Multistate Tax Alert: California Use Tax Registration and Payment Requirements
Safe Harbor applies to certain purchases
Although the California use tax has been around since 1935, use tax reporting requirements have changed recently and the California State Board of Equalization (“BOE”) appears to have stepped up enforcement efforts.
The use tax is the complement to the sales tax. Use tax is imposed on every person storing, using or otherwise consuming in California tangible personal property (“TPP”) purchased from an out-of-state retailer1 in a transaction where no California use tax was paid.2 For example, a California resident is typically subject to use tax for purchases of TPP made from an out-of-state Internet retailer when the TPP is shipped from a location outside of California in a transaction where no California use tax was charged by the retailer. Also, a business is required to remit California use tax on purchases of TPP (that the business uses or otherwise consumes in California) shipped from outside the state pursuant to a transaction where no California use tax was charged. In this Tax Alert we summarize the use tax requirements applicable to businesses and individuals and we highlight a use tax payment “safe harbor” that applies to certain small purchases and may be particularly beneficial to high-net-worth individuals.
Registration and payment requirements
Among other use tax obligations, a taxpayer that has a California seller's permit (i.e., a taxpayer registered with the BOE as a retailer pursuant to Cal. Rev. & Tax. Code §62263) must pay the use tax due on its purchases of TPP that are shipped from outside California and are used or otherwise consumed in California by that taxpayer. The tax is payable with the taxpayer’s sales and use tax return filed for the period in which the item of TPP was first used or consumed in California. Also, certain other taxpayers may be required to register as a “Qualified Purchaser” and pay use tax online using the BOE’s “eReg” service.4 A “Qualified Purchaser” is defined as a person that meets all of the following requirements: (1) the person is not required to hold a seller's permit, (2) the person is not required to be registered pursuant to Cal. Rev. & Tax. Code §6226 (required registration for retailers), (3) the person is not a holder of a use tax direct payment permit, (4) the person receives at least $100,000 in gross receipts from business operations per calendar year, and (5) the person is not otherwise registered with the BOE to report use tax.5 Cal. Rev. & Tax. Code §6225 requires a Qualified Purchaser to register as such with the BOE and report and remit use tax directly to the BOE.
An individual or business in California that is not required to hold a California seller’s permit or register as a Qualified Purchaser is still required to report the appropriate use tax where applicable. The taxpayer may either report and pay their California use tax liability on their California income tax return (as discussed below) or may choose to report and pay use tax directly to the BOE, using the eReg system (see link accessible in footnote 4).
The BOE provides a “safe harbor” for certain small purchases. Pursuant to Cal. Rev. & Tax. Code § 6452.1(e), if a person elects to report use tax on an “acceptable”6 annual income tax return filed with the Franchise Tax Board (“FTB”), and that person “has made one or more single nonbusiness purchases of individual items of tangible personal property each with a sales price of less than $1,000, [that person] may satisfy his or her tax liability for those purchases using the tax table shown in the accompanying instructions of the acceptable tax return.”7 If a person uses the “tax tables”8 “included in the instructions to their FTB return” to report and pay its use tax liabilities for such purchases, then “the BOE may not assess the difference, if any, between the … use tax liabilities reported in accordance with the use tax tables and the … [person’s] actual use tax liabilities for such qualified nonbusiness purchases.”9 As calculated by application of the use tax tables, the safe harbor amount of use “tax due is based on … [a percentage of the person’s] California Adjusted Gross Income (AGI) ….”10 For example, for calendar year 2011, the safe harbor “use tax liability factor or use tax table percentage[,]” for a taxpayer with AGI of $200,000 or more is 0.070% of AGI.11
For purposes of the safe harbor, persons eligible to use the use tax tables are those “who are not required to hold a California Seller's Permit or a Consumer Use Tax account.”12 Also, as noted previously, qualified “nonbusiness purchases” that are eligible for the safe harbor are limited to purchases of individual items for less than $1,000. Use tax owing on individual items purchased for $1,000 or more must be calculated separately.13
Taxpayers should review their purchases of TPP to determine if use tax is due and, if there is a use tax liability, the appropriate manner in which the tax should be reported and paid. For purchases in prior years upon which use tax was not paid, individuals may file and pay the tax through the BOE’s eReg system. Applicable interest and penalties may be due. Going forward, taxpayers should consider tracking their purchases subject to use tax and report and pay the applicable use tax liability as outlined above.
