sales to customers in California.

As a rule, the best place to turn for additional information about a state’s Internet sales tax laws is the state’s revenue agency. In California, the Board of Equalization has an online publication which provides a very brief overview of the state’s Internet sales tax law. It basically restates the physical-presence rule. Also, for more general information on taxes on Internet sales, see Nolo's article, Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.

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