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Don't forget: Report use tax on California income tax returns

It will soon be time for you to assist your clients in preparing their 2006 California state income tax returns. You probably know that tax practitioners prepare more than 60 percent of all individual income tax returns we receive. But did you know that only about 13 percent of the returns reporting a use tax liability were practitioner-prepared? And, more than one-third of the dollars the Board of Equalization (BOE) collects on tax assessments is for use tax on purchases from out-of-state vendors. Help your clients avoid penalties and interest on use tax they owe for 2006 by advising them to timely report and pay their obligation.

Although it has been in existence since 1935, use tax is one of the most overlooked and misunderstood state tax laws. Use tax is intended to protect California retailers who would otherwise be at a competitive disadvantage when out-of-state vendors make sales to California customers without charging tax.

How should I report use tax?

You can report use tax on your clients' California income tax returns. Legislation to add a use tax line to California's income tax returns passed in 2003. This addition made it easier for consumers, and businesses that aren't required to have a seller's permit with BOE, to report and pay use tax on out-of-state purchases. The alternative is for your clients to prepare an additional tax return and pay the use tax directly to the BOE. If you wish to use this alternative, you can download Publication 79-B, California Use Tax, or request a copy from the BOE's Information Center for additional information. The use tax return is included in this publication if your clients prefer to report and pay use tax directly to the BOE instead of reporting it on their state income tax return.

How do I know if I should report use tax?

Use tax applies to purchases from out-of-state or foreign sellers, and is similar to the sales tax that would have been paid if the item had been purchased in California. In general, your clients must pay California use tax on purchases made out-of-state (on the Internet, by telephone, by mail, or in person) if both of the following occur:

  • The seller does not collect California sales or use tax.
  • Your client uses, gives away, stores, or otherwise consumes the item in this state.

Some purchases from out-of-state may not be subject to use tax. Generally, use tax is due on a purchase from out-of-state if the purchase of the same item in California would be subject to sales tax. Please see the BOE Publication 112, Purchases from Out-of-State Vendors for additional information.

Act now

Time is running out for your clients to potentially limit their use tax liability for prior years through BOE's In-State Voluntary Disclosure Program (R&TC Section 6487.06). Under this program, BOE is limited to three years to make an assessment for prior use tax liabilities. When this law section expires on January 1, 2008, the applicable statutory period could be a maximum of ten years. For more information on this program go to the BOE Website and search for "voluntary disclosure program."

This article is part of the BOE's ongoing awareness program to inform tax practitioners and consumers of potential use tax liabilities. Please feel free to reproduce this article and give it to your clients. If you or your clients have any questions about the information provided in this article, please call the BOE Information Center at (800) 400-7115, or visit their Website at TDD service for the hearing impaired is available from TDD phones at (800) 735-2929 or from voice phones at (800) 735-2922.