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 Originally enacted to protect in-state businesses from out-of-state competitors, businesses should remember to look out for use tax in their business transactions.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.