Sales tax isn’t the only tax you need to worry about when purchasing goods in California. Many people are unaware of the California use tax rate, which applies to purchases made outside the state. In this article, we’ll dive deep into what California use tax is, how it works, and how you can ensure you’re in compliance. Whether you’re a consumer or a business owner, understanding this tax can help you avoid unexpected costs and legal issues.
What is California Use Tax?
The California use tax is a tax imposed by the state on the purchase of tangible goods that are used, stored, or otherwise consumed in California. The key difference between sales tax and use tax is that use tax applies when goods are purchased outside of California and brought into the state, while sales tax is collected by the retailer at the point of sale within California.
Why Does California Impose a Use Tax?
California imposes a use tax to ensure that out-of-state purchases are subject to the same tax rates as purchases made within California. It helps the state collect tax revenue on items that would otherwise go untaxed simply because they were bought from an out-of-state seller.
Use Tax and Online Purchases
One of the most common ways consumers end up owing use tax is through online purchases. If you buy something from an online retailer who doesn’t collect California sales tax, you may still be responsible for paying use tax on the item when it’s brought into the state. In other words, if you’re buying something from an out-of-state seller, even if they don’t charge you sales tax, you may still owe California use tax.
How Does California Use Tax Work?
In simple terms, use tax is meant to “level the playing field” between California-based retailers and out-of-state retailers, including those operating online. Here’s how it works:
- Purchasing Goods from Out-of-State Retailers: When you buy an item from a seller that doesn’t have a physical presence in California (e.g., an online retailer based out of state), sales tax isn’t applied.
- Tax Owed in California: Even though sales tax wasn’t applied, California still expects you to pay use tax on that item if you use, store, or consume the item within California.
- Rate of Tax: The use tax rate in California is generally the same as the sales tax rate. California’s statewide sales tax rate is 7.25%, but local taxes can push the rate higher depending on the specific area where the item is used. This means your use tax rate will vary depending on where you live or use the item.
- Reporting the Tax: You are required to report and pay use tax when you file your annual tax return. You’ll typically need to include the total value of taxable out-of-state purchases and then calculate the use tax owed based on the applicable rate.
When is Use Tax Due in California?
The due date for use tax generally depends on your filing schedule. In California, use tax is reported and paid either annually or quarterly, depending on your tax status. If you’re an individual taxpayer, you will typically file this when you submit your state tax return.
For businesses, use tax must be paid whenever taxable items are brought into California from an out-of-state seller, and it’s due at the same time as sales tax payments are filed. Businesses can pay use tax alongside other state taxes through the California Department of Tax and Fee Administration (CDTFA).
How to Pay California Use Tax
Paying your California use tax is a straightforward process, though it may require some tracking on your part. Here’s a step-by-step guide to make sure you stay compliant:
Step 1: Track Out-of-State Purchases
The first thing you need to do is track all of your purchases made outside of California, whether online or through catalogs. Most businesses that sell items to California residents will keep records, but it’s your responsibility to ensure you report all taxable purchases.
Step 2: Calculate Use Tax Owed
The use tax rate is typically the same as the sales tax rate for your area. To calculate the amount you owe, take the purchase price of each taxable item and multiply it by your local use tax rate. You can find the rate for your specific area using the CDTFA sales tax rate lookup tool.
For example:
- If you purchase a $500 laptop from an out-of-state retailer and your local tax rate is 8%, you would owe $40 in use tax.
Step 3: Report Use Tax on Your Tax Return
You’ll report your use tax when filing your California income tax return. There’s a specific line on your state return where you can enter the amount of use tax you owe. If you’re filing electronically, the system may automatically prompt you to include your use tax.
If you don’t have to file an income tax return (for example, if you make under the minimum taxable income), you can file a California Use Tax Return directly with the CDTFA.
Step 4: Remit Payment
Once you’ve calculated and reported the amount of use tax you owe, you can remit payment directly through the CDTFA website or through other payment options, depending on your tax situation.
Use Tax for Businesses in California
If you’re a business owner in California, you are also responsible for use tax on any out-of-state purchases that are brought into the state. For businesses, this typically applies to purchases of items like office supplies, machinery, or other inventory that will be used in the course of business operations.
Step 1: Register for a Sales and Use Tax Permit
Just like with sales tax, businesses need to register with the California Department of Tax and Fee Administration (CDTFA) for a Sales and Use Tax Permit if they plan to purchase taxable goods or materials from outside the state.
Step 2: Collect and Pay the Tax
Businesses must report both sales tax and use tax on the same return. If you’re purchasing items for business use from out-of-state sellers, make sure to track those purchases and calculate your use tax liability correctly.
Step 3: Report and File on Time
As with sales tax, businesses are required to file quarterly or annually, depending on their business size, and ensure that all taxes are filed and paid on time.
Key Exemptions and Exceptions
Like many tax laws, California’s use tax system comes with a few exemptions and exceptions. Here are some things that might not be subject to use tax:
1. Purchases for Resale
If you purchase goods for resale in the course of your business, you are not required to pay use tax. However, you’ll need to provide a resale certificate at the time of purchase to ensure you’re exempt.
2. Certain Goods for Business Use
Some goods purchased for manufacturing, research, or other exempt business activities may be eligible for a use tax exemption.
3. Purchases Made with California Sales Tax
If you’ve already paid sales tax on an out-of-state purchase (for example, if the seller is in another state and collected sales tax), you’re generally not required to pay use tax in California.
California Use Tax FAQ
1. What’s the difference between California sales tax and use tax?
- Sales tax is collected by the seller when you make a purchase within California. Use tax, on the other hand, applies when you purchase items outside the state and bring them into California.
2. How do I calculate my use tax?
- To calculate use tax, multiply the purchase price of the taxable item by the applicable use tax rate for your area.
3. Can I avoid paying use tax if I buy online?
- Even if you buy online, you may still owe use tax if the seller does not collect California sales tax. You are responsible for reporting and paying it yourself.
4. How do I report and pay use tax?
- You report use tax on your California income tax return. For businesses, use tax is filed along with sales tax through the California Department of Tax and Fee Administration.
5. Are there any exemptions from use tax?
- Yes, certain purchases are exempt from use tax, such as purchases for resale or specific business-related purchases, and if sales tax has already been paid on an item.
This article explains the ins and outs of California use tax, helping you understand how it works, when it’s due, and how to pay it. Whether you’re an individual or business owner, staying informed will help you avoid costly mistakes and ensure compliance with California tax laws.