Don’t forget use tax
on your clients' California income tax returns
Income tax time is here again – and that means it’s time to discuss with your clients how they can report and pay use tax on their state income tax return for purchases made during the 2007 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). You probably know that tax practitioners prepare more than 60 percent of all individual income tax returns we receive. But, did you know that for the 2006 tax year, only about 18 percent of the returns reporting a use tax liability were practitioner-prepared?
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. Even though sales tax is owed to the State by the retailer, use tax is generally owed by the purchaser. Visit the BOE Website for more information.
How should I report use tax?
You can report use tax for your clients on their California income tax returns. Legislation to add a use tax line to California's income tax returns was passed in 2003. This addition made it easier to report and pay use tax on out-of-state purchases for consumers, and for businesses that are not required to have a seller's permit with BOE.
The alternative to reporting use tax on the California income tax return, is to prepare an additional tax return and pay the use tax directly to the BOE. If you or your clients wish to use this alternative, you can download Publication 79-B, California Use Tax, from the BOE Website, or request a copy from the BOE's Information Center (see the phone number below). This publication includes a use 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. Generally, use tax is due on a purchase from an out-of-state retailer if the purchase of the same item in California would be subject to sales tax. However, not all purchases are subject to use tax. Please see the BOE Publication 112, Purchases from Out-of-State Vendors for additional information.
Publicizing this information is part of the BOE's ongoing 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. A special Website is available for more information about use tax reporting on the state income tax return. You may also phone the BOE Information Center at (800) 400-7115, if you have additional questions. 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.