Sales Tax vs. Use Tax
California sales tax is imposed on retailers for the privilege of selling tangible personal property at retail. The same is true of many other states but the majority of the 45 states and the District of Columbia with a sales tax impose this tax on the consumer rather than the retailer but it is the retailer that is required to collect it.
On the other hand, California use tax is imposed upon the storage, use, or other consumption of tangible personal property purchased outside of California by a California consumer for use in California. The obligation to pay use tax is on the consumer. However, if an out-of-state retailer is engaged in business in California, it is required to collect the use tax from the consumer at the time of making a sale.
Although all tangible personal property purchased from a retailer located outside California for use in California is subject to California use tax, it is widely believed that many, if not most, of the these purchases go unreported and untaxed as a majority of citizens believe that “they pay enough in taxes and the CDTFA will never be able to audit all purchases by consumers from out of state retailers and shipped into California.” After all, the sheer volume of internet or mail order sales is in billions of dollars annually, not millions of dollars; and, the CDTFA simply cannot force its citizens to voluntarily comply as it lacks sufficient policing power when it comes to internet sales. That may be true, but it will not stop them from trying to collect all of the taxes owed. Keep in mind that the CDTFA has thousands of tax auditors, 22 field offices in California and three out-of-state offices in New York City, Houston and Chicago dedicated to auditing retailers in order to ensure tax compliance. It’s important to remember that CDTFA auditors are trained to find taxpayer errors, intentional misrepresentations and underreporting of sales or use taxes and differentiate between negligence and fraud. Finding these errors, more often than not, generates additional revenue for the state and an auditor is judged, in part, by his or her audit results. Unpaid use tax on out-of-state purchases is on every auditor’s check list.
Are there any New Tax Laws, Court Cases or Other Developments that Have Changed Use Tax Collection Rules Recently?
The answer to this question is an emphatic, “YES”!
First and foremost was the burgeoning expansion of Amazon fulfillment centers/warehouses throughout the U.S. so that delivery of sold items to customers could be accomplished within one day. In brief, Amazon required its online sellers to transport their goods to Amazon’s warehouses and fulfillment centers. In turn, Amazon was free to move these goods to other warehouses around the country. When items were ultimately sold, Amazon would step into the shoes of the seller and set the terms of the delivered price and arrange for delivery of the goods to the customer. Unbeknownst to the internet seller, the storage of goods created taxable nexus with California amongst many others.
Second was the landmark decision by the U.S. Supreme Court in 2018 known as South Dakota vs. Wayfair, Inc. (2018) 585 U.S. ___, 138 S.Ct. 2080, 201 L.Ed.2d 403. The Wayfair U.S. Supreme Court decision overruled two prior U.S. Supreme Court cases, i.e., Quill Corp. v. North Dakota, 504 U.S. 298 (1992) and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967) that required physical presence in the state in order for nexus to be established in a taxing state. One of these cases had been the law of land for over 53 years. This decision by the U.S. Supreme Court can largely be attributed to the loss of state tax revenue as consumers switched from shopping in brick-and-mortar stores to online marketplaces like Amazon, eBay, Target, Walmart, Apple, Wayfair, and many others. Absent this significant change in the law, consumers were able to skirt sales and use taxes when purchasing products from out of state online retailers and Officials in California estimated that the state was losing up to $1 billion in use tax revenue a year.
Wayfair held that South Dakota can require out-of-state retailers, including internet sellers, to collect South Dakota sales tax from consumers in South Dakota if that retailer annually (1) delivers more than $100,000 worth of goods or services into the state or (2) engages in 200 or more separate transactions for the delivery of goods in the state. In response to the Wayfair decision, all 45 states with a sales and use tax began drafting and implementing laws that conformed to South Dakota’s law. In California, the law that was enacted in 2019 required out-of-state retailers to collect and remit use tax if the retailer sold more than $500,000 worth of goods for delivery into California.
What are the Sales and Use Tax Rates in California?
California state and local sales and use tax rates vary from taxing jurisdiction to taxing jurisdiction and currently range between 7.25% and 10.5%. For the correct tax rate applicable to your city, county and transit district, go the CDTFA website found at cdtfa.ca.gov.
What is Taxed Under Use Tax?
With a few exceptions, any purchase of tangible personal property made from a retailer located outside California is subject to California use tax.
The few exceptions worthy of mention include, but are not limited to:
- Food products
- Prescription medications
- Prescription wheelchairs, walkers, crutches, and canes
- Vehicle modifications for the handicapped
- Oxygen delivery systems
- Farm equipment and machinery
- Medicinal cannabis
- Rentals of household furnishings
- Animal feed, plants and fertilizer
- Merchandise purchased by an individual in a foreign country and hand-carried back into California (limited to $800).
These are but a few of the items that are exempt from sales and use tax. For a full list, please go the CDTFA website at cdtfa.ca.gov.
What is the Statute of Limitations?
In California, the statute of limitations for sales and use tax assessments or making refunds is generally speaking three years. That is, an audit assessment by the CDTFA must be made within 3 years of the last day of the month following a quarterly audit period, as the Quarterly Sales and Use Tax Return is filed at the end of the month following the quarter. For example, the first quarter ends on March 31, the second quarter ends on June 30, the third quarter ends on September 30 and the fourth quarter ends on December 31; so, the California Quarterly Sale and Use Tax Returns must be filed on April 30, July 31, October 31 and January 31.
Now, if you have not filed sales or use tax returns in the past, the statute of limitations has never even started to run. In such a case, the CDTFA can perform an audit going back to the first year that you entered California and failed to pay sales and use tax that was due.
How to Pay Use Tax?
- You can report your purchases subject to use tax on the CDTFA’s website at www.cdtfa.ca.gov by selecting “Make a Payment”, and then selecting “Pay Use Tax for One-Time Purchases from Out-of-State Retailer”.
- Once you have registered, you can pay any use tax due by filing your return. You can also register to report use tax in person at any CDTFA office; or,
- Report use tax on your Franchise Tax Board (FTB) personal income tax return when it is filed.
Who is Not Able to Report Use Tax on their FTB Franchise or Income Tax Return?
- Businesses that have a California Seller’s Permit; or,
- Businesses that are not required to hold a California Seller’s Permit but receive at least $100,000 in annual gross receipts; or,
- Individuals or businesses that have a California consumer use tax account.
Help You Can Trust
If you have purchased any large ticket items, such as an aircraft, a yacht, motorboat, vehicle, artwork, antiques or expensive jewelry outside of California and did not pay California use tax on your purchases, or if you have purchased a substantial amount of tangible personal property outside California for use here and not paid California use tax, contact Rex Halverson & Associates so that we might lend a hand.
Rex Halverson has over forty-two years of state and local tax experience, and three of those years were spent sitting on the California Board of Equalization, now known as the California Department of Tax and Fee Administration (CDTFA) and the Office of Tax Appeals (OTA). We will vigorously fight on your behalf and we have a proven track record of resolving clients’ tax problems. We can be reached at (916) 444-0015 or via the contact form on this page.