What Is Use Tax in California? (Definition, Examples & Exemptions)
California 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, CA use tax is one of the most miscalculated and unpaid taxes found during audits.
But that's where we can help you prepare...
In this California use tax guide, we'll cover areas such as what is California use tax, exemptions, examples and everything else you need to know so you're ready for potential future audits.
So, What Is California Use Tax? Our Use Tax Definition
California use tax is a tax on the use of tangible personal property not otherwise subject to sales tax and is taxed at 7.25%. 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. But also keep in mind that local tax and district taxes still apply.
It's 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, state sales tax.
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.
Purchases subject to use tax in California
So, what is subject to use tax in California?
Examples of purchases that may be subject to use tax in California include:
- Items purchased from an out-of-state seller and shipped to California, such as an online retailer, catalog company, or TV home shopping network
- Items purchased in another state and brought into California for use, storage, or other consumption
- Services performed out-of-state and consumed in California, such as repair or maintenance services on personal property
- Digital products, such as e-books, music, and movies, purchased from an out-of-state seller and downloaded or streamed in California
- Purchase of tangible personal property, such as furniture, appliances, or electronics, purchased from an out-of-state seller and used in California
California use tax for a car: specific example
In California, use tax may be imposed on the purchase of a car if the seller does not collect sales tax at the time of purchase and the car is brought into the state for use, storage, or other consumption.
You may have to pay California use tax for a car in these scenarios:
- If you purchase a car from an out-of-state retailer and have it shipped to the state of California.
- If you purchase a car in another state and bring it back to California for use.
Use tax on a car purchase is generally calculated at the same rate as the sales tax (7.5%) and is due at the time the car is brought into the state.
It is important to note that not all purchases are subject to use tax in California since some are exempt.
Note how use tax and sales tax interact with each other here. But there is an important distinction between the two. Check out our use tax vs sales tax guide for more on this.
California use tax exemption list
Some common California use tax exemption items/situations are:
Purchases made from a California seller: If you purchase goods or services from a California seller and pay sales tax at the time of purchase, you are generally not required to pay use tax on the purchase.
Purchases for resale: If you purchase goods for the purpose of reselling them, you may be eligible for a resale exemption from use tax. In order to claim this exemption, you must have a valid seller's permit from the California Department of Tax and Fee Administration (CDTFA) and you must provide the seller with a resale certificate at the time of purchase.
Groceries: Most food items.
Prescription drugs: Prescription drugs are generally exempt from sales and use tax in California.
Clothing and footwear: Most clothing and footwear items costing less than $100 are generally exempt.
It is important to note that these exemptions are subject to change and may not apply in all circumstances. If you are unsure whether a particular purchase is exempt from use tax in California, get in touch with us so we can assist you with your personal circumstance.
When do you pay use tax in California?
Use tax is typically due at the time the taxable purchase is made. If you make a taxable purchase and do not pay sales tax at the time of purchase, you may have to report and pay the use tax on your state income tax return.
If you are required to pay use tax, it is important to keep records of your taxable purchases so that you can accurately report and pay the tax due.
In addition, note that use tax may be imposed on purchases made at any time, not just at the time of purchase. If you have not paid use tax on a taxable purchase and have used, stored, or consumed the item in California, you may be required to pay use tax at a later date.
More learning on CA use tax
In addition to the above guidance, you can also expand your learning on what is use tax in California by:
- Learn the use tax vs sales tax difference
- Familiarize yourself again with the California use tax examples above
- Write a use tax policy for your business
- Review all your non-resale purchase invoices and determine California consumer use tax where 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 in-state. Instead, they charge me a 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.
Also be sure to update your knowledge on your California taxpayer rights.
Special Issues in California Usage Tax Audits
The below situations are important when building your California sales tax audit defense:
Tax Auditor Treatment of California Use Tax on Leases
In general, during a California sales tax audit, 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 use 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 indeed assessed, Form CDTFA–1164 will be sent to the lessor’s current district showing the amount of tax assessed and the applicable periods.
Use of Form CDTFA-1164 by the Tax Auditor
In California use tax audits, taxpayers should be careful with resale certificates by the purchaser, because the auditor will pay attention to the nature of the goods to determine if a transaction was done in bad faith.
For example, if a jewelry store obtains janitorial equipment and obtains certificates, the auditor will review this transaction very carefully and may determine lack of good faith by the taxpayer, leading to serious consequences.
The auditor may contact the vendor to determine whether the vendor holds a valid resale certificate.
In the event the vendor does not have a valid resale certificate, the tax generally will not be determined against the purchaser unless the sale occurred outside of California or is otherwise a transaction subject to use tax.
Form CDTFA–1164 will be prepared by the auditor setting forth the pertinent facts about the transaction. This form, along with any supporting documents, will be used as basis for investigation in California use tax audits.
The auditor will also prepare Form CDTFA–1164 if, in the examination of sales invoices, they find that the seller did not charge tax and has accepted a properly executed resale or exemption certificate in good faith.
If this is the case, the auditor could then question whether the buyer has in fact purchased the merchandise for resale or in fact an exemption applies.
The auditor should also prepare Form CDTFA–1164 where it is determined that a vendor is improperly computing tax on its invoices. For example:
- Is not charging tax
- Charges tax on repair labor or other exempt items
- Does not charge tax on fabrication labor, trade-ins, or other components of the sale which should be included in the measure of the tax
Unsupported sales for resale to Mexican migrants that are discovered during audits of California sellers will be disallowed against the seller. The auditor also will prepare Form CDTFA–1164 for such sales, which then will be forwarded to the San Diego District Office.
Treatment of Storage of Property Intended for Resale in Use Tax Audits
If a purchaser, who timely gives a resale certificate or purchases property for the purpose of reselling it, makes any storage or use of the property, the storage or use measured by the purchase price is taxable as of the time the property is first so stored or used.
The above doesn't apply if the purchase is for retention, demonstration or display while holding it for sale in the regular course of business.
Sections 6094 and 6244 provide that for property used under the following conditions the measure of the tax is the fair rental value of the property for the period of such other use:
- Loan of property to customers as an accommodation while awaiting delivery of property purchased or leased from the lender
- Loan of property to a customer while the customer’s property is being repaired by the lender, provided it is not a loan of property pursuant to a mandatory warranty.
During California use tax audits, if a specific charge is made for use of the property, this may be used as the measure of tax provided the charge is consistent with the fair rental value. Property used frequently for purposes of demonstration or display and used partly for other purposes.
Final thoughts on the California import tax (use tax)
In conclusion, California's import tax is imposed on the purchase of taxable goods and services when the seller does not collect sales tax from the buyer.
The California use tax rate is the same rate as the sales tax rate of 7.5% and is generally due on purchases made from out-of-state sellers or on items brought into the state for either storage or use.
Finally, use tax in California is generally required to be paid by individuals and businesses that make taxable purchases from out-of-state sellers and do not pay sales tax at the time of purchase.
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