Tax Alert: California Looks to Boost Sales Tax Revenue With “Use Tax” Compliance Enforcement
3/16/2010
Like many states facing budget deficits, California has turned to stronger enforcement of use tax compliance by individuals and businesses that live or operate in the state as a means to generate increased tax revenue.
Use tax is a mirror of state sales tax and is levied on taxable goods that are purchased in a state that does not levy sales tax or in situations in which no state sales tax is applied to specific purchases. It is a self-reporting tax, meaning that taxpayers—both individual and corporate filers—that purchase goods without paying California’s state-mandated tax rate must self-assess and remit use tax.
Attention paid to the use tax issue has heightened significantly as internet sales have increased and state sales tax is frequently not charged. Unless an item is specifically exempt from sales tax, all individuals and companies living or operating in California are obligated to pay sales and use tax. This means that, for example, a jacket purchased from Retailer ABC’s website is subject to the same tax as if that jacket had been purchased in a brick-and-mortar location, and the onus is placed on the consumer to report the purchase and ensure he or she has paid the appropriate tax. However, as long as use tax has remained a self-reporting tax, not all taxpayers who are obligated to pay sales or use tax on purchases of taxable goods have actually done so.
That’s a problem, as far as California’s treasury is concerned. To combat perceived under-reporting of use tax, in July 2009 California passed legislation requiring individuals and companies who had 2007 business gross revenues of more than $100,000 to register for a use tax ID and file annual use tax returns, even if no reportable transactions occurred. Use tax returns for 2007, 2008, and 2009 must be filed by April 15, 2010.
The requirements impact both business and individual filers with Schedule C (sole proprietor/independent contractor) or Schedule E (rental) having revenues of more than $100,000 in 2007. Such taxpayers should have received account and login information from the State Board of Equalization (BOE) during early March. By April 15, 2010, impacted taxpayers must file use tax returns for 2007, 2008, and 2009. If no tax is due, a zero return is required. If a return is not filed, the BOE will estimate the amount of taxable purchases and the related use tax based on the taxpayer’s income level.
Taxpayers must file use tax returns on a calendar year basis even if a fiscal year reporting structure is in place. The BOE has requested returns be filed electronically, but paper returns will be accepted.
For questions regarding use tax filing requirements and guidelines, please contact Melody Thornton, CPA, a J.H. Cohn tax partner, or your J.H. Cohn client service professional at 858-535-2000.
Melody Thornton, CPA, is a J.H. Cohn tax partner and a member of the Firm's State and Local Tax Group. She can be reached by email or at 858-300-3426.
March 2010
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