Tuesday, December 15, 2015

California Sales Tax for Authors

Introduction: Sorting Trash

The first week I came to live in Japan, the district sent us bright-eyed English teachers down to City Hall, where a patient woman lectured us for an hour and a half about how to sort trash. We listened with rapt attention.
"By all means, tell us more about the proper way to recycle plastic bottles."
Now, no one in their right mind cares about sorting trash, until you come to Japan and learn that you need to separate your Burnables from your Non-Burnables, your Recyclables from your Plastics, but that Recyclables is further subdivided into Bottles, Cans, and Paper, and that paper is divided into Newspaper, Magazines, and Cardboard, but shopping lists go in Burnables, and plastic bottles go into a section called Pet Bottles, which is in Recyclables, but separate from the normal (i.e., glass) Bottles, but if a glass bottle breaks, it goes in Non-Burnables, and if a plastic bottle is bent out of shape, it goes in Plastics, and if food is encrusted to your plastic bottle and won't wash off, it goes in Burnable...

You'd better know which container to stick it in!
...and heaven help you if you don't do it correctly, because then they'll write up a notice on your bag and leave it at the designated trash pick-up station for the whole neighborhood to stare at, until you're shamed into picking up your trash and sorting it the right way... or worse still, until a nosy grandma knocks at your door and returns your trash to you.

And that's what California sales tax is like. No one cares to learn about it, until you have to do it yourself, whereupon you take one look at the convoluted system and start hyperventilating into a paper bag. But whereas, in Japan, if you fail, you are branded with dishonor and disgrace, in America, Uncle Sam simply slaps you with a hefty fine.

Why does America make money so difficult!
I'm a new author, and my passion is words, not numbers. But by becoming an indie publisher, I've essentially started my own small business, and so I need to learn about taxes. Fortunately, on September 15, 2015, the California State Board of Equalization invited me to a free seminar discussing the basics of sales tax.

I'm passing on what I think I've learned, not because I'm an expert, but because I believe that even a little practical information makes the whole process less intimidating. Hopefully, it will give you a foothold to start your own research, whether or not you live in California.

What Do I Have to Pay Tax On?


Whenever you sell a tangible object (aka "stuff"), such as a book (the kind with pages and a cover), you need to pay either sales tax or use tax.

Whats the difference? As best I can tell, sales tax applies if you make the sale in California. Use tax applies if you purchase an item, not necessarily in California, but for use in California. (For more information, see this link: https://www.boe.ca.gov/sutax/usetax.htm)

This means that if you've got a stack of your books, and you're selling them at parties, you're selling them at conferences, you're selling them out of the trunk of your car, you're selling to random people you come across on the street, you need to pay a sales tax on those books. You are the seller and you're responsible for collecting sales tax.
You pay sales tax on this!
However, if you've created a hard copy of your book and people go on Amazon or Barnes and Noble to buy your book, then Amazon or Barnes and Noble will take care of the sales tax. They are the vendor, not you.

You do not need to pay sales tax on a digital or e-book, since that's not a tangible object. As a general rule, you do not need to pay sales tax on anything that floats through the Internet like a ghost. It needs a body, or they can't tax it.
Not on this!

You do not need to pay sales tax on writing-related services, such as editing. If you charge money to proof-read someone's book, even if you print out the paper and mark it up, you do not pay sales tax, because your client is paying for the service (editing) and not the product (the marked-up manuscript).

If you give your tangible object (your book) away, you still pay tax on it. This is called a "use" tax. It doesn't seem to matter whether you give it to a friend as a birthday present or if you give it to a reviewer in hopes of selling more copies. The government wants its money.
If you give it away, you pay use tax.

If you barter items ("I'll give you a copy of my book, if you give me a copy of yours"), you still need to pay sales tax. Don't try to be cute. The government knows your tricks.

If someone is supposed to pay you for your book and they don't (aka, the check bounced), you still pay sales tax. Sucks for you.

If they return a book and you refund it, you return the sales tax and don't have to pay it to the government.

If you sell to the federal (but not state) government, you don't have to pay sales tax. 

Shipping overseas? That's a whole new headache.
If you sell your book in a different state outside of California or overseas, you do not need to pay California state tax. Of course, you might need to pay use tax for that state or that foreign country, but don't expect the California state government to help you with that. If the money's not coming to them, they couldn't care less about it.

If you give your product to a charity, you might not have to pay sales tax. Maybe. Make sure you check.

For more information on sales tax, go here: http://www.boe.ca.gov/sutax/faqpurch.htm 

* * *

Who Do I Pay?

