You just found a great deal on a new, state-of-the-art computer on the Internet, or you found that big-screen television that you have been searching for day and night. Maybe you are ready for a new book that you plan to purchase by mail order. Possibly you’ve found a new dining table you want to purchase via the telephone. In all of the above situations, California use tax may be due on purchases made from an out-of-state merchant when there is no tax collected by the out-of-state merchant.
The California Board of Equalization administers approximately 30 different tax and fee programs. The best known of these programs involves the sales and use tax. Sales tax applies to purchases made within the state of California. The sales tax counterpart, use tax, applies to purchases made outside the state of California. Sales tax is generally due on the sale of tangible property and is collected by retailers in California at the point of sale. Retailers then remit the sales tax collections directly to the Board of Equalization.
Use tax is sometimes called “sales tax,” but it is actually a separate tax that is generally due on the purchase of tangible property from outside California. If you purchase an item out of state that will be used, consumed, or stored in California, then you owe use tax. If the out-of-state merchant charges you the correct amount of sales or use tax on your purchase, then your use tax requirement has been fulfilled. Out-of-state companies that are “engaged in business” in California must register with the Board of Equalization and collect sales or use tax on their retail sales of personal property to California customers. However, if no sales or use tax was collected on your purchase, you are required to compute and pay the amount of use tax due.
In an effort to assist taxpayers with their use tax reporting requirements, the Franchise Tax Board has included a “use tax” line on the personal income tax return (Form 540). This allows taxpayers the option of reporting their use tax on their individual returns for out-of-state purchases. The other option available for taxpayers is to file a use tax return with the California Board of Equalization (BOE). The use tax return can be obtained online at www.boe.ca.gov and looking for Form BOD 401-DS which is in Publication 79-B.
How do you compute the use tax liability? First, multiply the cost of the property purchased from an out-of-state merchant times the applicable use tax rate. The use tax rate and the sales tax rate are the same. The use tax rate is determined by where the property will be used, consumed, or stored in California. Then, look to determine if any sales or use tax was collected from the out-of-state merchant and subtract this amount from the amount of use tax due.
Here’s a brief example of the calculation: Karen, a Palo Alto resident, bought a TV from computers.com for $1,000. Karen owes $82.20 use fax to California. She may report and pay it on her Form 540 income tax return or on the Form 401 Use Tax Return.
Thank you for being a client—we value your business.