The state of California is getting even more aggressive at collecting all the taxes the law allows — no matter how small. Use tax is the latest way for the state to look for cash. The Legislature has enacted strict new registration and filing requirements for businesses with gross income of $100,000 or more.
Use tax is like sales tax but you pay it directly to the state, rather than to the retailer. The rule of thumb is: You owe use tax if what you bought would have been subject to sales tax if you purchased it at a local store and you did not pay California sales tax. You generally owe California use tax when you use, store, or consume — in California — tangible personal property purchased from an out-of-state vendor. If the vendor does not collect the California tax on the purchase, the purchaser must pay the tax directly to the state. If you don’t report and pay your use tax in a timely manner, such as with your income tax return, the state will assess penalties and interest.
If you don't have business income and file only a personal income tax return, you are required to report your purchases on your income tax return and pay the use tax with your return.
If you have rental or business income meeting the threshold you don't pay with your income tax return but have a brand new requirement for an annual form to the BOE (assuming you don't already have a resale license). You may have received a letter from the California State Board of Equalization (BOE) requesting contact information so you could be registered as a use tax payer. The letter advised you to provide contact information. Whether you provided that information or not, the BOE registered your business because they believe you meet the $100,000 requirement.
The letter also requests that you file returns and pay use tax that you have not paid for
2007 and 2008. You must also file a Use Tax Return on or before April 15, 2010 to pay use tax on any out-of-state purchases during 2009. To begin to prepare your forms you will need a list of purchases you made where no California sales or use tax was paid but where the item was sent to and first used in California during 2009.
What is and is not subject to sales and use tax can be complicated. There are numerous exceptions to the rules, but here are some common ways that people make out-of-state purchases that are subject to use tax:
- Internet purchases;
- Certain foreign purchases;
- Shopping channel purchases;
- Mail-order purchases; and
- Phone-ordered purchases.
These are some common examples of items subject to use tax:
- Machinery and equipment;
- Computers, printers and other electronic equipment;
- Office furniture and supplies;
- Computer programs shipped on a disc;
- CDs and books;
- Anything on which you would have paid sales tax if you purchased in from a California retailer.
Items that are exempt from sales tax are also exempt from use tax. Here are a few
- Software that is transferred over the Internet and nothing is mailed to you;
- Newspapers, magazines, and other periodicals; and
- Purchases where the seller added California sales tax to your purchase.
What if another state’s sales tax was paid?
If you were required to pay, and did pay, another state’s sales tax on the purchase, you may take a credit against the California use tax due. So, for example, if you paid 7% sales tax to another state, you are only required to pay the difference between the 7% and your rate.
There are so many rules and requirements to which you may be subject with the use tax. Be sure that, if you are not completely sure of your own requirements, you meet with your CPA and go over your particular situation. The penalties for errors here can be quite severe.
You can read about this directly at the BOE Web site with this link, http://www.boe.ca.gov/sutax/useTaxRegFAQ.htm.
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