If you have questions regarding California use tax registration or payment, or other California sales or use tax matters, please contact any of the following Deloitte Tax professionals or your Lead Multistate Professional.
Deloitte Tax LLP, Sacramento
+1 916 288 3246
Deloitte Tax LLP, San Jose
+1 408 704 2456
Deloitte Tax LLP, Los Angeles
+1 213 688 3386
You can also download the attached Alert. To receive these alerts and stay connected, please sign up for our weekly newsletter State Tax Matters.
1 Cal. Rev. & Tax. Code §6202(a).
2 Cal. Rev. & Tax. Code §6201. “Use” is defined broadly as the exercise of any right or power over TPP incident to the ownership of that property and includes the storage, possession, gift, or lease of TPP. See, Cal. Rev. & Tax. Code §6009.
3 Cal. Rev. & Tax. Code §6226 provides: “Every retailer selling tangible personal property for storage, use, or other consumption
in this State shall register with the board ….”
4 The BOE’s eReg service is accessible at: https://efile.boe.ca.gov/ereg/index.boe.
5 Cal. Rev. & Tax. Code §6225.
6 An “acceptable tax return” is a timely filed original return as specified in Cal. Rev. & Tax. Code §6452.1(d)(1). The election to report use tax on an “acceptable tax return” is irrevocable. See, Cal. Rev. & Tax. Code §6452.1(c).
7 Cal. Rev. & Tax. Code § 6452.1(e)(1). See also, Cal. Code Regs. tit. 18 §1685.5.
8 The use tax tables are shown in the “accompanying instructions of [an] acceptable tax return.” See, Cal. Rev. & Tax. Code §6452.1(e)(1). The BOE is required to calculate on an annual basis the estimated use tax amounts for inclusion by the FTB in the instructions to the FTB’s returns. See, Cal. Code Regs. tit. 18 §1685.5(a)(1).
9 Cal. Code Regs. tit. 18 §1685.5(a)(3); See also, Cal. Rev. & Tax. Code §6452.1(g).
10 See, BOE “Estimated Use Tax – Use Tax Table,” Q&As at: http://www.boe.ca.gov/info/eut.htm, question no. 4.
11 Cal. Code Regs. tit. 18 §1685.5(b)(2), (d)(1).
12 See, BOE “Estimated Use Tax – Use Tax Table,” Q&As at: http://www.boe.ca.gov/info/eut.htm, question no. 4. Note, however, sole proprietors that are registered as retailers may elect to report their qualified non-business purchases using the safe harbor use tax table. See, “Estimated Use Tax – Use Tax Table,” Q&As at: http://www.boe.ca.gov/info/eut.htm, question and answer no. 8, which provides: “I am a sole proprietor and file an annual sales and use tax return for my crafting business. I purchased a computer for personal use over the internet and the retailer did not charge me sales tax. Can I use the table to report the purchase on my FTB income tax return? Yes. Even though you are registered as an individual business (sole proprietor), you may report your non-business purchases on individual items of tangible personal property each with a sales price of less than one thousand ($1,000) on your FTB return. Business purchases subject to use tax should be reported on your sales and use tax return.” See also, Cal. Code Regs. tit. 18 §1685.5(a)(2)(B), which provides: “The use tax table may not be used to estimate use tax liabilities for business purchases, including purchases made by businesses required to hold a seller's permit or to register with the BOE under the Sales and Use Tax Law and report their use tax liabilities directly to the BOE.”
13 See, BOE “Estimated Use Tax – Use Tax Table,” Q&As at: http://www.boe.ca.gov/info/eut.htm, question and answer no. 4. The answer provides further that: “The threshold for reporting use tax is based on the purchase price of the individual items, not the total purchase amount.” Id.