How to Calculate Use Tax in California
Unravel California's use tax. This guide provides clear steps to understand, calculate, and fulfill your tax responsibilities on purchases where sales tax wasn't collected.
California’s tax system includes a use tax that complements the sales tax, ensuring a level playing field for retailers. This tax applies to purchases where sales tax was not collected, but the items are intended for use, storage, or consumption within California. Individuals and businesses commonly encounter use tax obligations, especially with online shopping and out-of-state vendors.
Understanding California Use Tax
California’s use tax applies to items purchased outside the state or from online retailers that do not collect California sales tax, but are subsequently used, consumed, or stored within California. It ensures that goods acquired from out-of-state vendors or online platforms are taxed similarly to those bought from local California businesses.
Common scenarios triggering use tax include buying merchandise online from a seller without a California presence who does not charge sales tax. This also applies to items purchased while traveling outside California and then brought back into the state for personal or business use. Businesses might owe use tax on equipment or supplies acquired from out-of-state suppliers without sales tax applied. The use tax rate is equivalent to the sales tax rate that would have been applied if the item had been purchased within California.
Step-by-Step Use Tax Calculation
Calculating California use tax involves identifying the purchase price, determining the correct tax rate, and applying a simple formula. The purchase price subject to use tax includes the total cost of the item, along with shipping and handling charges. Separately stated installation charges are excluded from this taxable amount.
To determine the applicable tax rate, you must consider the location where the item is used, consumed, or stored in California. While the statewide sales and use tax rate is 7.25 percent, local jurisdictions often add district taxes. These district taxes can vary significantly, leading to combined rates ranging from 7.25 percent to over 10 percent depending on the specific city and county. The California Department of Tax and Fee Administration (CDTFA) website, cdtfa.ca.gov, provides a tool to look up the precise sales and use tax rate by address.
Once the purchase price and the correct local tax rate are identified, the use tax due is calculated using a straightforward formula: Purchase Price multiplied by the Applicable Tax Rate equals the Use Tax Due. For example, if an individual purchases an item online for $100 and pays $10 for shipping and handling, and the applicable combined sales and use tax rate for their location is 9.25 percent, the calculation would be ($100 + $10) x 0.0925 = $10.18 in use tax.
Consider a slightly more complex example for a business purchasing office furniture. A business buys furniture for $2,500, with $150 in shipping fees and a separately stated $50 installation charge, and the local tax rate is 8.75 percent. The taxable amount would be $2,500 (furniture) plus $150 (shipping), totaling $2,650, as installation is not included. The use tax owed would then be $2,650 x 0.0875 = $231.88.
Reporting and Paying California Use Tax
Once the use tax has been calculated, individuals and businesses have specific methods for reporting and remitting the amount owed to the state. For individual consumers, the most common way to report and pay use tax is directly on their California Resident Income Tax Return (Form 540). This form includes a specific line where the total use tax liability can be entered.
Alternatively, individuals can report and pay use tax directly to the California Department of Tax and Fee Administration (CDTFA). This can be done through the CDTFA’s online services, which provide a convenient platform for consumers to declare and pay the tax. The CDTFA website, cdtfa.ca.gov, offers resources and instructions for direct payments.
Businesses typically report and pay use tax through their regular sales and use tax returns filed with the CDTFA. These returns are filed periodically, such as monthly, quarterly, or annually, depending on the business’s filing requirements. The use tax due on business purchases is integrated into these routine filings, streamlining the process for entities already registered with the CDTFA.