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Small Business

If Your Clients Have an Online Business - They May Owe State Taxes

We, along with the California State Board of Equalization (BOE), urge online buyers and sellers to be informed about their tax obligations. The Internet is a dynamic and convenient technology that many businesses use to sell their products and that shoppers use to find great deals.

However, one essential fact is often overlooked — there is no general tax exemption for sales made over the Internet.

We are jointly contacting Internet auction houses to provide them with educational material to help their customers meet their state tax responsibilities. We created a new publication designed to assist online buyers and sellers to understand their tax responsibilities, FTB 3730, Online Buying or Selling — Know Your Tax Obligation.

Sales Tax
The tax imposed on retail sales in California is called sales tax, and the retailer is responsible for reporting and paying the tax to the BOE. California retailers typically collect tax reimbursement from their purchasers for the sales tax these retailers owe. If a business is located in California, Internet sales of its physical products are generally taxable. For sales tax purposes, Internet sales are treated just like sales made at retail stores and other outlets. A seller’s permit is generally required if a business makes three or more sales in a 12-month period. This applies even if sales are made through Internet auction houses or websites that offer online classified advertisements.

Use Tax
When a California purchaser buys from an out-of-state retailer who does not collect California tax on the sale, it is the responsibility of the individual purchasing the product to report use tax on the item paid. Use tax is simply a tax on the use, storage, or consumption of personal property in California. As an individual, use tax can be reported and paid either through a separate line designated for use tax on the California state income tax return or by filing a consumer use tax return directly with the BOE. If the purchaser is a retailer with a seller’s permit, the use tax should be reported on the regular sales and use tax return.

Income Tax
In general, California taxes the income of residents on all of their income, regardless of source. A state tax return is due when an individual’s income reaches certain levels. For 2009, a single person must file when his or her income reaches about $15,000. If you are an online auction seller and have exceeded this income level, you may have income tax obligations.

Additional Resources

FTB 988, California Use Tax & Your Filing Requirements
Publication 109, Are Your Internet Sales Taxable
Publication 177, Internet Auction Sales and Purchases
Publication 110, California Use Tax Basics

For more information on other taxes and fees in California, go to taxes.ca.gov.  

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