Three Taxes California Businesses Need To Know About
Make no mistake about it; there are many advantages to operating an online business in California. However at the same time, there are some drawbacks… the taxes and red tape are more burdensome than what you will encounter in most other states. Large corporations have the resources to navigate this extra red tape, but for a small business owner, it’s not always easy staying on top of what you have to pay. Are you currently aware of these taxes?
1. Local Gross Receipts Tax
Depending on where you live, you may owe your local city or county a gross receipts tax. Unlike most taxes which are based off of your earnings, this one is based off of your revenue. So even if your business is in the red with negative earnings, the tax is still owed each year.
The worst part about this tax is that it hasn’t been updated for the internet age. Traditionally, it was a tax for the privilege of doing business in a given municipality. However if you have an internet business, you may have zero customers/clients in your city, and hence, it’s a bit unfair if you aren’t doing business with anyone locally.
For example with my review site CreditCardForum.com, my LLC has to pay this tax to Los Angeles (where I live) despite the fact that I’m not doing business with anyone in the entire county.
2. LLC estimated tax fee
I’m mentioning these together, because they often get confused with one another. All LLCs in California are required to pay an annual franchise tax of $800, and depending on your revenue, you may also be subject to an LLC fee which is based on total revenue.
- LLC Franchise Tax: With this you must pay a minimum of $800, even if you are being taxed as a disregarded entity.
- LLC Fee: This is a tiered fee based on your total annual revenue. If your LLC’s gross revenue is less than $250,000 you won’t have to pay it, but anything at or above that will require payment of this fee. It ranges from $900 to $11,790.
What’s so confusing about these is their names. The first is better described as a fee (rather than a tax) and the latter should be called a tax since it’s calculated based on your revenue. So why does California name name them like that? Because “taxes” require voter approval, so this was a sneaky backdoor technicality they used to enact the “fee” for gross receipts. The constitutionality of this fee has been brought up numerous times over the years.
In addition to these two, please note there are other fees and taxes involved with LLCs which may vary depending on whether you have elected to be taxed as a pass-thru entity or a corporation.
3. CA Sales Taxes
The days of tax-free online purchases are quickly going the way of the dinosaurs. Back in 2011, a new state law went into effect which requires all online retailers to collect sales taxes from CA residents. In backlash, many e-commerce giants like Amazon and Overstock cut off their CA affiliates to avoid being subject to the law.
Since then, businesses are coming to the realization that sales taxes are inevitable. Amazon made peace with the state and will start collecting taxes from CA customers very soon. Other states like Texas and New Jersey are also adapting this practice.
However what isn’t new is that e-commerce businesses in CA have always had to charge sales tax to in-state customers. Make sure you do this otherwise the consequences are steep.
Also, don’t forget how your credit card processing costs might eat into those sales taxes you are collecting. For example, if someone bought $100 in merchandise from your site and the sales tax owed was 7.25%, then you would have to charge the customer $107.25. If the card processing fee was 2%, then right off the bat you will have lost $0.14 on the collection of that extra $7.25. This can really be painful when a customer is paying with a small biz card because those can carry processing fees of up to 3.5% (and sometimes even higher). Make sure you factor this added cost into your product pricing.