Changes to the California Use Tax

A recent law change requires many businesses that do not currently hold a seller’s permit to register with the BOE (Board of Equilization), and report and pay, by April 15, any use tax due from purchases made in the preceding year. Taxpayers who must register will be required to file a Form BOE-401-A, State, Local, and District Sales and Use Tax Return, or a BOE-401-EZ, Short Form — Sales and Use Tax Return, even if they owe zero tax.

Who must register A qualified purchaser that must register with the BOE is a business that:

• Is not required to hold a seller’s permit with the BOE;
• Is not required to be registered, and is not otherwise registered with the BOE;
• Is not a holder of a use tax direct payment permit; and
• Receives at least $100,000 in gross receipts per year from business operations.

The new law applies to purchases made during the 2009 calendar year. Returns to report use tax on 2009 untaxed purchases are due on April 15, 2010.

Because of the quick start date, some businesses may not have kept track of their purchases that were subject to use tax and may have a difficult time determining their correct use tax liability.

Registering

The BOE will begin sending letters to taxpayers, informing them of the new registration requirement, over the next few months.

They are reviewing IRS data from 2007 returns, and they will send letters to taxpayers with at least $100,000 in business gross receipts who are not already registered with BOE, and do not hold a seller’s permit.

The taxpayers will be asked to verify their contact information, and then the BOE will register them. Once taxpayers are registered, the BOE will send them an account number and log-in information so that they can e-file their returns.

If the taxpayers do not respond to the letter, the BOE will register them automatically. Taxpayers that no longer meet the registration requirements should report that when they receive the letter.

After taxpayers are registered, the BOE will ask them to verify that they reported and paid their use tax for 2007 and 2008. The BOE is likely to waive any penalties on unpaid use tax, but taxpayers will be required to pay interest.

Registered taxpayers will also be required to file a use tax return for 2009 and later years, even if they do not owe any tax.

Penalties

The legislation does not provide for any specific additional penalty for not registering. There is also no penalty for failure to file a use tax return if there is no tax due. However, there is a penalty if those taxpayers fail to file returns and pay their use tax.

Taxpayers who fail to properly pay their use tax will be subject to a penalty of 10% of the tax owed plus interest.

Gross receipts test

All businesses with operations in California that receive at least $100,000 in gross receipts from business operations worldwide will be required to register with the BOE.

Gross receipts from business operations are defined as “all receipts” of the business operation. Gross receipts include all income, whether the income is from in-state or out-of-state operations.

This means that many tax professionals will be required to register, even if they are not required to pay any use tax. Furthermore, taxpayers who are required to register with the BOE will not be permitted to report and pay their use tax on their FTB returns (such as Forms 540, 100, or 100S). These taxpayers will be required to file a separate use tax return with the BOE.*

Click here for registration forms and other answers to frequently asked questions from the BOE website.

*Spidell's California Taxes On-Line.