Use tax, put simply, is a transaction tax that acts complimentary to sales tax in most states and municipalities. In the state of California, just as the sales tax applies to the sale of taxable goods, the use tax applies to the use, storage, or consumption of those taxable goods in cases when the sales tax did not apply, such as inventory taken out for personal use. Originally enacted to protect in-state businesses from out-of-state competitors, businesses should remember to look out for use tax in their business transactions. Use tax may be an uncommon tax issue, but it arises significantly in the event of an audit.

Sales tax is usually passed on to the customers on their purchased goods, but more importantly, businesses are responsible for reporting and remitting collected sales tax to the state. The same rules apply in collecting & remitting use tax. Here is an example to illustrate a use tax transaction:

Yoona’s Jewelry is a boutique online retailer of jewelry and other trinkets. Yoona uses a resale certificate to purchase inventory, nontaxed, from out-of-state suppliers. Her suppliers send inventory to her business based out of her home in Irvine, CA. On occasion, she takes some of this inventory and gives it away as promotional items to online influencers or to her friends that reside in the area.

Use tax applies to the inventory she gave away to friends and influencers because it wasn’t sold at retail (sales tax), but instead was “used” by the influencers and friends that she gave her products. When Yoona files her business sales & use tax return, she will report the value of the given-away inventory and the use tax rate will apply to those goods.

Rate of Use

In California, the applicable use tax rate on a taxable item is the same as the area’s sales tax rate. Going back to the previous example, the use tax rate on Yoona’s jewelry she gave to her friends visiting her home would be the same as the applicable sales tax rate for the city of Irvine, 7.75%.

Out of State & Beyond

California Use Tax transactions can also occur in some inter-state sales when CA sales tax does not occur. For example, a business receiving furniture to use in California from a non-sales tax state like Oregon. However, with the ascent of online marketplaces and the South Dakota v Wayfair decision, sales & use tax regulations in states have tightened considerably.

The internet has made interstate transactions commonplace. Business owners often have enough on their plate working to grow the business. Minding the possibility of use tax transactions, especially in the context of an audit, opens new avenues of concerns. Luckily, business owners can rely on the help of trained and knowledgeable tax accountants, such as us here at MiklosCPA, to work with them on identifying any foreseeable tax issues. Want to know how we can help your business? Let’s chat. In the meantime, check out our social media accounts and look forward to future articles and other “good to know” tax tidbits.

Taxes seem to be everywhere and with every thing in California. Sales tax is a type of transaction tax we often encounter in the sale of assorted goods. Sales tax rules in California operate similarly to other states, but here are some notable pieces to remember in the golden state, whether as a retailer or a customer in California.

Tangible Personal Property

For the most part, unless there is a specific exemption, sales tax applies to the sale of all tangible personal property. Tangible personal property can be basically thought of as all physical personal property that aren’t considered real estate, so it’s a broad category of things like furniture, cars, computers, tools, and food.

Exemptions to Sales Tax

In California, there are certain groups of tangible personal property that are exempt from sales tax. Common examples include groceries, prescription medication, and labor, such as fixing a car. Of course, as you delve further into these categories and sales tax law in California, you start to discover the technicalities that CAN make a sale taxable. Examples include hot prepared food for sale to-go (but not cold food to-go), over-the-counter medicine, and fabrication labor. To illustrate, here’s an example:

Bob goes to his local convenience store. They sell cold, ready-to-heat burritos and have a microwave on the premises for customers to use after purchasing. Selling the burrito is non-taxable since it is purchased as a cold food item. Bob can decide if he wants to warm it up there or not. However, if for whatever reason, the employee decides to heat up the burrito, then sell it to Bob, the burrito technically becomes taxable because it’s now considered hot prepared food (by the employee) sold to a customer.

Sales Tax Rates in California

Statewide, the current California sales tax rate sits at 7.25%. Counties and cities often apply voter-approved measures that add to the base state rate, thereby increasing their area’s total sales tax rate. In some parts of the state, the sales tax rate can noticeably fluctuate. For example, the rate in the city of Long Beach is currently at 10.25%. Drive northeast a few miles into the city of Buena Park and the tax rate dips down to 7.75%. While that extra 2.5% in Long Beach may not be very significant on buying food from your favorite restaurant, it can become more noticeable if you buy big-ticket items like furniture or vehicles.

Tax rates and tax laws seem to operate in constant flux. Business owners may often have a hard time keeping up to date. Having a team to support and guide owners on questions of tax and accounting helps owners focus on their business goals and ambitions. MiklosCPA is a California-based accounting firm that helps small and emerging businesses with their accounting and tax needs. If you wish to know more of our services, contact us. Also, follow our social media accounts for future good-to-know blog posts like this one!