MEDIA RESOURCE: Use Tax

What is use tax?

Use tax is like sales tax and is generally paid on items, purchased from out-of-state retailers, that will be used in California. The applicable tax rate is usually the rate at the location where the item will be first used. Usually, this is the location where the item will be shipped.

Some out-of-state retailers, including businesses selling online, by mail order or by telephone, collect use tax and pay it to the state. Others are not required to do so. If the out-of-state retailer does not collect the use tax or does not collect the tax based on the full tax rate applicable at the location where the item will be used, the purchaser is required to pay use tax.

Use tax is not an "Internet tax." The California use tax law became effective on July 1, 1935.

Examples of when use tax may apply:

A consumer purchased a tent online from a company outside of California. The seller shipped the tent to the consumer’s home in California, and did not charge any tax. In this case, the consumer would owe use tax on the purchase using the sales and use tax rate for their home address.

A consumer purchased a digital camera as a gift for a friend by mail order from a company outside of California where tax was not charged. The camera was shipped directly to the consumer’s friend who lives in California. For this example, the consumer who made the purchase owes use tax, but it should be paid using the tax rate of their friend’s address.

In addition to purchases from out-of-state businesses, use tax may be due when a person purchases a vehicle, vessel, or aircraft from a seller who does not hold a California seller’s permit. Use tax is also owed when a California seller withdraws taxable merchandise from its resale inventory for personal or business use.

Why is it important for individuals and businesses to pay use tax?

It helps pay for important state and local services Californians enjoy, such as public safety, education, and transportation.

Make Online Purchases? You May Owe Use Tax

How do I know if I owe use tax?

The easiest way to know if you may owe use tax is to review your receipt to see if you were charged sales tax. If someone buys taxable items (e.g. books, electronic equipment, and toys) from any out-of-state seller and is not charged tax, the buyer is responsible to pay use tax.

How do individuals pay use tax?

There are three easy ways for consumers to pay use tax:

  • On their state income tax form (purchases of vehicles, vessels, aircraft, and mobile homes are not to be reported on the California state income tax return)
  • Download and use our ePay mobile app
  • Through our website

For more details: see the "For Personal Use" tab at Use Tax – What You Should Know.

How do businesses pay for use tax?

Payment methods may vary depending upon the type of business. Those required to register with the BOE must pay directly to the BOE at the time they file their returns.  Service businesses that are not required to register with BOE  are able to pay on their state income tax forms.

For more details: see the "For Business Use" tab at Use Tax – What You Should Know.

How does someone calculate what they owe?

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There are two ways to calculate what you owe:

  1. Find the tax rate by the address of the place in California where the item is used, stored, or otherwise consumed and apply it to the total purchase price. This is usually the address to where the item was shipped. Include handling charges.
  2. A person may use the convenient Use Tax Lookup Table to pay use tax on all nonbusiness items with a purchase price under $1,000 bought in the previous calendar year. That person would simply locate their adjusted gross income on the table and enter the indicated tax amount on the use tax line on their California State Income Tax return.

What are the challenges of use tax compliance?

California loses approximately $1 billion every year in uncollected tax. The State of California and our local communities rely on use tax to help fund various public services. This underpayment is largely because many Californians are unaware of use tax and their obligations to pay.

What happens if someone owes use tax from prior years?

The person should report and pay use tax for prior years directly to the BOE using the online registration system. Interest and penalty will be incurred for late payments.

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Annual Reported Use Tax

Source Use Tax Reported
(in millions)
(FYE 2011-12)
Use Tax Reported
(in millions)
(FYE 2012-13)
Use Tax Reported
(in millions)
(FYE 2013-14)
Registered with BOE
Use Tax Reported by Registered California Consumers (excluding Qualified Purchasers) $122 $147 $166
Use Tax Reported by Qualified Purchasers (service businesses) $45 $47 $35
Use Tax Reported by Registered Out-of-State Retailers $1,596 $2,005 $2,337
Use Tax Reported by Seller’s Permit Holders $1,507 $1,517 $1,374
Use Tax Assessed in Audits $100 $107 $134
 
Not Registered with BOE
Use Tax Reported on One-Time, Individual Use Tax Returns $7 $4 $6
Use Tax Reported on California Income Tax Returns $16 $18 $18
Use Tax Reported on Out-of-State Purchases of Vehicles, Vessels, and Aircraft $21 $26 $30
Use Tax Collected by DMV on Private Party Transactions $469 $486 $539
Use Tax Reported for Mobile Homes $3 $3 $3
Total $3,886 $4,360 $4,642

Use Tax and the Marketplace Fairness Act:

The Marketplace Fairness Act (MFA) is a federal bill pending in the U.S. Congress that, if enacted, grants states the authority to compel online and catalog retailers, regardless of location, to collect sales tax at the time of purchase, if states agree to enact simplified sales tax laws. Supporters say sales tax is already due on all purchases in 45 states and the MFA allows states to enforce existing laws.

The Board of Equalization is monitoring the progress of pending federal legislation and will evaluate its impact on the state if and when a bill passes through Congress and is signed by the President.

Use Tax and Assembly Bill (AB) 155:

California legislation enacted in 2011 (AB 155, Ch. 313, Stat. 2011) expanded the number of businesses are required to collect and remit California taxes to the BOE. The law became effective on September 15, 2012.

Online and other retailers that do not have a direct physical presence in California are required to register with BOE, report and collect use tax if the retailer meets the following criteria:

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  • Sold more than $1 million in tangible personal property to California consumers in the past 12 months.; and
  • More than $10,000 in sales to California customers through referral from California-based affiliates.

Consumers may now see a point-of-sale charge when buying from these retailers, and no longer have to pay use tax themselves on these purchases.

As of July 1, 2013, approximately 45 companies have registered with the BOE due to the enactment of AB 155. Revenue collected from companies generally associated with the enactment of AB 155 during Fiscal Year 2012-13 totaled $262 million. Business-specific information is not available due to taxpayer confidentiality laws.

AB 155 Revenue Reported for Sales During the Quarter:

  • 2Q 2014 – $101 million
  • 1Q 2014 – $97 million
  • 4Q 2013 – $123 million
  • 3Q 2013 – $85.8 million
  • 2Q 2013 – $79.3 million
  • 1Q 2013 – $75.8 million
  • 4Q 2012 – $96.4 million
  • 3Q 2012 – $11.9 million