California Sales and Use Tax. What is the Difference and Why Does it Matter?

California sales and use tax are transaction taxes imposed on residents and retailers in the State of California. The terms are commonly used interchangeably, and the rates are the same, but the difference is critical, especially when discussing big purchases. Sales tax is charged based on where the item is purchased, while use tax is charged based on where the item is intended to be used.

Virtually everyone is familiar with sales tax. It is the tax you see on your receipt at the end of the purchase, the reason why that $50.00 purchase actually costs you $55.00. Besides factoring sales tax in the cost of your purchase you probably give it very little thought.

In its simplest form use tax is charged for the privilege of using property in the state. There is potential for use tax on every transaction. For example, most people have enjoyed the benefit of not paying sales tax on internet orders from out-of-state retailers. Guess what? In California, use tax is still owed. The policing costs on these small ticket items are too expensive for the government to pursue. But on high dollar items the government is highly incentivized to collect their tax. The bottom line is, if a buyer plans to use the property inside the state of California, they probably owe use tax. This can be true even if the owner of the property is not a California resident.

There is another reason why sales tax doesn't matter to the average purchaser, because the retailer, the seller, is responsible for the tax. Use tax is sales tax's twin brother. The two taxes are virtually indistinguishable expect for one key difference; the buyer is responsible for use tax.

Why Does it Matter Who is Responsible for Paying the Tax?

Simply stated, the government can only go after the party that was responsible for paying the tax. This basic example will illustrate the importance. You are in Alameda, CA and find a part for your boat that you cannot live without for $100.00. Alameda County has a sales tax rate of 9.25% so that hundred-dollar boat part is $109.25 out the door. You pay the retailer their $109.25 and never think about the $9.25 again. This is because the retailer is responsible for remitting that tax to the California Department of Tax and Fee Administration (CDTFA). If the retailer does not pay the State of California its tax, the CDTFA has no cause to come after you. It is not your problem.

Now, let's take a look at that same boat part from the side of use tax. You see that same part for a $100.00 online from an out-of-state retailer. Since the retailer offered free shipping the watch comes to an even hundred shipped to your door. Great! You just saved $9.25, right? Sorry to be the bearer of unwelcomed news, but that is not the case. You still owe the State of California its $9.25. The state will look solely to you for collection, not the retailer.

The CDTFA Actively Pursues Use Tax on High Value Items

California use tax is a transaction tax based on the privilege of using the item in the State of California. Sales tax is determined by the location of the purchase, use tax by where the item purchased is going to be based. If the item was purchased for use in California, use tax is probably owed. The state uses a couple of different tests to determine if the item was purchased for use in California, but in this example it clearly was.

Luckily for the purchaser in the example above, the boat part is a relatively small ticket item. The enforcement costs for the State of California are simply too high, and the $9.25 most likely slips through the cracks. Even if the state was able to collect the $9.25 with its 50% penalty, plus interest, we are still under $15.00. It is just not feasible for them to pursue these smaller value items. High value items, especially those that require registration (boats, RV's, and planes), are all on the CDTFA's radar. The recovery potential for the CDTFA may be upwards of six figures; meaning their agents are highly motivated.

We Are Here to Help

There is still hope. We can help. It is not possible to avoid California Sales and Use Tax. But it is possible to structure the transaction in a manner that creates a nontaxable event. With our help, we can create a transaction where use tax is not applicable. Contact us today to find out how.