Sales and use tax are taxes levied on items that are purchased for consumption or use within a given state, like California for example. Any business that sells a qualified product within the state of California must report and pay the collected sales tax charged to the customer for the product. A company that is not from California does not have to charge the same sales tax on a similar product. To level the playing field, the state levies what is called a use tax. There are certain rules for who is subject to report use tax, most service businesses are not required to pay use tax on items they buy out of state.
There are two ways in which you would qualify to have to report California sales and use tax:
- You are a retailer or sell a product that qualifies as a taxable purchase. In which case, you would need to file quarterly sales and use tax returns. Or;
- You meet the requirements to become a “qualified user.” A qualified user must 1) receive more than $100,000 in gross receipts in a given calendar year, 2) not be required to hold a seller’s permit, 3) not hold a use tax direct payment permit, and 4) not be registered to report use tax. In this case, you would need to file annually.
If you meet one of these requirements, you must file and pay use tax to the state. Not all products are subject to sales and use tax. Food products, for example, are tax exempt. There is a list on the Board of Equalization’s website for all exempt products.
Some companies qualify to report use tax, but don’t actually have any purchases to report. However, this would be very rare as all purchases would have to be made in state and all products sold within the state would have to be charged sales tax. It’s easy: if you qualify as a use tax payer and you purchased any products that were used or consumed in California without paying sales tax, you have to pay use tax.
Where it can get confusing is when a company has to pay use tax on merchandise they sold. For example, sometimes a company will sell a product, but there is also a service portion to what the customer is buying like a set up or installation. The company has two ways of billing the customer: 1) Bill for the product and charge sales tax and tack on the service piece; in which case, the company would simply remit the collected sales tax. Or 2) Bill for the entire thing (product and service) as one lump sum in which case you wouldn’t charge sales tax to the customer. However, in the second scenario, the seller is now responsible to pay use tax on the materials that you used.
Additionally, different districts and cities can have their own tax rate in addition to the state minimum. So it not only matters what you bought or sold, it also matters in which part of the state the product was used. Now for most companies, you would just pay the local rate for where ever your office is located, but for companies that pay use tax for items sold, it matters where your customer is located as you have to pay the use tax for consumption in their district. A company can sell the same product for the same price, but pay two different tax rates depending on where the customer is located which dictates the use tax rate.
California sales and Use Tax can be a difficult item to manage, and the penalties for late filings and improper reporting can be severe. Reach out to your CPA or TGG Professional to help ensure your accounting records are accurately recording these transactions.Written by: Ashley Peth TGG Accounting