Here in California, you pay the California Board of Equalization (http://www.boe.ca.gov/). Heres a little about them from their website.

“Established in 1879 by a constitutional amendment, the BOE was initially charged with responsibility for ensuring that county property tax assessment practices were equal and uniform throughout the state. Currently the tax programs administered by the BOE are concentrated in four general areas: sales and use taxes, property taxes, special taxes and the tax appellate program.”

Again, this only applies to sales made in California.

Every time you make a sale in CA, the state wants its cut.

If you're in Florida at a conference and you sell five books, you do not pay California. Most likely, you pay Florida. I don't know who. You'll have to look that up.

If someone in Japan contacts you and you ship them a book via a common carrier (meaning a professional shipping agency, like the United States Post Office, Fed-Ex, UPS, etc.--not your friend who happens to be visiting Tokyo next week), you do not need to pay a sales tax. On the other hand, you do need to worry about import/ export tax and fun stuff like that, but don't expect California to handle it.

(If you do have a Japanese friend, just tell them to buy it on Amazon and save yourself the hassle.)

The flip side is that if you're not from California, and want to come to our state and sell your book--guess what--you need to pay a "use" tax on it.

* * *

How Much Do I Pay?

Currently, the sales tax in California is 7.5%. However...

Here's the mathematical formula.
Different counties and even cities may have their own additional tax that they tack on for the cost of doing business on their turf. This is called a district tax.

For example, I live in Orange County, which tacks on an additional .5% district tax, so I'd have to pay 8% (7.5 % + .5%) for any books I sold in my home city of Brea.

But let's say I drove into the neighboring city of La Habra, which has their own .5% tax hike, in addition to Orange County's .5%. So I'd need to collect 8.5% sales tax (7.5% + .5% + .5%) on any book I sold in La Habra.

Now those taxes only apply if you've actually stepped foot out of your house to make the sales. If, however, instead of driving over and selling in La Habra, I simply ship books to La Habra, using Fed-Ex or another common carrier, I don't have to pay any of the district taxes. Just the sales tax of 7.5%

What figuring out the tax rate feels like.
Do you want to cry yet?

The main thing is to pay attention to where you make the sales. You can look up the different cities and their tax rates here: http://www.boe.ca.gov/cgi-bin/rates.cgi The electronic filing system also breaks it down for you.

Let's say, for the sake of argument, you sold your books at the Brea Library and you owe 8% sales tax. Hooray. You have a percentage. But 8% of what exactly?

Whatever you sold the book for.

If, for example, the list price of the book says, $21.99, but you sold it for $20, you pay 8% sales tax on that $20--or $1.60. Now you can either ask the customer to pay the $1.60 for you or you can pay it out of your own profits. The state doesn't care.

What you cannot do is charge the customer $20 and do an elaborate algebra wiggle to find out that if Price of Book (x) + Tax on Book (.08x) = $20, then what is the real Price of Book? At least, I don't think you're supposed to do that.

Should have paid more attention in math!

But let's say, you shipped a book by mail instead of selling it at location. Does the cost of shipping end up in the final total.

The answer is: No, unless you get greedy.

If shipping cost you $5 and you charged the customer $5, you don't get taxed on shipping. If shipping cost $5 and you charged the customer $7, guess what, you get to pay tax on that extra $2 you pocketed. Math is how the government punishes your greed.

Don't be greedy!
 But if you're selfless and don't charge your customer that $5 shipping cost at all... the government doesn't care. You do not deduct that $5 out of the price of that book. Whatever you charged for the product is what you get taxed on, not your profits, not your costs, not your bottom line.

Don't be altruistic either.
 Now let's say that someone asks for a copy of your book for their birthday present, so you give them one. Now you need to pay "use" tax, which means you pay tax on the wholesale value of that item.

So I buy my books on Createspace and it cost me $6.33 per book, not including shipping. If I gift my brother a copy for his birthday, I pay tax on that $6.33.

* * *

When Do I Pay?

Tax is charged when purchase made. When the product goes to into another person's hand, that's when the tax is due, regardless of when you get paid.

As soon as this happens, tax is due.
For example, let's say on Christmas Eve 2014, you sold a book to your Mom to give to her friend. But Mom's overspent, and can't pay up until after New Year. The sale was still made on Christmas Eve, and so it counts in 2014's tax revenue.

If you only got paid for part of the product, the full tax is still due.

Let's say that you sold 10 books to a book club at $20 per book. However, some members are a bit flaky. The group only gives you $100. They promise to bring the rest next week, so you give them the books. Unfortunately, from the moment you make that sale, you still owe the government $16 in sales tax.

