Use tax and sales tax both are used to fund state and local services paid for by the states. And dodging either of them, intentionally or unintentionally, constitutes non-compliance and puts you and your business at risk for audits. Most of us have a firm handle on sales tax already, so here’s some useful information about use tax that you may not already know.
(Note: Although many states require use tax, for the purpose of clarity I will mainly refer to the state of California. Be sure to familiarize yourself with your current state laws in your particular area.)
The California State Board of Equalization defines use tax simply as “a tax on the use, storage, or consumption of personal property in California.” California imposes a use tax in order to avoid losing tax revenues on sales transactions that take place outside the state. In other words, if you purchased tangible personal property out-of-state (and therefore did NOT pay California sales tax) but you store, use, or consume the items in California, you will most likely owe use tax.
Why is there a use tax? California’s in-state retailers are required to collect tax, but out-of-state retailers are not. This could effectively drive most sales out of California while constituting an unfair burden on legal California retailers. So In 1935, California decided to try to make it a little fairer for everyone, and collect the normal sales tax (on sales in California) and also collect use tax (on sales outside of California for use in California).
Lately, with the addition of a huge online market, the lines have gotten blurred as online retailers do not want the added burden of state tax on purchases, but states also want to be fair to the “brick-and-mortar” retailers who must pay sales taxes that online retailers can side-step. This ongoing issue was discussed in a prior post which can be read here https://affordablebookkeepingandpayroll.com/?p=2632. But what you need to know is this: keep track of whether or not the online retailer charges you sales tax. If they don’t, you probably owe use tax, which will be same rate as the sales tax in your area. If you purchase items that are normally exempt from sales tax, they will also be exempt from use tax as well.
If your business is in California, check out these resources for more information:
http://www.boe.ca.gov/ads/news06.htm
http://www.boe.ca.gov/taxprograms/usetax/scenarios.html
If you have questions on how use tax applies to your business and need help with the bookkeeping in this area, let us help! (310) 534-5577 or [email protected]
