California Use Tax: Do You Report Your Purchases On Your California Income Tax Return? It Now May Be Moot.

Have you noticed the line on your California Income Tax Return marked “Use Tax?”

The statement appears on all California Income Tax Returns but may be overlooked or misunderstood.

By way of definition, use tax is the complementary tax to sales tax and is generally imposed on transactions where the sales tax cannot be imposed on the seller but the tax is still due (e.g., purchases made from out-of-state vendors). Until recently the “Use Tax” line on the Income Tax Return was the main mechanism used by California to collect use tax from individuals and businesses not required to register with the Board of Equalization (“BOE”) as a “retailer.” However, the passage of Assembly bill AB X4-18, which added Section 6225 to the Revenue and Taxation Code, changed that.

Key Provisions of Section 6225

1. Requires “qualified purchasers” to register with the BOE and report and pay by April 15th the use tax owed for purchases made during the calendar year.
2. Defines “qualified purchaser” as a person that meets all of the following conditions:
   
   1. The person is not required to hold a seller’s permit.
   2. The person is not required to be registered pursuant to Section 6226.
   3. The person is not a holder of a use tax direct payment permit as described in Section 7051.3.
   4. The person receives at least one hundred thousand dollars ($100,000) in gross receipts from business operations per calendar year.
   5. The person is not otherwise registered with the board to report use tax.
3. This provision becomes effective January 1, 2010.

The first two conditions required for classification as a “qualified purchaser” essentially limit the tax to use tax by eliminating any business that is defined as a “retailer” and thereby required to report sales tax on its sales. The third and fifth conditions eliminate from registration businesses that are currently registered for use tax purposes. Finally, discussions with and written guidance provided by the BOE indicate that total gross receipts, not merely California sourced gross receipts, are considered for purposes of the $100,000 gross receipts threshold.

The Effects of Section 6225

Based on the criteria for “qualified purchaser,” the legislative committee summary supporting the legislation estimated that approximately 200,000 businesses would be required to register. This includes all professional service providers (e.g., attorneys, accountants, doctors) that meet the $100,000 gross receipts threshold. However, this estimate may be conservative as many businesses may have several separate legal entities, such as single member LLCs, which are disregarded for income tax purposes but would individually be required to register for use tax reporting purposes.

Additionally the BOE is requiring that upon registration, registrants file past returns for 2007 and 2008 purchases, with the 2009 return due on April 15, 2010. Even if all 2007 and 2008 purchases were reported on the appropriate income tax returns, use tax returns must be filed with a credit taken for taxes previously paid. For any amounts previously unreported, the BOE will charge interest and penalty. A request for an abatement of penalty may be made but interest is imposed under a statutory provision and will not be waived. Finally, with limited exceptions, the BOE is requiring electronic (online) filing and payment of returns, which becomes available on March 1, 2010.

The Mechanics of Registration and Filing

Upon passage of the bill, the BOE began notifying potentially affected businesses by sending letters with the intention of businesses completing the registration process by January 1, 2010. While January 1, 2010 has passed, there are still a significant number of businesses that still need to register. In order to register, an application (BOE-404-A) must be completed and submitted to the BOE. The applicant will then receive the use tax registration number and be required to file the past returns. As previously indicated, online filing becomes available on March 1, 2010; however, if there are significant past due liabilities, the taxpayer should file paper returns prior to March 1, 2010 in order to stop interest from accruing. The taxpayer should then file the 2009 return by April 15, 2010. Even if the taxpayer made no purchases that are subject to use tax, a $0 return must be filed.