State Board of Equalization Sales & Use Tax Department Use Tax Basics For CSU Purchasing & Contracting Staff November 20, 2008 Presenter: Sergio Quiniola

Objectives  To provide a basic understanding of the sales and use tax law  To recognize and avoid common mistakes.  To publicize available services within BOE.

What Is Sales Tax? Tax imposed upon the retailer (seller) for the privilege of selling tangible personal property at retail in the state of California. Tax imposed upon the retailer (seller) for the privilege of selling tangible personal property at retail in the state of California. Retailer may be reimbursed for the sales tax by their customers. Retailer may be reimbursed for the sales tax by their customers. Tax due is based on the gross receipts from retail sales. Tax due is based on the gross receipts from retail sales. It’s the responsibility of the retailer (seller) to pay Sales Tax to the Board of Equalization. It’s the responsibility of the retailer (seller) to pay Sales Tax to the Board of Equalization.

What Is Use Tax?  Tax imposed on purchaser.  Use tax was put in place to protect California merchants from aggressive out-of-state competition.  When you buy a physical, tangible product that will be used, consumed, given away, or stored in California. Analysis of the California Sales and Use Tax Law

Out-of-state retailers “engaged in business” in California must collect and pay use tax on items sold to Californians. Out-of-state retailers “engaged in business” in California must collect and pay use tax on items sold to Californians. Tax is measured by the purchase price. Tax is measured by the purchase price. Remember that use tax items are supplies and/or equipment that you use in your business. Merchandise that you sell (inventory) is not a supply item. Remember that use tax items are supplies and/or equipment that you use in your business. Merchandise that you sell (inventory) is not a supply item.

Sales Tax vs. Use Tax (in General) Sales Tax  Tax imposed on retailer (seller).  Seller reports and pays the sales tax due on items sold at retail in California.  Tax measured by the gross receipts from the sale. Use Tax  Tax imposed on purchaser (consumer).  California consumer owes use tax due on items purchased without tax.  Tax measured by the purchase price. The tax rate is the same for both sales & use tax.

When Might Use Tax Be Due? Example 1 Inventory items purchased with a resale certificate without payment of tax Resale Inventory Analysis of the California Sales and Use Tax Law Items withdrawn from inventory for use other than resale (including use as gifts and free samples or for personal use) = Use Tax Due

When Might Use Tax Be Due? Example 2  From out-of-state businesses and  Purchases for your own use (not inventory). Analysis of the California Sales and Use Tax Law Items purchased without payment of California sales or use tax: 

Required Records (For Use Tax Transactions) Records of purchases including: Records of purchases including: Purchase invoices Purchase invoices Purchase journals Purchase journals Credit card statements (including backup) Credit card statements (including backup) Normal books of account. Normal books of account. Schedules or working papers used in preparing tax returns. Schedules or working papers used in preparing tax returns. Records must be maintained for at least four (4) years. Records must be maintained for at least four (4) years. Regulation 1698 Publication 116 – Sales and Use Tax Records

Components of the Tax State Tax - currently at 6.25% State Tax - currently at 6.25% County Tax -.25% County Tax -.25% Local Tax -.75% Local Tax -.75% District Tax(es) - up to 1.50% District Tax(es) - up to 1.50% Any city or county with applicable district taxes will have a sales and use tax rate over 7.25% Any city or county with applicable district taxes will have a sales and use tax rate over 7.25% State Tax County Tax Local Tax District Tax(es)

California District Taxes What is District Tax? Voter-approved special taxes in certain California counties, cities or districts that increase the total rate of sales and use tax. Voter-approved special taxes in certain California counties, cities or districts that increase the total rate of sales and use tax. There may be multiple District Taxes in one county. There may be multiple District Taxes in one county. Refer to Publication 71 for a list of counties/cities in which the district tax applies. Refer to Publication 71 for a list of counties/cities in which the district tax applies.

Be sure to check the tax rate applied to your purchase. While out-of-state vendors often apply tax at the statewide rate (currently 7.25 percent), you are liable for use tax at the full rate in effect at the California location where you will first use the merchandise. Be sure to check the tax rate applied to your purchase. While out-of-state vendors often apply tax at the statewide rate (currently 7.25 percent), you are liable for use tax at the full rate in effect at the California location where you will first use the merchandise. When that location is within a special tax district, the full tax rate in effect for that district applies (statewide tax rate + district tax rate). When that location is within a special tax district, the full tax rate in effect for that district applies (statewide tax rate + district tax rate). If the vendor charged you tax at a rate lower than the rate in effect for your location, you owe the remaining use tax to the State. If the vendor charged you tax at a rate lower than the rate in effect for your location, you owe the remaining use tax to the State.

