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Monday, July 9, 2007

Have you paid your use tax?

Many California residents and companies have not paid their use tax. Over $1 billion of this tax, that has been around since 1935, goes uncollected each year! That money could really help the state improve health care coverage and education.

So, what's a use tax? It's a complement to the sales tax and imposed at the same rate. If a seller is not required to collect sales tax, such as because it has no physical presence (offices or employees) in the state, then the buyer owes use tax. The buyer must self-report and pay the use tax. For example, when you buy books from, no sales tax is charged because Amazon has no physical presence in California. So, you must keep track of these types of purchases. At year end, you add up all your purchases of taxable goods for which you were not charged sales tax and multiply that amount by the sales tax rate for your county.

For the past few years, California has done what many states have done for years - it added a "use tax" line to individual and corporate state income tax forms. This is a generous approach to collecting the tax because it allows taxpayers to avoid sales tax forms and let's you pay the tax late with no penalty (for example, you pay your 2006 use tax on your 2006 Form 540 which you file in 2007). However, the "use tax" line on Form 540 is elective because you could instead pay your use tax in the year it is owed using sales/use tax forms.

Well, not much has been collected. Only about $13 million over the first 3 years of the "use tax" line. The Board of Equalization thinks it has a solution and is sponsoring AB 969.

AB 969 removes the elective language and makes it mandatory to report use tax on the state income tax form (unless the taxpayer is a registered seller). This would also make it clearer that if you neither file use tax forms or use the line on Form 540, the existing sales/use tax penalties of 10% + interest apply. AB 969 also makes the "use tax" line a permanent part of the law (rather than expiring after 2008).

Is it realistic to think that people are going to pay the use tax?
  • Perhaps if the state improves its efforts to educate consumers about the tax, more people will keep records and comply. Why doesn't the Board of Equalization put ads on Internet sites with info about the use tax?
  • The Board needs to let people know it is serious about enforcement. Given how little is reported on Form 540, there are a lot of people and businesses that owe back use tax + penalty + interest. I think we'd be dismayed if the IRS were as lack in enforcing the income tax.
  • Think you don't have your records to compute use tax? You'll likely find that many Internet vendors keep a record of all of your past purchases indicating the date and amount (Amazon has this - go to "your account" at the top of their webpage). You'd also need to keep track of your catalog purchases for which you were not charged sales tax. Why not keep a record that you complete each month as you pay your credit card bills?

California should consider one more improvement to use tax compliance. Give taxpayers a choice of keeping records to compute their actual use tax liability or using a table that indicates a use tax amount based on the taxpayer's income. Both Maine and New York use this simplified technique.

How do you track your use tax? Would you prefer the table option?

For more ideas on improving use tax compliance:


Anonymous said...

....or maybe a person made their purchase because it was cheaper on-line due to not having to pay the sales tax.....otherwise they might not have purchased it to begin with!.......all taxes (or higher prices) do is stifle the economy and/or moves that activity "underground".......get it?

Anonymous said...

"That money could really help the state improve health care coverage and education."

No, it goes to get politicians re-elected.