Travis H. Long, CPA, Inc. Blog

Originally Published in the Pacific Grove Hometown Bulletin

December 21, 2011

If you made any purchases over the Internet or via mail-order catalogs for your holiday shopping (or any time during the year) for business or pleasure, California does not want to be left out of the gift-getting!  Due to the strain on California’s budget over the past few years they have been looking high and low for additional revenue – including the enforcement of existing laws that have historically been quite lax.

For decades, California, and many other states have had use tax laws.  California use tax is basically sales tax imposed on all those purchases you make online or via mail-order catalogs, or while in no sales tax states like Oregon (you know – all those purchases you made so you could avoid paying sales tax!).  If you bring the goods into California and use them here (or give them to somebody in California), you owe California use tax equivalent to the sales tax rate where you reside.  This applies to individuals as well as businesses. Certain goods like cold meats, cheeses, crackers and other grocery type foods that are not subject to sales tax are not subject to use tax either.

The California Board of Equalization (BOE) has been aggressively marketing its efforts to pursue this tax including sending letters to tax professionals several times a year, hiring auditors, registering businesses, working with the Franchise Tax Board (FTB) to add a form to your 540 income tax return, and now creating safe-harbor use tax tables based on your income.  The downside of not complying is that if audited, they can go back for years looking through your bank statements and credit card statements for purchases from the likes of Amazon.com – and who knows what else they might find…

The new safe-harbor use tax tables are available for use with your individual 540 California tax return (business entities including schedule C businesses cannot use these tables).  Instead of collecting all your receipts for non-taxed purchases, California will allow you to pay a predetermined amount based on your adjusted gross income (up to $20K – $7, up to $40K – $21, up to $60K – $35, up to $80K – $49, up to $100K – $63, up to $150K – $88, up to $200K – $123, over $200K – multiply by 0.07%).

If you elect to use the tables, you will be presumed to have met your requirement and they will not ask for more, even if the actual tax based on receipts would have been much higher.  Individual purchases over $1,000 are treated separately from the use tax tables.  This can be a strategic move.  Beware, if you owe money to the FTB for any other reason such as past due taxes, the FTB will not pass the use tax paid to the BOE, and you will get a bill from the BOE with a 10 percent late penalty.  Your other option is to file a separate Form BOE-401-DS Use Tax Return, but the safe harbor tables are not available for this return.

All businesses (including schedule C businesses) that have gross receipts over $100K, and do not already have a seller’s permit with the BOE, are required to register with the BOE and file a separate use tax return.  Even if they made no qualifying purchases they have to register and file a zero return each year.  If you fail to register and file, and the BOE discovers this, they will likely require use tax returns for the past eight years.  It is probably in your best interest to register and file simply to avoid the possibility of an eight-year look-back!

So as you open gifts this year and ponder how smart you will look in that new sweater, you may also think, “I wonder if the giver has a use tax issue?!”

For more information on use tax, registering, and filing returns you can go to http://www.boe.ca.gov/sutax/sutprograms.htm.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.