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What Is a Use Tax?

user tax.jpgTaxes collected by California retailers from in-state transactions are called sales taxes. The retailer is responsible for collecting this tax from the customer at the time of sale and for reporting and submitting that tax to the state of California. Also, thanks to California's e-fairness law, out-of-state retailers, including online retailers, are responsible for collecting taxes on sales to California customers. However, in cases where the out-of-state retailer isn't required to charge a sales tax, the customer may be required to pay a "use tax," which is a tax on personal property that is used, stored, or consumed in California. It's a counterpart to the sales tax and you should not ever pay both on the same transaction. Both of these types of taxes go to support California's government.

The use tax was created in July 1935 in order to level the playing field between in-state retailers who were collecting sales taxes and out-of-state retailers who were not. As a result of the use tax, whether a customer purchases his item within the state or without, he will pay the same tax rate on that item, the only difference being that when he purchases it in-state it will be a sales tax and if he purchases it out of the state, it will be a use tax.

How to Pay Use Tax

Businesses are customers, too, and certain businesses frequently purchase products from out-of-state retailers for use, consumption, or to be given away within California. Use taxes must be paid on those items. Business with a seller's permit use a form called the "sales and use tax return." These taxes are due after the end of each quarterly reporting period, although the second quarter reporting date is not until June because March and April have other important tax deadlines.

Any business that sells products that would ordinarily be taxed in a retail setting must acquire a seller's permit. Even businesses that sell products only seasonally, such as Christmas farms, have to get a temporary seller's permit.

Some businesses, called "qualified purchasers," do not have to hold a seller's permit so they must register directly with California's Board of Equalization (BOE) to register and pay their use taxes. Qualified purchasers pay their use tax once a year on April 15th. To be a qualified purchaser, you must not be required to hold a seller's permit or certificate of registration for use tax; you must not be a holder of a use tax direct payment permit; you must not otherwise be registered with the BOE to report use tax; and you must have annual gross receipts of at least $100,000, including domestic and foreign receipts.

Some purchases are not reported on tax returns and must be reported directly to the BOE. For example, purchases of road vehicles, waterborne vessels, and aircraft should be reported either by the California dealer that sold the item or by the purchaser to the BOE immediately after purchase. Keep in mind that the use tax does not apply if the vessel will not be used in California, such as commercial deep-sea fishing boats that will be used outside the territorial waters of California.

Let Our Attorneys Help You

The skilled San Jose business lawyers at our firm can help you stay compliant with California's business tax laws. We serve many areas, including Sunnyvale, Santa Clara, and Milpitas, and you can reach us at (408) 971-6270 for an initial consultation on your case.




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