Specific Exemptions Delivery Charges  If items are delivered by retailer’s facilities, delivery charges are generally taxable if the sale is taxable.  If items are delivered by common carrier, delivery charges (sometimes called “shipping charges”) are generally not subject to tax as long as they are actual (not marked up) and are separately stated on the invoice, or contract for sale.  “Handling” charges typically are taxable if the sale is taxable. Regulation

Software (Custom vs. Prewritten) Custom software - software prepared to the special order of the customer even though it may incorporate preexisting routines, utilities or similar program components. Custom software - software prepared to the special order of the customer even though it may incorporate preexisting routines, utilities or similar program components. Prewritten software - software held or existing for general or repeated sale or lease. The term also includes a program developed for in-house use which is subsequently offered for sale or lease as a product. Prewritten software - software held or existing for general or repeated sale or lease. The term also includes a program developed for in-house use which is subsequently offered for sale or lease as a product.

Software Custom Programs Custom Programs Not taxable. Not taxable. May include significant custom modifications to prewritten programs May include significant custom modifications to prewritten programs Prewritten (Canned) Programs Prewritten (Canned) Programs Tax applies to entire amount charged for program including license fees. Tax applies to entire amount charged for program including license fees. No tax due if program is transferred by remote telecommunications or by “Load & Leave” (if no tangible personal property is received). No tax due if program is transferred by remote telecommunications or by “Load & Leave” (if no tangible personal property is received).

Software Maintenance Agreements Mandatory Maintenance Agreements: Examine software invoices and contracts to determine if the maintenance agreement is mandatory or optional with the purchase of software. Examine software invoices and contracts to determine if the maintenance agreement is mandatory or optional with the purchase of software. If you must purchase the agreement in order to purchase or lease the software, the charges are taxable. If you must purchase the agreement in order to purchase or lease the software, the charges are taxable. Mandatory consultation charges are also taxable. Mandatory consultation charges are also taxable.

Optional Maintenance Agreements: Lump-sum maintenance agreements which provide program updates & telephone or technical support. Lump-sum maintenance agreements which provide program updates & telephone or technical support. 50% of the lump-sum charge is considered taxable. 50% of the lump-sum charge is considered taxable. If no updates are transferred during contract period, no tax is due. If no updates are transferred during contract period, no tax is due.

Labor Charges Charges for installation & repair labor are not taxable. Charges for installation & repair labor are not taxable. Installation labor is labor to affix new or used property onto used property or work done to real property. Installation labor is labor to affix new or used property onto used property or work done to real property. Repair labor is labor to return an item back to its original condition. Repair labor is labor to return an item back to its original condition. Charges for fabrication & assembly labor are taxable. Charges for fabrication & assembly labor are taxable.

Leases Lessor has the option of charging tax on lease receipts or paying tax on purchase price of leased item. Lessor has the option of charging tax on lease receipts or paying tax on purchase price of leased item. If no use tax is noted on sales invoice, verify with lessor that tax was paid on purchase price. If no use tax is noted on sales invoice, verify with lessor that tax was paid on purchase price. If not, accrue use tax on lease receipts. If not, accrue use tax on lease receipts.

Commonly Noted Use Tax Problem Areas Books Books Tools Tools Office Supplies Office Supplies Equipment Equipment Printed Material Printed Material Construction Contracts Construction Contracts

Section 6406 Credit Can I get credit for paying another state’s tax on my purchase? Can I get credit for paying another state’s tax on my purchase? If you were required to pay, and did pay, another state’s tax on your purchase, you may be able to take a credit against the California use tax due. This is referred to as a “6406” credit on the return. If you were required to pay, and did pay, another state’s tax on your purchase, you may be able to take a credit against the California use tax due. This is referred to as a “6406” credit on the return.

Services Available Tax Information BOE Website Library of BOE information Links to other CA websites On-line Verification of Seller’s Permit numbers Local Board Offices BOE Information Center /TDD Mon. - Fri. 8am to 5pm 24 hr fax-back service Commonly requested forms and publications to choose from automatically faxed back to you 24 hr voice recordings on specific topics Taxpayers’ Rights Advocate If you have been unable to resolve a disagreement with the Board, or if you would like to know more about your rights under the law

Other Services Available  BOE Website (  On-line Tutorial (PDF) On-line Tutorial On-line Tutorial  E-file E-file  Classes & Seminar Classes & Seminar Classes & Seminar  Publications Specific to Your Type of Business Publications Specific to Your Type of Business Publications Specific to Your Type of Business  Frequently Asked Questions (FAQ’s) Frequently Asked Questions (FAQ’s) Frequently Asked Questions (FAQ’s)  Directory of BOE Offices Directory of BOE Offices Directory of BOE Offices  Board Member Biographies Board Member Biographies Board Member Biographies  Tax News Tax News Tax News  On-line Verification of Seller’s Permit Numbers On-line Verification of Seller’s Permit Numbers On-line Verification of Seller’s Permit Numbers  Credit Card Payments Credit Card Payments Credit Card Payments  Useful Links to Other Websites Useful Links to Other Websites Useful Links to Other Websites

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