California: Use tax must be reported on income tax returns

California taxpayers owe consumer use tax on purchases of taxable goods or services for storage, use, or other consumption in California when the seller didn’t collect sales tax at checkout. This most frequently occurs when the seller is based in another state and the purchase occurs online, by phone, or by mail. Use tax may also be owed on items purchased in other states or countries (e.g., while on vacation) and brought back to California for storage or use.

Use tax reporting has never been optional, but compliance is low in all states and enforcement is costly and challenging. For years, tax authorities in California have been urging taxpayers to pay the use tax they owe. They’ve strived to increase use tax compliance by encouraging participation in voluntary disclosure programs, heralding the services use tax revenue funds, and reminding traveling taxpayers to Save Room in Your Suitcase for Use Tax.

Now they’re taking off the kid gloves. Assembly Bill 1593, enacted Oct. 7, 2017, requires all California taxpayers to enter a number on the use tax line of their personal income tax return. Income tax returns will be revised by the Franchise Tax Board to make that requirement clear.

There are two ways for taxpayers to remit the use tax they owe to California:

1. Pay it directly to the California Department of Tax and Fee Administration (CDTFA)
2. Report it on — and remit it with — their California income tax return

No matter which option is selected, use tax must be accounted for on income tax returns for taxable years beginning on and after Jan. 1, 2017.

According to the California Franchise Tax Board, there are two ways to determine the amount of use tax owed:

• Use tax lookup table (for qualifying taxpayers)
• Use tax worksheet

The use tax lookup table allows individuals to report use tax due based on their California Adjusted Gross Income. However, it can only be used for individual purchases less than $1,000.

On the use tax worksheet, taxpayers:

1. Add the amount of all purchases made without payment of California sales or use tax
2. Look up the use tax rate for the location where the items purchased were consumed, given away, stored, or used
3. Multiply the amount by the use tax rate
4. If the use tax lookup table is used to estimate individual purchases less than $1,000, add the amount from the table
5. Subtract any sales or use tax paid to another state for the items purchased
6. Enter this amount

Additional information is available from the California Franchise Tax Board.

Taxpayers with no use tax due come income tax time can enter “zero” on their income tax returns. However, they must validate that either:

• They owe no use tax
• They’ve already remitted the use tax owed for the taxable year directly to the tax authorities

Within 10 days of receiving a tax return with such a claim, the tax department must either approve the form or “submit comments to the Franchise Tax Board regarding changes to the returns and instructions” that must be completed before the tax department will approve the form.

California evidently still has faith that consumers can be persuaded to pay the use tax they owe. Other states are more jaded. Colorado, Louisiana, Puerto Rico, Vermont, and Washington have all adopted stringent use tax notification and reporting policies that require non-collecting sellers to notify customers of their use tax obligations as well as share customer information (e.g., name, amount of purchases) with the state tax department.

Learn more about how data-sharing requirements can affect sales and use tax compliance here.