Tax compliance is a crucial step in starting a business in California. As a startup, it is necessary to know how the California Department of Tax and Fee Administration (CDTFA) considers and classifies a new business to prevent penalties and use the available exemptions. The following are the important questions that are posed directly in relation to this issue.

What Is the CDTFA’s General Definition of a ‘Startup’?

CDTFA does not have such a legal term as startup. It uses the terms of the new businesses as a new registrant or new entity instead. Under CDTFA proposals, a start-up is any new business organization, either incorporated or otherwise, which undertakes the activity of selling tangible personal property, leasing goods, or providing taxable services in California.

This includes:

  • Sole proprietorships
  • LLCs
  • Corporations
  • Partnerships
  • E-commerce brands, Online sellers

In California, a business is required to register with CDTFA regarding the Wayfair economic nexus provisions in case it expects to earn a revenue of $100,000 or a higher amount, as well as 200 or more distinct sales, every year.

When Is a Business Required to Register With the CDTFA?

It is important to note that a business that intends to sell taxable goods or services in California must be registered at CDTFA before it starts to sell. In such cases, the registration is a condition when:

  • You are presently based in California, making sales.
  • You keep stocks in the state (using Amazon FBA warehouses, too).
  • You are selling digital or tangible products that are under sales and use tax.
  • You can be classified under economic nexus under out-of-state operations.

Once your activity in the online sphere reaches the economic levels, you also lose your exemption, even if you are a small online seller.

Does the CDTFA Treat All New Businesses Equally?

Not exactly. Differentiating businesses by the CDTFA is:

  • Type of business (retail, service-based, wholesale, and manufacture).
  • Taxable activity (sale of tangible commodities vis-a-vis nontaxable services).
  • Channels of sale (real vs. internet).
  • Physical presence (California-based and off-site sellers).

All of them are bound to tax compliance, but some of their characteristics may be different concerning the filing frequency, license type, and the risk of an audit, according to these criteria.

Are There CDTFA Incentives or Reliefs for Startups?

There are no direct tax reliefs provided under CDTFA, which is limited to the word startup. Nevertheless, new businesses can receive:

  • Sales Tax Exemption (of selected manufacturing equipment).
  • Seller permit fee waivers (the regular permit is not charged).
  • Take use tax exemptions (not on behalf of out-of-state purchases when resold).
  • Late filling calendars (quarterly and monthly, depending on volume).

One should seek the advice of a tax adviser in order to maximize these provisions.

What Licenses or Permits Does a Startup Need from the CDTFA?

The majority of startups will require:

  • A seller’s permit is required when selling or renting physical items in California.
  • A Use Tax Account in case they purchase items out of state to be used in a California business.
  • Special Tax Permit in case of trade in regulated activities (e.g., alcohol, tobacco, fuel).

Note: A service or service-based startup might also be required to register in case they offer any job, the generation of tax, or any other fabrication services.

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