Tax News: New Safe-Harbor for Use Tax……Yes it Applies to You
California taxpayers may have noticed their tax preparer is asking them about something called “use tax.” What is this tax? Why do they have to pay it? Everyone is familiar with sales tax, where the retailer collects the sales tax from the buyer and includes the tax in the total charge. California imposes sales tax at a state rate of 7.5%, with local sales rates ranging from 0% to 2.5%. By combining the state and local rates, the amount of sales tax collected on a retail sale may be as much as 9.0% depending on where in California a sale is made.
On the other hand, not all taxpayers are familiar with use taxes. A California resident who buys merchandise from an out-of-state retailer that does not collect California sales tax is responsible for paying the would-be sales tax if this purchase was made in California – this is the use tax. This commonly occurs when items are purchased in states that do not have a sales tax and brought back to California, or when items are purchased online from out-of-state companies that do not collect California sales tax. In both of these situations the buyer does not pay sales tax at the time of purchase, but will have to pay the use tax to have the product in California. The amount of use tax due is the same as the sales tax that would have been collected if the merchandise were purchased from a California retailer, which is 7.5% to 9% depending on where a buyer uses the purchased item(s).
Now that the dream is crushed of buying large items out-of-state to save money by avoiding sales taxes, how does a California resident pay the use tax? The use tax can be paid on the taxpayer’s California tax return. The problem then becomes, who actually keeps track of these purchase amounts? California realized such recordkeeping would be onerous for the taxpayer and difficult for California to verify. To solve the problem, California created “safe harbor” amounts that can be paid without calculating the precise use tax due. Taxpayers can simply pay this set safe harbor amount based on their income and do not have to calculate the actual use tax that they would owe. In order to qualify for safe harbor reporting the following requirements must be met:
- The buyer is an individual
- The buyer is not required to hold a California Seller’s Permit or Consumer Use Tax account
- The items purchased are for personal use
- The price of each individual item is less than $1,000
The safe harbor amounts range from $2 – $61 for taxpayers earning less than $200,000/year and .033% of income for taxpayers above $200,000/year.
As you can imagine, for most taxpayers this information is interesting and can help understand the question from the tax preparer, but a $2 – $61 additional tax is not a major deal. However, for taxpayers making many purchases, the safe harbor could potentially offer tax savings, as long as these purchases are less than $1,000 each. In general, use tax probably won’t drastically change your taxes, but it is something to be aware of, in case there is a unique situation, and to make sure you properly address it on your tax return. If you have questions about use tax or are having a Board of Equalization audit (the group that collects and enforces use tax), contact us at Hone Maxwell LLP. As always, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.