California Use Tax Law

Don't overlook use tax when preparing returnsUse tax is one of the least understood aspects of state tax law. California use tax law became effective on July 1, 1935. Section 6201 of the Revenue and Taxation Code established the use tax to eliminate the price disadvantage to California businesses when California consumers purchase taxable merchandise from out-of-state retailers. In general, taxpayers must pay California use tax on purchases made from out of state if the seller does not collect California sales or use tax, and the taxpayer uses, gives away, stores, or consumes the item in this state.

State Legislation passed in 2003 required a use tax line to be added to California's income tax returns, making it easier for consumers to report and pay use tax on their purchases. Several other states allow taxpayers to report use tax on their state income tax returns. In our analysis of individual returns from tax year 2003, we found that taxpayers who self-prepared their returns were nearly eight times more likely to declare use tax than those who used a tax practitioner. Nearly 63 percent of all individual returns we received were practitioner-prepared. Yet, only 16.6 percent of all use tax declarations were made on practitioner-prepared returns.

Please advise your clients about the possibility of having a use tax liability. For many taxpayers this new line added to our income tax returns is their first introduction to the idea of a use tax. If your clients have a use tax liability, advise them to report it on their California income tax return. It's easier and more convenient to report it to us than reporting it separately to the Board of Equalization.