Use tax bears repeating because it can create so many headaches and it is an area where the CDTFA is really digging in their heels. In fact, use tax is one of the most miscalculated and unpaid taxes found during audits.
The use tax is a tax on the use of tangible personal property not otherwise subject to sales tax. Use tax is typically owed when someone purchases a product while paying less than the applicable sales tax or paying no sales tax at all.
Unless that buyer has an exemption, use tax is owed to the government. Use tax is also due when a product is purchased from outside the state for use within the state when the seller is not registered for, nor collects sales tax in that state.
Use tax in the past has not been the purview of the seller; the buyer owes the use tax. However, state governments are beginning to hold sellers responsible for it when it is not paid.
What to Do:
- Learn the difference between sales tax and use tax
- Write a use tax policy for your business
- Review all your non-resale purchase invoices and determine consumer use tax where is applicable
- Properly track and account for any withdrawals made from your resale inventory
Use tax is a counterpoint to sales tax. For example, if I buy a car in Arizona, I can ship it to California because California is not charging me sales tax on that transaction because it is not occurring within the state. Instead, they charge me a use tax.
Use tax is levied on consumers of merchandise used, consumed or stored in the State of California. It does not matter where it was purchased. If you buy something from an online source that is not registered to collect California sales tax or else does not collect it, you are on the hook for paying the tax, which is the same rate as the sales tax.
Use tax is also imposed on leased merchandise such as cars, boats and planes. If you make a purchase in a foreign country and hand-carry it through U.S. customs into California, you must pay the use tax.
Use tax is the tax that I pay for importing goods into California. In situations where there is no sales tax, I pay use tax.
Sales and use taxes are mutually exclusive. You cannot be required to pay both sales tax and use tax for the same merchandise.
Special Issues in California Use Tax Audits
Tax Auditor Treatment of Use Tax on Leases
In general, during California use tax audits, use tax will only be asserted against the lessor since it is difficult to determine from the lessee’s records whether the lease is a “sale” under the Sales and Use Tax Law. Therefore, a review of the lessor’s records will be made to determine if any tax liability exists.
Whenever the audit of a lessee reveals that tax has not been collected by the lessor, and the auditor cannot determine that tax was properly due, an audit memorandum (Form CDTFA–1164) will be prepared and sent to the lessor’s district. During use tax audits, the auditor will not assert tax against the lessee.
An exception to the above general policy is that tax may be assessed against the lessee if the lessor is located out-of-state, and the property being leased is not mobile transportation equipment (MTE). If tax is assessed, Form CDTFA–1164 will be sent to the lessor’s current district showing the amount of tax assessed and the applicable periods.