Layaway and pre-orders, however, do not count as a sale. 

Pay tax later!
 For example, an out-of-state friend calls you in November and tells you she'll be coming to visit in February. She asks you to put aside a signed copy of your book for her. She even sends you a check. But until she comes to collect that book, no tax is due.

Of course, the government doesn't expect you to send them a check immediately after every, single purchase. They do, however, expect you to hold the money in reserve until the time comes to make a payment.

When are payments due?

Either every year, every fiscal year (July 1-June 30), or every quarter. The government will tell you when the money is due on your seller's permit. But the general rule is that the more money you expect to make, the more frequently you are expected to make payments.

Pay your sales tax or face 10% penalty!
I'm a young writer who doesn't expect more than the occasional sale at speaking event. On my Seller's Permit, it says "Yearly Reporting," which means I'm supposed to pay the sum total of all sales tax I've collected from January 1, 2015-December 31, 2015 in one bulk payment. That payment is due by January 31, 2016.

If you file late, you pay a 10% penalty on all sales due. 

* * *

How Do I Pay?

Now, if all this math is giving you a headache, the good news is that, if you file your taxes online, the form breaks it all down for you.

The simplest way to pay taxes is online.

Let's face it, no one uses paper any more.
First you register here: https://efile.boe.ca.gov/boe/registration.jsp You will need your account number and express log-in code, both of which you get when applying for a Sellers Permit.

Once you register, log-in. You will see a button called, File Your Return. Press it.

Did anything happen?

If you try to file during the incorrect filing time, you wont be able to go anywhere. This is what happened to me. I have a Yearly Filing, which means I file after December 31st. So, as of right now, this is where my experience ends.
Unless you're rolling in sales, this is your entire window for filing.
From what I saw from the presentation, supposedly when you file a return online, you will be connected to a wonderful spreadsheet which will do all the math for you. You just need to type down how many items you sold in which particular place and at what cost. If you bought items for your own personal use (gift, barter, review), you type that in as well. Then the program magically calculates everything and gives you a final number.

You can pay electronically, by credit card, or by check. However, if pay by credit card, you will be charged 2.3%. If you send a check, it better be postmarked by the due date, or you will charged a late fee. And, frankly, they might charge you for paying via check, too. 

Beware paying with credit. You will incur fees!
 So pay electronically if you want to pay the least amount of money.

(I’ll try to update this section once I try it for myself.)

* * *

What Sort of Documentation Do I Need?

I'm going to go over this, document by document. Once again, this only applies to California. It might be similar in other states, but you'll have to check it out for yourself.

Fictitious Business Name and Business License

This isn’t really part of the sales tax lecture, but I thought I’d throw it in anyway, just in case.

A “Fictitious Business Name” or a “D.B.A” is basically creating your own little company. In my case, it’s “Winter Dragonfly Press.” “Winter Dragonfly Press” basically amounts to one person (me!) formatting, selling, and in general handling all the business of my books. But it sounds so much better to have a name.

How you feel with a DBA.
So how do you get one? The California Governor’s Office says this:

“A fictitious business name statement (D.b.a. or “doing business as”) must be registered with the county clerk of the county of the registrant’s principal place of business […]. You must contact the city and/or county clerk and/or recorder where the principal place of business is located for information regarding filing or registering fictitious business names.”

Basically, you register with the city/ county where you plan to do business. In my case, my business was my home address in the city of Brea, which is in Orange County, so I registered here: http://ocrecorder.com/services/fictitious

I printed a document and went to the Clerk-County Recorder branch office in Fullerton. I paid a $23 fee. (This was in 2014.) After they approved my form, I had to publicize my business in a local newspaper. They gave me a list of names and numbers. I think the cost for registration and publicity came out to less than $50.
If you want to put this sign on your door, you need a business license.

Soon afterwards, the City of Brea came after me with a business license.

According to their website, “A business license is required of all businesses operating within the city limits, including home based operations and temporary activities or contractors with offices outside the City, but who are doing a project in Brea.” Even though I didn't have my own shop, since my home was in Brea, they made me purchase a license and pay a yearly fee for renewal.

$21 a year for this ugly gray rectangle... and I got it cheap!
If you live in Brea, you can find out more information here: http://www.ci.brea.ca.us/Index.aspx?NID=111

If not, look up your city’s website and go from there. Whether or not you want to get a DBA, I'm pretty sure you will need your business license if you want to make a sale. Unfortunately, it doesn't just end there...

Seller's Permit

You need a Seller's Permit (https://www.boe.ca.gov/sutax/faqseller.htm ) in order to sell a physical product to customers in California. Digital products are excluded. Selling via a third party (such as Amazon) is excluded.

