What IS Use Tax, and Why Do I Have to Pay It?

Amazon has been in the news a lot lately because of their affiliate programs and not charging their California customers state sales tax on their purchases.

The definition of use tax from the Franchise Tax Board website is as follows: Use tax is a separate tax that is generally due on the purchase of tangible property from outside of California. If you purchase an item from out of state that will be used, consumed or stored in California, you owe use tax. If the merchant charges you the appropriate tax on the sale, then your use tax requirement is fulfilled. According to the Franchise Tax Board, “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, then you are required to compute and pay the amount of use tax due.”

Use tax has actually been around since 1935, but only came to the forefront recently because of internet purchases and budget issues. Up until the advent of the internet, it was unlikely for a consumer to go out of state for purchases, unless they were mementos from a trip or business expenses. And people have been using the internet to make purchases, assuming that they were saving money on sales tax by avoiding purchasing the product in a brick-and-mortar store. They clearly hadn’t heard of use tax.

You don’t need to be a bookkeeper or accountant to figure out what you owe. It’s easy to keep track of this, especially since internet transactions need to be done by credit card, debit card or something like PayPal, which will keep track of the transaction and tell you what state the merchant is from. That will be your clue that it’s an item you’ll need to pay use tax on, and since most people don’t buy everything online, it should be fairly easy to keep track.

Now, a company like Staples will charge you sales tax on your order because they have brick-and-mortar retail facilities all over California. A purely online company like Amazon.com or iTunes will not charge you sales tax. So think about those purchases you made on Cyber Monday, Black Friday or over the last two months paying for holiday gifts online in order to avoid all the crowds—will you need to pay some use tax?

They have also provided a “use tax” line on the personal income tax return Form 540. How do you calculate this amount? Here’s the Franchise Tax Board’s guidelines:

  1. Add the amount of all purchases made from out-of-state or Internet sellers made without payment of California Sales/Use tax. Include only items on which you would have paid sales tax if you had purchased them in California. See the Board of Equalization Website for more information on taxable items.
  2. Look up the use tax rate for the location where you used, gave away, stored, or consumed the items you purchased.
  3. Multiply the amount by the use tax rate.
  4. Subtract any sales or use tax you paid to another state for the items you purchased.
  5. Enter this amount.

Confused about use tax, why you should pay it or how much you owe? How about if you’re confused about all three of those questions? Give us a call—we love the tax code and can answer all of your questions and even analyze your past returns to make sure they’re up to scratch. You can use our online form or you can just call us direct: (714) 637-4552.

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