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Report use tax, "nanny tax"

Report use tax and the "nanny tax" on the individual income tax return

The tax gap isn't just about income tax, abusive tax shelters, and big money. It's also about small amounts that are ignored or overlooked by large numbers of taxpayers. Two good examples of taxes that are owed, but often go unpaid are use tax, and the domestic service employment tax, often referred to as the "nanny tax."

Use tax

On July 1, 1935, Section 6201 of the Revenue and Taxation Code became law. It established the use tax as a mechanism for leveling the playing field for California businesses. Use tax eliminates the price disadvantage to California businesses when California consumers buy taxable merchandise from out-of-state retailers.

In general, taxpayers must pay California use tax when these conditions are met:

  • Purchases are made out of state.
  • The seller does not collect California sales or use tax.
  • The taxpayer uses, gives away, stores, or consumes the item in this state.

An analysis of individual returns from tax year 2003 showed that taxpayers who self-prepared their returns were nearly eight times more likely to declare use tax than those who used tax practitioner services. Nearly 63 percent of all individual returns we received were practitioner-prepared, yet only 16.6 percent of all use tax declarations were made on practitioner-prepared returns.

Our income tax booklet instructions contain general information about the use tax and a worksheet to calculate the amount due. You can get more information about use tax from the Board of Equalization at www.boe.ca.gov (enter "use tax" in the search field).

Enactment of Assembly Bill 2786 would affect the nanny tax

People who employ “domestic service employees” must pay domestic service employment tax. Although informally known as the nanny tax, it applies to employment of any domestic service employee. The requirement to pay this tax is not new. What is new, if AB 2786 becomes law, is that people who must pay the nanny tax may elect to report and pay it annually on their personal income tax returns filed with FTB.

If AB 2786 is enacted, it will simplify reporting and payment requirements for those domestic service employers that pay less than $20,000 annually. Like the use tax, the nanny tax can be reported and paid on the state income tax form at the same time that income taxes are reported and filed. As the bill is currently written, this provision would take effect on January 1, 2008, and be repealed on January 1, 2013.