If you need a cash register, you need a sales permit.
It costs $0 to obtain a Seller's Permit. No upfront fee. No cost of renewal.

You can file digitally, through e-Reg, starting here: https://efile.boe.ca.gov/ereg/index.boe When you get the permit, print it from home.  As long as you have all the proper information, you can probably complete the whole process in an hour or less.

By the way, here’s the information you need, ripped straight from the website.
  • Your social security number (corporate officers excluded).
  • Your date of birth.
  • Your driver license number, state ID number, or other ID (e.g., passport, military ID).
  • Incorporation date, corporate number, and FEIN number (corporations and LLCs only).
  • The name and location of a bank where you have an account.
  • Names and addresses of suppliers.
  • Name of the person maintaining your account.
  • Names and addresses of personal references.
  • Anticipated average monthly sales and the amount of those sales which are taxable.
  • Your email address.
  • Additional information may be required.
This is what it looks like. You print it from home.
 When they talk about taxable monthly sales, this only applies to the physical books you peddle yourself. If your book blows up on Amazon and you find yourself making hundreds of thousand's dollars, don't panic. That's Amazon's problem and has nothing to do with your Seller's Permit.

If you already have a Seller's Permit for a different business, say, a restaurant, you need to obtain a new Seller's Permits in order to sell your books. 

Certificate of Resale

You need a Certificate of Resale in order to buy wholesale without getting double taxed.
Unless you're operating a printing press, you aren't a wholesaler and will need a Certificate of Resale.
For example, Createspace makes my books--they are my wholesaler. I want to buy books at my discount author's price and re-sell them at my speaking event. I need to obtain a Certificate of Resale and show it to Createspace. Createspace then knows not to charge me sales tax for the books.

Now, you may ask, why not pay the sales tax on the discount books and then sell them back at a higher price without paying tax. I think, though I'm not sure, that it's illegal. Whenever you sell, you pay sales tax.

It costs $0 to obtain a Certificate of Resale. No upfront fee. No cost of renewal.

It's even easier to obtain than a Seller's Permit. Just fill out the document here: http://www.boe.ca.gov/pdf/boe230.pdf

Fill this out and send it to your wholesale vendor.
You need a Certificate of Resale for each vendor you purchase from. So if you buy books from both Createspace and Ingram's Spark, you need a certificate of Resale for both.

By the way, if you misuse a Resale Certificate, it's a misdemeanor, subject to $500 or 10% of the amount of tax per transgression, whichever is higher.

So, uh, yeah, don't get yourself a $500 fine just because you didn't want to pay 80 cents worth of sales tax.

For more information, see this link: https://www.boe.ca.gov/sutax/faqresale.htm

Personal Documentation

You are responsible to keep your own documentation for your sales tax. You must hold onto them for at least 4 years, possibly more.

This might help keep track of sales.
These include:

* Records of Sales (sales invoices, cash register tapes, sales journals, etc.)
* Records of Purchase (purchase invoices, cancelled checks, purchase journals)
* Documents to Support Claimed Exemptions (shipping documents, Resale Certificates)
* Normal books of accounts
* Schedules or working papers used in preparing tax returns

Hold onto these, too.

If you buy a number of books wholesale, keep the receipt.

If you ship out-of-state, keep the receipt.

Keep track of all your sales.

It's probably best to keep your personal bank account and business bank account separate.
Letters from the Board

Now let's say that you have a unique product--half-book, half-cookie. The book part is taxable, but the cookie part isn't. (Food isn't included in sales tax.) What do you do?
When in doubt, get it in writing.
The answer is to write to the Board of Equalization, explaining your unique situation. They should respond within a few days by letter and give you advice. Keep that letter as proof. If someone tries to audit your cookie-book, your letter will show that you were advised not to pay tax.

Please note: this letter only applies to you. If your sister copies your book-cookie idea, she'd better write to the Board of Equalization herself and get her own letter, or when the tax man comes, she may be held liable.

* * * 

Where Do I Go for More Information?

If you want to see a video of the presentation I saw, click here: http://www.boe.ca.gov/info/VirtualSeminars/basic_sut_video.htm

You can also go to the California Board of Equalization's website or to their office. If worse comes to worse, ask a person there. They want you to pay the correct amount, so they'd be happy to help.


How's This Article?

I'm a novice. This is the information I absorbed after one tax lecture. If I've got any of the information wrong or if you have anything to add, please let me know, either in the comments or by emailing me at Reddragonfly1285@yahoo.com.

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