Remember to ask your clients about use tax. They may owe on out-of-State purchases.
It’s income tax time again and that means it’s also time to discuss with your clients how they can report and pay use tax on their state income tax return for out-of-state purchases made during the 2008 tax year. By doing so, you may help them avoid penalties and interest on use tax that has not been previously reported and paid to the Board of Equalization (BOE).
Use tax is intended to protect California vendors who would otherwise be at a competitive disadvantage when out-of-state vendors make sales to California customers without charging tax. While sales tax is owed to BOE by the seller, the purchaser is generally responsible for payment of use tax. The use tax rate is the same as your local sales tax rate. Visit the BOE website for more information.
How do I determine if my clients owe use tax?
Use tax applies to purchases from out-of-state or foreign vendors. In general, your clients must pay California use tax on these purchases (made on the Internet, by telephone, by mail, or in person) if both of the following occur:
- The vendor does not collect California sales or use tax.
- Your client uses, gives away, stores, or otherwise consumes the item in this state.
Generally, use tax is due on purchases from out-of-state or foreign vendors if the purchase of the same item in California would be subject to sales tax. However, not all items are subject to tax. Please see BOE Publication 112, Purchases from Out-of-State Vendors for additional information. If the out-of-state vendor charges California tax, you should advise your clients to keep the receipt showing the tax for their records.
Some out-of-state vendors may apply tax at the “statewide rate” (currently 7.25 percent), but your clients are liable for use tax at the full rate in effect for the California location where they first use the merchandise. When that location is within a special tax district, the full tax rate in effect for the district applies (statewide tax rate plus district tax rate[s]). If the vendor charged tax at a rate lower than the rate in effect at your client’s location, your client will generally owe the remaining use tax.
The first $800 of tangible personal property that is both purchased from a vendor in a foreign country and personally hand-carried into California from the foreign country within any 30-day period is exempt from use tax. This exemption does not apply to property mailed or shipped to your client from a foreign country.
How can my clients report and pay use tax?
They can report and pay use tax on their California income tax returns. This makes it easy for consumers, and businesses that are not required to have a California seller's permit with BOE, to report and pay use tax on their out-of-state purchases. Additional use tax information is included in FTB tax instruction booklets.
As an alternative, use tax may be reported and paid directly to BOE on a separate use tax return. If you wish to use this alternative, you can download BOE Publication 79-B, California Use Tax, from the BOE website, or request that a copy be mailed to you by contacting their Customer Service Representatives at 800.400.7115.
If your client is required to have a seller’s permit, they cannot report business-related use tax on their state income tax return or on the tax return in Publication 79-B. They must timely pay the use tax on line two of their sales and use tax return for the period that includes the date when they first used, stored, or consumed the item in California.
Use tax on aircraft must be reported on the use tax return contained in BOE Publication 79-A, Aircraft and California Tax. Use tax on documented vessels must be reported on the use tax return contained in BOE Publication 79, Documented Vessels and California Tax. Use tax owed by your clients for these purchases cannot be reported on their California state income tax return or on the use tax return in Publication 79-B.
How do I get additional information?
In addition to the Internet links included in this article, BOE provides a California Use Tax Information website. You may also phone BOE Customer Service Representatives with questions at 800.400.7115 from 8 a.m. to 5 p.m. Pacific time, Monday – Friday, except state holidays. TDD service for the hearing impaired is available from TDD phones at 800.735.2929 or from voice phones at 800.735.2922. Income tax information is not available through any of these phone numbers.
Your business clients will find important information about use tax in BOE Publication 123, California Businesses: How to Identify California Use Tax Due.