I had never even heard of use tax until the State of California told me to pay it.
I had recently registered for a seller’s permit, which is a requirement of doing business in California, and which affords you the privilege of collecting sales tax for the state. It’s an awesome racket. I get to work as a tax collector for the state! Without getting paid!! And all I had to do was pay $50 to sign up!!!
Unfortunately, if you want to be able to purchase things for resale, you’ve got to have one of these seller’s permits. It’s the only way to prove you’re a business and not just paying half price for items for personal use. But it also means that at the end of your first year in business, you will receive a deceptively simple-looking form from the state, asking you to hand over your sales and use tax.
The form is only one page long, front and back, but I couldn’t answer even the first question on it. I called my friends Oliver and Eleanor at The Present Group for help. Eleanor tried to walk me through the definition of use tax, but I asked so many follow-up questions that she finally gave up and said, “You really just need to take the class.”
“The class,” it turns out, is the Basic Sales and Use Tax Seminar offered by the California Board of Equalization. If you sell anything for profit within the state of California, you MUST take this class. Nothing I explain in this post will be as helpful as that free seminar and they will walk you through filling out your entire return step by step. However, for the sake of personal edification and to help you understand why you need to take the free BOE seminar, I will try to provide a brief overview of sales and use tax here:
Contrary to popular belief, sales tax is a tax that companies pay for the privilege of being able to conduct business in their state (8.5% in most of California). It is not actually a tax on consumers for the privilege of being able to buy things. Most businesses, however, can’t afford to pay nearly a tenth of all their sales to the state (in addition to regular income and payroll taxes), so they pass the cost on to their customers by simply adding it to the total sale. Sales tax only applies to taxable goods (most things other than groceries), not services, and does not apply to non-profit organizations. It also only applies to sales that end up within your state of business, so if you sell things online, you only need to pay sales tax for things you ship to addresses within your state.
Filing sales tax forms is complicated because you need to pay sales tax not only to your state, but also to each individual county in which you did business, and every county has its own sales tax rate. You can also deduct the cost of any sales tax you paid on materials you bought for your business from the amount you owe the government (more on the definition of materials later), since this is technically a resale transaction.
So what the hell is use tax? Use tax is a tax businesses pay for anything they buy for resale (i.e. without paying sales tax), but don’t, in fact, re-sell to the public. It is always the exact same rate as sales tax (e.g. 8.5%).
Let’s say, for example, that I buy fleece, buttons, scissors and a marking pencil for making plush meats. I don’t pay any sales tax when I buy these items because I am buying them wholesale for my business. The fleece and the buttons eventually end up as plush meats and go to a customer’s house; they have been re-sold. I therefore collect and pay sales tax for them. The scissors and marking pen, however, stay with me at my studio. I don’t resell those items, I use them, so I need to pay use tax on them. This also applies to plush meats I “use” as gifts or promotional items but don’t sell. (I don’t need to pay income tax on any of this stuff, since it is still a business expense, but more on income tax in another post.)
In the end, you see, anything you buy for your business requires giving the government sales or use tax. They both cost the same amount, but need to be neatly divided when filing — I have no idea why. I have only given a brief overview of the rules above. I would never attempt to file a BOE-401 form based on this information, but hopefully it will act as a good primer before taking “the class.”