Use tax occurs whenever California sales tax is not paid. Sellers having no physical presence in California are not required to collect California sales tax. Consequently, purchases made from out-of-state catalogs and over the internet may initially escape California’s sales tax. Nevertheless, California use tax is owed by the purchaser when the merchandise is brought into California. The use tax is the same rate for any California location as the sales tax rate.
Practically every California service business will now be required to register with California’s Board of Equalization (BOE), and file an annual tax return covering use tax obligations. The BOE indicates that it will be sending 184,000 California businesses letters during the fall of 2009 to (i) notify them of the registration obligation, and (ii) provide a form for this registration. The new registration requirement was added to the Revenue and Taxation Code (section 6225) by ABx4-18 (Stats. 2009, Ch.16).
The new use tax registration and reporting requires “qualified purchasers” to register with the BOE and report and pay use tax using an annual tax return. The registration does not create a new tax. Instead, the registration begins a process of filing a new annual tax return, and makes it easier for the BOE to perform audits. A qualified purchaser is a business that meets all of these tests:
- Is not required to hold a seller’s permit with the BOE;
- Is not required to be registered or otherwise register with the BOE;
- Is not a holder of a use tax direct payment permit; and
- Receives at least $100,000 in gross receipts per year from business operations.
Those businesses who do not meet the $100,000 gross receipts threshold are still required to report and pay use tax, but they do not have the mandatory obligation to register with the BOE.
The first tax return for the businesses now required to register is April 15, 2010. This tax return will cover purchases made during 2009. The BOE is also requiring returns to be filed for purchases made in 2007 and 2008. Since Revenue and Taxation Code Section 6225 was not established until 2009, the due dates for the 2007 and 2008 returns (and hence the date for calculating interest on unpaid amounts) are the prior and earlier deadlines of January 31, 2008 and January 31, 2009 respectively. The Revenue and Taxation Code allows the BOE to go back as far as (i) eight years (longer if fraud is involved) or (ii) ten-years for use tax liabilities occurring prior to January 1, 2003, so the three-year return requirement is not as onerous as might otherwise be possible.
When use tax is not paid timely, the BOE imposes a 10 percent penalty, plus interest, currently at the rate of 8 percent per year. Without exception, interest (currently at eight percent) will be due on all late-filed taxes. The BOE may waive the late filing and late payment penalties if it determines that the failure to comply is due to reasonable cause or circumstances beyond the purchaser’s control. The BOE has not provided updated guidance as to how this will be interpreted. The reporting form (BOE-735, Request for Relief of Penalty) simply provides an empty space for the taxpayer’s narrative statement of why penalties should be waived. Don’t count on a lot of sympathy from cash-strapped California in waiving these penalties.
The annual lost taxes from noncompliance are estimated at a billion dollars annually. The BOE estimates that the current registration and tax return effort will raise $81 million in 2009-10, $183 million in 2010-11, and $367 million in 2011-12. The BOE did not explain why they thought the amount of tax voluntarily paid would increase so much over this three-year period. One could guess that this is due to increased enforcement/audit activities.
This is the second recent initiative to increase use tax collections. The first recent effort to increase the public’s awareness and encourage voluntary reporting compliance occurred in 2003 (SB 1009, Ch. 718). This law required the Franchise Tax Board (FTB) to revise the personal and corporate income tax returns to add a separate line for use tax reporting. However, the amount of additional tax voluntarily paid through the income tax forms was relatively small when compared to the estimated tax that is not being paid.
California’s use tax has been on the books since 1935, but compliance with the tax has previously been poor. This has occurred because use tax is more expensive to enforce and audit. However, California’s budget woes are predictably causing the state to become more aggressive in tax compliance. It remains to be seen what resources will be placed on enforcement.