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Michael Green: Tax due on Web, out-of-state purchases

Tax time

Posted: February 17, 2011 1:55 a.m.
Updated: February 17, 2011 1:55 a.m.

The explosion of electronic commerce has fueled an ongoing debate regarding its tax implications.

In the face of a long-term shift to a service-driven economy, many states cannot risk losing an important source of sales/use tax revenue from purchases of tangible products.

States are stepping up their efforts to collect sales tax on Internet sales, since there is a substantial amount of fiscal revenue at stake. Some Internet sellers collect sales tax, and some don’t. But the obligation to pay the sales tax is determined by the location of the buyer, not the seller. That means you.

According to California’s Board of Equalization, the state is aggressively collecting all the taxes the law allows — no matter how small — and that includes taxes due on Internet and out-of-state purchases.

If you purchase merchandise from a vendor located outside the state or country, you may owe California use tax. This includes purchases you make over the Internet. When you or your tax preparer, prepares your taxes you need to declare what purchases you made outside of California, because you can pay the use tax with your income tax return.     

Use tax is like sales tax, however you will pay it directly to the state, rather than the retailer. The rule of thumb is, you owe use tax if what you bought would have been subject to sales tax if you purchased it at a local store and you didn’t pay California sales tax.

You generally owe California use tax when you use, store, or consume – in California – tangible personal property purchased from an out of state vendor. If the vendor does not collect the California tax on the purchase, the purchaser must pay the tax directly to the state. If you don’t report and pay your use tax in a timely manner, such as with your income tax return, the state will assess penalties and interest.

What is and is not subject to sales and use tax can be complicated. There are numerous exceptions to the rules, but many of us make out-of-state purchases that are subject to use tax, such as Internet purchases, many foreign purchases, shopping channel purchases and mail-order purchases.

Items subject to use tax are clothing, CDs and books, computers, cameras and other electronic equipment, toys, small appliances, beauty products like make-up and facial enhancement products, over-the-counter medications, collectibles, jewelry, sports equipment and computer programs shipped on a disc.      

Items that are exempt from sales tax are also exempt from use tax. A few examples might be music and other online media purchases for your IPOD or MP3 player that is transferred directly over the Internet, software that is transferred over the Internet and nothing is mailed to you, prescription drugs, newspapers, magazines, most food items, purchases where the seller added California sales tax to your purchase and the first $800 in property hand carried back from a foreign country.  

What if another state’s sales tax was paid? If you were required to pay, and did pay, another state’s sales tax on the purchase, you may take a credit against the California use tax due. That’s the difference between what you paid to the other state and what’s owed California.

By now you are wondering how you pay the use tax. You will either pay the tax on your California income tax return or complete From BOE-402-DS, Individual Use Tax Return. But remember the obligation to pay the sales tax is determined by the location of the buyer and not the seller. And it’s incumbent upon each of us to keep good records and records of our out-of-state and online purchases.

Michael Green of Michael L. Green Tax and Financial is an enrolled agent and Certified Financial Planner in Valencia. His views reflect his own views and not necessarily those of The Signal. Green can be reached by calling (661) 257-4111.


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