California Tax Board Ramping Up Collection Efforts for Use Tax

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Are you a California resident or business owner? Do you live near the Oregon border or shop online? Do you file a use tax report on the items you buy in sales tax-free Oregon or online? Then the California Board of Equalization wants to hear from YOU! (And you don’t really have a choice in the matter).

The great State of California has put thousands of California individuals and businesses on notice that it’s intending to take a much more proactive look at collecting use tax than it has in the past. The state is in the process of creating a registration system for all qualified businesses, and pre-registering those businesses. It’s also asking business owners to voluntarily submit a Use Tax Report for the past 3 fiscal years (2007, 2008 and 2009), once the registration process has been completed.

The letter then goes on to casually mention that it has the right to audit backwards over a seven year period … just in case you were thinking about not complying with the voluntary 3-year report request.

Qualified businesses and individuals are those who receive $100,000 or more in gross receipts from business operations per calendar year. But that doesn’t mean you don’t have an obligation to report use tax — it just means you don’t have to register with the BOE.

Use tax is probably the most underreported tax we’ve got. It’s a tax created when you purchase something in a sales tax-free state, or online. Essentially, use tax is the sales tax amount you WOULD have paid, had you gone to a local store and purchased that same item. It applies to individuals and businesses alike, but because it’s completely voluntary, most people and business owners either don’t know, or don’t bother to report it.

It’s not surprising that California is taking action. Back in 2005, the Board of Equalization had this to say about unpaid use tax: We now estimate annual revenue losses of $1.091 billion in calendar year 2005. Of the total, $409 million are owed by consumers and $682 million were unpaid by businesses. These revenues are spread among approximately 11.5 million households and more than two million businesses. Sales and use tax liabilities average $340 per year for each unregistered California business, and $36 per year for each California household.

Those kind of numbers are too attractive to ignore for a cash-strapped government. Depending on how this experiment works out, you can expect to see other states following suit.

So what can you do as a individual or business owner? You’ve got a few options. Many of our clients file a use tax report voluntarily, and report an arbitrary amount of tax. In their eyes, reporting something, anything, lowers the audit risk. Or you can go purchase by purchase, and log your online or qualified out-of-state purchases. A qualified purchase is one where you don’t pay sales tax at all. Purchases where you pay something, either to your home state or the purchase state, are exempt from use tax.

For more information on sales and use tax, business nexus and more, stay tuned. You may also want to become a member of our First Class Lounge, where you have full access to our interactive Forum, receive discounts on product purchases and seminar tickets, and receive advance notice of new tax developments that can affect you. Your first 30 days are free, so why not join today and see all that TaxLoopholes has to offer?

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